Do you sometimes wonder what are the best approaches for tackling fear, greed, and regret when trading? Or do you have problems with following your trading plan or wonder how Chris and Nenad tackle trading psychology in general?
Then today is a good day for you because we are offering a full guide on trading psychology. You have taken the very important first step by investing your valuable time into learning the fundamentals about trading psychology.
This ultimate guide will provide information about:
- Why is trading psychology important?
- Why is trading psychology so hard?
- How do you improve trading psychology?
- And other practical tips and ideas.
Thanks for reading and we hope the “Ultimate Guide on Trading Psychology” will help your trading. If it does, please leave a comment at the bottom of the article and/or on Forex Peace Army.
Part 1: Why is trading psychology important?
Forex trading is the art and science of successfully combining 3 core elements:
- Risk management – this improves the chances of protecting our trading capital
- Traders who are lacking in risk management could lose all of their trading capital, which means end of business and game over.
- FX trading strategy (CAMMACD, LIVE and SWAT) – this improves the chances of increasing our trading capital
- Traders without a strategy might not lose their capital but certainly have difficulties growing it.
- Trading psychology – this improves the chances of protecting our mental capital
- Traders, who are weak in the trading psychology department, could lose their trading capital because their mental capital can’t handle the stress and strains, which lead to costly mistakes.
Forex traders are running into serious risks if any of the above points called the “3 pillars” is missing or weak. Traders must carefully maintain a balance in this “house” of 3 pillars to achieve consistent profitable trading.
A trading plan shows traders how to approach risk and strategy, which is why it is a crucial method in obtaining success in Forex trading. However, it becomes worthless when the psychology is incorrect.
If a trader has a great plan but they are not able to follow that plan, then the trading plan will certainly fail.
The trading psychology is basically the GAP between the trading plan on paper and the reality:
- The more problems with trading psychology, the bigger the difference between the trading plan and the actual real life trading (reality or execution);
- The fewer problems with trading psychology, the smaller the difference between the trading plan and the actual real life trading (reality or execution).
The gap needs to be as small as possible! That is why trading psychology is important.
One very important way of minimizing the gap is to make sure that our psychology is in sync with the risk management and strategy.
Minimizing the gap
One of the reasons why the gap widens is because Forex Traders love to break the rules!
Because it’s part of our DNA! 😉
Forex traders are per definition rule breakers because we trying to earn income in a ‘non-traditional’ way. Remember the standard way that most people earn their living is via 9 to 5 employment, which is considered secure, safe and socially accepted, yet is often disliked, low rewarding and not as secure as it seems. As a Forex trader you want to test those waters and try something else!
So… Now that we established that YOU are a rule breaker, you need to ensure that this not turn into a weakness when trading the Forex. Breaking the rules could be a good motive to start trading Forex, but will seriously hurt you if you do it during trading.
There are 2 main reasons why Forex traders break the rules very regularly:
- They do not treat trading as a business but as hobby.
- Their trading psychology and trading strategy do NOT MATCH…
Hobby: most of the trading decisions should be clearly outlined in the trading plan. Trading is a two-step process where traders set up their trading plan beforehand and then execute their plan during the trading day. This document is an important rule and guideline book to keep the head cool and focused on the most profitable decisions in the long-run.
During the heat of the trading battle, however, taking decisions can become more ‘messy’. Forex traders tend to make emotional decisions, which are often counterproductive in the long-run.
Difficulty in taking trading decisions often arises in 3 cases:
- In areas where the trading plan does not specifically explain what trader should do;
- In areas where the trader has difficulty with implementing the trading plan;
- During individual trades where traders might have the urge to abandon their trading plan.
Ultimately problems arise due to a trader’s psychology OR the lack of clarity in the trading plan. In all cases traders must avoid emotional and impulsive based trading.
- Another reason why Forex traders break the rules so often is because
Match: what do we mean with “match”?
Simply implementing rules which are “going against” your analysis and outlook… Every trader has a ‘natural’ way of trading. This is a method that is supported by their view on markets and trading and instinctively makes sense. When you trade a method that does not fit with ‘you the trader’, then obviously rules will be broken!
Traders must create a trading plan where it is easier to follow the rules than break the rules. Otherwise failure of implementing your plan is luring around the corner each and every trading day. Traders must create a sustainable flow of correct strategy implementation and keep the mental balance along with it (see rest of this document for tips on that).
So the motto is: Forex trading is simple, but it is not easy because breaking the rules IS easy.
Optimizing psychology and strategy
There are 3 great methods to figure out whether psychology and strategy are aligned with each other.
- Evaluate YOUR own trading. Here is a checklist:
- A trader must know if something was not implemented as per plan. Those areas are usually the weak spots of a trader.
- A trader can then judge whether this was a repetitive error or a single occasion.
- If it was a first time error then it was most likely an unlucky incident and its best to analyze how future mistakes can be avoided.
- With a repetitive rule break, don’t be mad at yourself but instead work on understanding why the rules were broken.
- It is best practice to re-evaluate the rules and strategy and analyze which parts needs to be altered so that the new rules are indeed in sync with the psychology.
- Another preventive tool is to complete an analysis of strengths and weaknesses of you as a Forex trader. A trader is able to comprehend what style, indicators, tools, time frames, discretion, etc are best suited by identifying strong and weak points. You want to understand your strong and weak points on topics like:
- Ability to cope with stress and stressful moments
- Current distractions or other time commitments
- Ability to focus on one task
- Determination to complete the job
- Willingness to take risk and manage risk
- And any other topics that are important for you and your analysis
- Choose a strategy that allows for flexibility in implementation and adjustments for personal preferences.
- When a Forex pro uses a very rigid strategy, there is no guarantee that another trader can copy that success.
- This changes drastically when a Forex pro uses a sturdy, strong and solid strategy, but allows for personal adjustments. In that case other traders can copy that success because they are able to personalize the strategy to match their psychology.
- Elite CurrenSea offers that ideal mix of a well-tested, strong and simple strategies. We offer both rules based (CAMMACD and LIVE) and discretionary approaches (SWAT).
Part 2: Why is trading psychology so hard?
Every trader has difficulties in different areas. Some traders become nervous when the trade goes against them, whereas other traders become nervous when the trade gets closer to the take profit.
There is no right or wrong here. Each trader has their own fear(s) and must address those particular issues to become a better and stronger trader. This guide will mention the typical fears and difficulties most of the traders face when trading in the markets.
Greed, hope, fear, impatience
Greed, hope, fear and impatience are the enemies of all traders. Any of these emotions could easily disturb a trader’s balance and bring the trade and account crashing. Traders must walk across a thin rope while trading so losing one’s balance can occur quickly.
Traders often make the following mistakes when they notice greed, hope, fear or impatience:
- A greedy trader could take profit too soon.
- A hopeful trader could exit too late.
- An impatient trader could exit too soon.
- A fearful trader could take a loss too soon.
All of these emotions lead to undesirable outcomes.
For traders, fear is an emotion caused by a thought process because obviously there should be no fear of any physical harm when being behind the pc. Our internal thoughts, however, can be destructive. Our internal thoughts distract us by imagining losing trades, rigged markets, wrong markets, and losing accounts, which certainly will undermine a trader’s confidence.
Here is a list of possible reasons causing fears:
- Insufficient knowledge of the market, trading, currency pair
- Insufficient experience in applying the knowledge
- Improper risk management
- Money management rules which do not fit your trading style
- Fear of a new trade & fear making a mistake again
- Dwelling about past mistakes
- Paralysis of analysis in their decision making capabilities
- Not enjoying the act of trading and not treating it as intellectual challenge/game
- Any other reason a trader might regard as the cause of fear
Fear is imbedded in the subconscious mind. Accessing, interpreting, and understanding that inner mechanism of the brain is very important, yet difficult to achieve.
Fear often stems from deeper beliefs about what is good or bad, about making profit, and the mechanics of the market, according to Bill Williams in this book Trading Chaos. These beliefs are developed in our past due to our experiences and culture and are the corner stone and building blocks for the way we view the market. This belief system however can run contrary to the nature of the market and therefore hinder success.
A self-protection mechanism embedded in our subconscious is another deeper reason for fear. Survival is the strongest and the highest overriding goal in our system and the subconscious mind bears the ultimate responsibility for that. This defense of ourselves by the subconscious mind is powerful and complex and is very difficult to regulate by the conscious mind.
But there is a solution… You need to free yourself of these emotional chains to enable a clear mental state and be(come) a rock (star)!
Our attention, actions and focus go to the area of our thoughts. So if we think negatively, we might be focusing on it as well. Our view of the world is then seen though a negative lens.
Therefore ask yourself: am I thinking in fear and failure when approaching the market? When you think in fear then you will act in fear.
A trader must slowly but surely substitute fear with a balanced confidence.
A balanced confidence means that fear is NOT replaced by arrogance (when too successful) or by aggression (when unsuccessful).
Personal and market beliefs
We traders filter the information and price action we want to see and use. This is called our paradigm. Our character, our attitudes, our past, our culture, our experiences and our beliefs all influence that paradigm. They influence our view of the world. They therefore also are an integral part of how and what we think of the market and how we approach it. That belief system will impact our mindset when approaching trading.
The good news is that we always can change our attitude towards the market and therefore change the paradigm we use to see the market. That new view might make it possible for an entirely different mindset and approach to trading and to the markets.
Why is a mindset important?
1) You will able to see more and different kind of opportunities never seen earlier.
2) With the absence of fear, you will also be able to handle and judge that information in a confident manner.
3) There will also be no temptation to tinker with risk management. Why over risk or under risk at any point in time when you know that the market provides plenty of opportunities.
The individual will become a well balanced trader. They understand that their market interpretation will be both right and wrong, but their confident approach to trading will allow them to have fun and achieve better results.
The best thing a person can do to succeed in trading is to have a positive and hands on approach towards the market, trading and learning.
By having a positive can-do attitude and openly analyzing your thinking process, your attitudes and actions, you will start to constructively work on making you a better trader. This will replace fear for a balanced confidence.
Characteristics of a confident versus fearful trader
The views of the confident trader and fearful traders differ. Of course not all traders will share all of these characteristics.
It is your decision to judge which characteristics are good/bad and which ones can be improved. In general though, we can see the following distinction between traders with fear and traders with confidence.
|Trader with Fear||
Trader with Confidence
|They like trading sometimes||They (almost) always love trading|
|They use the market to prove they are right – they seek to confirmation of what is right, and care less of what can be improved||They love to be wrong – only then do they know what elements they are doing wrong and what needs to be changed|
|They act in fear and have phases of over confidence or insecurity||They are fearless, but not overconfident or reckless|
|Their focus is on being correct and having a high win%||Their main focus is on the return %, not on the win %|
|They fear the market and view it as a dangerous place. They fear their trades, their losses, their evaluations||They know there is nothing to fear from the market – the market speaks, they listen.|
|Their main goal is money – trading is a means to an end||Their main goal is trading – they enjoy the act of trading in its own right|
|They treat trading as a test and not as a game or something that is fun to do||They approach trading as a game and an activity which is fun|
|They challenge the market and not themselves||They challenge themselves and not the market|
|They might not be prepared with proper testing, no strategies or proper strategies, no or incorrect risk and money management||They have everything very well prepared and their game plan is crystal clear|
|They might not have a risk limit or they might exceed that limit||They know when to risk more or less depending on the market conditions, but they never risk more than allowed|
|They view the market as confusing and directionless||They view the market as a place where price chooses the path of least resistance|
|They are impatient and absent minded||They are patient yet alert|
|They might freeze in their decision making capacity as the fear and stress paralyzes their ability to evaluate new information||They are always open and responsive towards new information and are able to (re)evaluate their trading situation without stress|
|They will get (very) emotional with every loss or win. They will get mad at the market.||Their emotional balance is (always) maintained. They accept their wins and their losses.|
|They see the market as a beast, which is ready to take their money at any point||They view the market place as a natural outcome of the psychology of all the traders in the market|
|They do not review their trades, they do not evaluate their trading day, they do not review their evaluation plan and points||They review every trade, they evaluate every day, they review their evaluations|
|They do not learn from trading mistakes in the past||They make sure they learn from their mistakes|
Most successful people are successful because they actually enjoy the activity they are performing in its own right, without the financial benefit. People learn a lot quicker when they enjoy something without any external benefit compared to the people who learn something with the purpose of gaining a benefit.
Discipline and patience
It requires a lot of discipline to diligently and consistently work and improve on your business and trading plan. But it will lead to better perspectives because the trader will invest sufficient time into research, charting, demo trading, paper trading, live trading, risk management, money management, and strategies.
It also requires a good dose of patience. The profits will most likely not be rolling in from day one. The process of creating a business and trading plan simply requires sufficient time. In fact, for most traders it takes a couple of years before they become consistently profitable. This holds true not only in the world of Forex, but also in the broader business world. Many startup companies struggle in the first few years. It is vital that all of your stake holders are aware of this time plan and investment because even if you do not run out of patience, your environment certainly could.
For many the temptation to immediately capitalize on the opportunity the market provides is just too great. They start trading with real money way too soon. The early enthusiasm gets slammed down at one point or another when the luck runs out and the lack of preparedness becomes apparent. Any patience that was still present just vanished like snow before a blazing sun.
The level of discipline and patience traders have at the moment they start and progress in their trading career certainly varies from trader to trader. Despite the variations among us, all traders equally share the opportunity to improve on their discipline and patience skills.
Discipline can be increased by creating a routine.
Remember that you are what you habitually do. If someone is watching TV and playing video games 20 hours a day, 5 days per week then their chances of succeeding in the Forex market are – logically – low. When tackling anything in life, the best and fastest route to success is when a consistent approach is applied. Without the consistency, traders will swing back and forth between periods of success and losses. The best method is to do regular (daily, every 2-3 days) activities that are connected to improving your Forex trading. What you can handle as a routine (intensity) is irrelevant as long as you can apply it regularly instead of investing a ton of time ad hoc for one week and then not looking at it for 3 months.
The next golden rule is to tackle goals step by step.
Once you have a routine in play and have developed the discipline to follow it, you can start working on your goals diligently. The only thing stopping you now is lack of patience. Creating a step-by-step plan allows you to break down the goals into manageable pieces and also allows you to prioritize the importance of tasks. In the end, it provides you with a method of reaching the big goal. The step by step approach is important for remaining patient: the fact that targets have been hit at the end of the day, week or month boosts excitement and motivation and keeps the mind on the right track.
Organize yourself by writing down (on paper, pc, tablet) the tasks.
It should be mentioned when the tasks need to be completed by when and how important they are. The task list provides perfect clarity. Providing yourself an honest grade for your own performance at the end of the day is one way of keeping your mind focused on the duties at hand instead of being distracted.
Here are some practical tips:
- Turn off notifications
- Put your mobile telephone on silent mode
- Explain to your closest circle why you need focus time
- Explain to people when it is ok to interupt you and when not
- Use reminders to keep track of your to-do-list so can focus on trading
- Use evernote, excel, google sheets to keep track of your trading plan and evaluations
For more information on organising yourself, we recommend the book “Getting Things Done” by David Allen.
Forex traders run into trouble when a decision must be taken immediately. This is the ultimate pressure point which precedes impulsive and emotional decisions during trading.
The pressure slowly grows as the trader is analyzing and reviewing the charts:
- A thought suddenly enters the mind which forces you, the trader, to consider a decision right now and quickly;
- The market does not pause and wait for your decision to be taken, which can amplify the nervousness around that decision;
- The longer it takes to take a decision, the more the internal pressure is created and the more difficult it will be to remain calm;
- This, in turn, increases the chance of an impulsive emotionally based decision.
I think the internal pressure to make a decision quickly increases when traders feel they do not have sufficient time to reflect on a decision. Those moments happen most of all during these times:
- The market is moving fast (momentum);
- The volatility of the market is high;
- A trader is scalping;
- A trader expects to miss out on a trade opportunity;
- A trader expects to lose their trade;
- A trader expects to lose their profits.
To avoid the problems connected to making quick decisions, traders need to regain control and patience.
Regain control and improve patience
The ultimate goal is to create space and time in your mind, which in turn allows you to take decisions without creating an internal pressure. Ideally traders take decisions from their comfort zone. This is a mental state where traders are not pressured in making hasty conclusions but take informed and well balanced choices.
An essential component is the importance of removing the necessity of making a decision NOW. Nothing is an emergency in the Forex market if you adhere to strict risk management principles (unless perhaps with a black swan event). Here are tips that could help with maintaining calm and patience during the process of trading:
- Traders need to work on recognizing the moment when they feel compelled to make a decision now, soon or quickly;
- Traders must implement a trade plan that they feel comfortable with;
- Traders should trade a time frame where they have enough time to reflect on their plan;
- Traders should take deep breaths and take regular breaks away from the computer;
- Traders should not needlessly look at the charts as it could create emotions;
- Traders can implement the ‘wait 1 candle’ technique.
Wait 1 candle technique
A simple technique to gain a higher level of patience is to wait 1 candle. As soon as traders recognize the moment where impatience starts, the rule states that traders must wait one entire candle before making the decision.
Let me explain with an example: trader ABC is trading on the 1-hour chart. He recognizes that his trade is not going his way and this feeling pressured to move the stop loss. The rule states that he must let the current open candle and the next one 1-hour bar candle close before making a decision. This time frame is a mere example and the technique is valid for each time frame.
The advantage of being forced to wait for the next candle is that it compels us to take time for our choices and it avoids impulsive and emotional decisions. This technique is a supportive crutch if traders cannot create the space and patience by themselves. There is a potential disadvantage of this concept that price could have moved away from its former level, so consider whether this idea is right for your trading first of all. Write us at firstname.lastname@example.org if you have questions or doubts.
Obviously the concept will not miraculously turn all setups into winners. It simply intends to create more time for trading reflection and trading plan implementation. The wait 1 candle technique is a rule that allows traders to regain a calm mindset.
Impulsive and emotional decisions are created in our own mind. Most of the time the problem occurs when a trader feels under pressure to take an immediate trading decision. Traders however should aim for staying calm and patient during trading to optimize results.
Greed, fear, hope and impatience are the enemies of traders.
Discipline, patience, perseverance and a balanced confidence are the allies of traders.
Part 3: How do I improve trading psychology?
First of all, please realize that part 2 has already mentioned a lot of good improvement techniques for patience (1 candle technique), discipline (timely routine taking small steps) and fighting fear (balanced confidence). In this part we will take it to the next step and focus on creating a winning trading psychology. Our first step is establishing a successful mindset.
This guide is naming it a “super cool” mindset, because ultimately a cool or focused state of mind is what leads to success. A super cool trading mindset is when a trader is fully focused on their trading business and trading skills without being an emotional roller coaster. The trader is not concerned about being ‘right’ or ‘wrong’… they are only concentrated about being profitable (also over the long-term).
First question is: how do you recognize whether you have a super cool mindset in trading? Let us do a test to judge your current status! There is no reason to cheat; the answers remain private and are only intended as a rough guideline for each trader.
The mindset test
Here are 10 questions that help with judging your current state of the trading mindset.
Obviously, the scope of the test is very narrow so don’t get to upset if your score is low or too happy if your score is high. In other words, do not get too happy if you have 10 out of 10 or too worried if you have 0 out of 10 – it is just to get an idea 😉
- Do you feel any nervousness when completing analysis or trading?
- Are you insecure when you are not participating in the market or when you have not entered a trade for a long while?
- Are you trying to outsmart the market by guessing what the most profitable decision is for each decision (instead of implementing your trading plan)?
- Do you notice that you are sometimes missing signs within the trading day that you only pick up on after the trading day has been completed?
- Do you make (or feel the desire to make) impulsive decisions which are not based on your trading plan?
- Are you excited when entering or exiting a trade?
- Are you worried about making the best choices instead of focusing on the trading plan?
- Do you become nervous, greedy, or fearful when looking at price action?
- Do you always analyze missed opportunities or reminisce about missed profits?
- Do you fail to write down evaluations and review trade statistics?
A trader with a super cool trading mindset will tend to answer these questions with a NO. So the more questions answered with a no, the better it is for you as a trader. But do not get discouraged if you answered some or many of these questions with a yes. The most important is the willingness to improve!
Dangers of a ‘non-cool mindset’
You might be wondering why creating a successful mindset is of imminent importance so let us discuss this first of all.
There are serious dangers lurking around the corner if a trader has not yet reached the level of a super cool mindset.
A trader who ignores the importance of the mind set has a higher chance of running into trouble:
- They run the risk of overtrading and taking too many setups;
- They are more likely to over-risk on a setup;
- They tend to revenge trade;
- They can blow up the entire trading account / risk capital;
- They show imbalanced emotions;
- They are overly confident of a trade or strategy;
- They are not able to handle losses or draw downs.
Any of the above problems could seriously hinder de development of the trading business.
In fact, any of the above mistakes can turn out to be mega costly and could ultimately lead to an early exit out of your Forex trading business.
Benefits of a cool mind set
Traders with a successful mindset do not care about being ‘right’ or ‘wrong’. They do not seek validation from the market. In fact, they see the market as a place of opportunity! They are able to observe price action and their tools/indicators closely without any bias or judgment.
These traders keep the flow of information open. Their mindset does not ignore undesired warning signals, nor do they allow emotions to cloud their decision making process. They accept both their wins and their losses equally gracefully. They calmly evaluate the charts and execute their trading plan without the emotional roller coaster. They demonstrate a balancing of patience and preparedness. They demonstrate positive thinking.
The main benefit of the super cool mindset is that it allows traders to fully focus on trading without getting distracted by emotions, moods or presumptions about what the market should do.
The mindset journey
First of all, reaching a successful mindset is a journey and not a destination. No trader will ever fully master the mindset because there will always be something that can be learned. Simply put, there is always a way to keep improving. But obviously some of us will be further on that journey than others. It is your job to make that progress!
Needless to say, it takes time to cultivate and improve the mindset and never should any trader expect miracles within days. Winning traders approach the market every day as an adventure, a journey whose end-of-day destination is unknown.
This process requires a couple of winning traits such as:
- A dedicated and committed mentality to learning the markets and trading.
- A step by step approach to avoid over or under loading yourself.
- An ability to measure your intermediate SMART goals (SMART is an abbreviation which stands for specific, measureable, achievable, realistic and timely).
Another important factor is that trading can only be done with risk capital that is acceptable to lose in its entirety. Clearly the goal is to avoid losing the entire trading capital, but the point is to choose a level of trading capital that a) traders feel comfortable with and that b) does not create a mental block. Risk taking must never lead to fear, or in other words there must be willingness to risk.
Once the comfort zone of the risk boundaries is established, then the next aspect is the application of consistent risk management. It is vital to keep your trading capital intact, which means both to avoid over-risking at all times and to keep the risk small until you are completely comfortable with their trading plan.
Critical to that super cool mindset is the “don’t know” mind or attitude, which looks at the world with vision unclouded by bias, preconceptions, or treasured opinions. The simple truth is no trader knows what will happen in the markets with 100% certainty. And the best traders are fully aware of that fact. Only attention seekers claim to know it all, but their intentions are to become famous. Realistic traders approach a trading day knowing that they do not know how the trading day will unfold. Therefore, they approach the market every day with a state of “relaxed focus”. It is comparable to someone who is waiting for something important to happen and wanted to be prepared to react both immediately and appropriately.
Traders with a super cool mindset are confident in their ability to profit from whatever the trading day or week brings. They carefully watch the action unfold and are able to catch the clues to future market movement and are then ready to promptly take appropriate action. They are experts in “trade what you see, not what you expect”. Most traders have a preconceived idea what should happen in the market, which obstructs their ability to clearly see what is actually happening on the charts. These traders cling on to their ideas (hope for the best) and ignore all the clues to the contrary. They become overly attached to their opinions and trades. Then later on when the trade has closed, they suddenly are able to see all the missed clues and warnings with clear vision. Traders with a super cool mindset are confident in their approach but open and flexible to new information and adjustments.
Approach the market without bias, be open to understanding its signals, feel comfortable with your trading plan and decisions, be willing to risk within your risk parameters, and be clearly focused without distractions. Also remember you do not control the market! A trader can only influence their trading plan and the implementation of this plan and nothing else.
A balanced confidence
Furthermore, it is key to realize that the market has its moments of insecurity and emotions (this drives price), but that does not mean that traders should follow suit. A trader needs to find equilibrium. They must be certain of themselves, their approach to trading, and their belief system, but on the other hand realize that trade setups and strategies are a probability and not a certainty.
Traders need to be confident on the one hand but accept the insecurity of the market on the other hand.
The worst is when a trader is over-confident about the market (leads to over-risking, etc) or
when a trader is under-confident of their approach and/or themselves (leads to missing trades, etc).
It is important to approach your Forex trading via the framework of probabilities. Traders must realize that nothing is a ‘sure win’ in the Forex market and each trade setup has a chance, never a guarantee, of turning into a profit.
A trader can become better at seeing trading as a probability. There is not one magic formula that provides an instant success. Most of the time, it boils down to a process where consistent efforts are required from traders. Traders need to train themselves to view strategy and setups as probabilities.
A trader who is trading a non-discretionary system is already exposed to probabilities. When making back tests traders quickly notice losses, losing streaks, draw downs, and slumps occurring regularly and can brace and prepare themselves for that. However, there is still an important difference between seeing a drawdown on paper and actually living through one as a trader.
A trader who is either beginning their trading business or is using a discretionary system might expect and/or want a high level of security (consistent success) from their trading endeavors. They fail to see the reality of trading: setups are ever a guaranteed win! In fact traders should expect to take losses – it is part of the business. Many traders desire an ultra high win percentage and they are disappointed when it becomes clear that the market is not as easy.
Traders must have a probabilistic mindset if they want to achieve a super cool mindset.
The best training is practice, practice, practice. Here are the steps you can follow:
- Conduct back testing;
- Perform forward demo testing;
- Estimate beforehand the probability of success for each setup that meets your trading plan;
- Write it down in a journal;
- Monitor how the trade developed and write down why it did or didn’t work out;
- Keep track how close your assessments are compared to the reality;
- Make conclusions based on the assessments in point 6:
- If the actualwin percentage is smaller compared to your assessments, then you are overrating the odds of success for a particular situation. Let’s say that the trades you assess with an 80% chance of success actually only win 65% of the time. You are over-confident in these cases.
- If the actualwin percentage is larger compared to your assessments, then you are underrating the odds of success for a particular situation. Let’s say that the trades you assess with a 60% chance of success actually win 70% of the time. You are under confident in these cases.
- Attempt to understand why there are any differences in point 7.
Trading in the zone
When a trader starts to incorporate a confident approach with a respect for the market, and adds a probabilistic mind to it, then you will slowly but surely start trading ‘in the zone’. This is when a new level of balanced confidence starts to grow and when the past experiences will make you develop. Remember, a smooth sea never made a skillful sailor. In trading too your experiences will enable your growth.
The successful mindset will start to evolve from “I might be able to do this” to “I will be able to this” to “I can do this” to “I am able to this!”
You will worry less about past losses, past mistakes, lost opportunities and missed trades. Your focus will move from the past to the current moment (now). You will be better equipped to protect your trading capital and be more committed to achieving your goals.
It is important, even when you see growth, to keep focused on your journey. Never think that you are ready. Always maintain this passion for the process. Accept the tedious work in your learning process. Accept the frustration and see it as a sign of progress. Keep your expectations modest, do not look for an easy way out and take responsibility for your decisions.
With a super cool mind now established you as a trader will be in the zone. Trading in the zone is a great rhythm: it means that you are trading at your best level. Let’s review how that looks like.
Here is a list of elements when I am IN the zone:
- I stay confident in my approach, analysis and setups but without any arrogance or over-confidence and with a natural and humble respect for the market.
- I keep my analysis simple yet effective. I remember that trading is not easy but overcomplicating matters does not help either.
- I am following my trading plan, following my trade management plan, and implementing my evaluations.
- Trading in the zone is balancing a ton of emotions that can be pulling and impacting my thoughts before, during and after a trade. Primarily, it’s about managing my own self-talk before and during a trade setup.
- I am upbeat and have a positive
- I have optimal focus on the charts and am not distracted by social media, mobile phones, news, need, fear, impatience, hope and greed.
- I am flexible to interpreting new information quicker and I am more adaptable to change.
Here is a list of pointers when I am in the zone and want to STAY there:
- I keep my routine going. Staying in the flow is all about consistent repetition. My motto is: “do not change a winning vibe!”
- I ride the tide and keep the trend alive. Remember that trends are very powerful on the charts and with trading streaks. Keep track of it and write down why trading has gone smoothly. Also, remember the state of mind at this time and what you are thinking.
- I keep evaluating and practicing. Do not stop with sensible and useful analysis.
- I avoid overconfidence. Keep your feet on the ground and remain realistic. Don’t start over risking due to a win streak but rather keep your discipline in check at all times.
Here is a list of elements when I want to get BACK into the zone:
- I analyze my trade statistics, trade setups, entries, trade management decisions and exits thoroughly. Keep in mind that the greatest professionals of any business are constantly preparing day in and day out.
- I decrease the mental pressure of not being in the zone. When expectations are not being met, pressure can become overwhelming and the weight on the shoulders can do more harm than good. Step backand relax instead of freezing up.
- I keep trying. A losing streak never finishes if a trader stops. Just like in baseball, a trader needs to keep swinging to get back into the rhythm. I practice more paper trading, more testing, more demo trading.
- I focus on the details. Avoiding a mistake could be the difference between a win and loss.
- I evaluatethe market conditions. What is the optimal market structure for my strategy to thrive in? And how does that compare to current market conditions? Am I implementing my strategy incorrectly or are the market conditions making my strategy struggle?
Does that sound like a lot?
Well, realize that trading must be treated like a business if you want to achieve profitability. The problem is that many traders approach their trading with the same attitude as they do with a hobby, extreme sport or gambling: adrenaline based decisions. This activity is fun for a while but when the boredom sets in then they quickly move on to something else.
The solution to profits in Forex trading is a bit ironical because it is simply: find the “boredom”!
When trading is “boring”, trading becomes successful. Why? Because Forex traders are then using a systematic and well balanced approach with a smart business mentality. This enables traders to trade consistently and apply their edge day in and day out.
Sound boring? Good, then you are on the right track!
The smart, well-balanced, systematic, and business-like approach to Forex trading is vital to a super cool mindset.
You are now aware how the super cool mind set looks like! But there are going to be some ups and downs along the way. Let’s now work on some details that need to be addressed and try to remove any potential problems and pitfalls that could occur! The various parts will be named “working on detail” and will all address different problems.
Working on Detail: Accepting Losses
Part of the winning mindset is accepting losses.
It might be difficult to imagine showing empathy to your losing trades. Also, letting your losses become your best friend probably sounds exaggerated to most of the readers. Embracing losses, however, has the possible advantage of speeding up the path to success tremendously.
The process of improvement is a journey, as we have mentioned before. And the journey can never start without the realization that each trade in general and each loss specifically is a moment of feedback. In fact, the market is sending a steady stream of criticism but are we ready to listen?
The trader can only learn from the market if they show openness to the feedback and if they are willing to learn from the each trade and specifically each loss. There are a number of factors that can hinder a trader’s openness to learn from the market. Let us discuss a few of them. Hopefully you will be able to avoid similar mistakes by recognizing the pitfalls.
Difficulties with negative feedback
The number 1 clarification is that people in general can easily accept “positive” feedback, whereas negative comments are a hard sell. Also people have trouble with accepting feedback from an external reference when it does not align with their own vision.
Traders are exactly the same. Obviously traders imagine themselves having winning trades so losing trades are almost a certain mismatch with their perception. Losing trades are seen as “negative” feedback and the pain and annoyance is often directed at the market.
The solution is to prepare yourself for losses well in advance. When demo trading, paper trading, back testing, forward testing, testing with a small demo account, and real life trading, always focus on the losses. If a trader were to test a strategy and only focus on the winning traders, then no wonder trading in real life suddenly seems so different.
When traders are prepared for, aware of, and expect losing trades to occur, then their mental willingness to recognize the loss will allow them to receive the market information with open arms.
The market is the market
It is vital to recognize the fact that neither the market nor the trades are intentionally hurting you. It makes no sense to get irritated by the market because traders cannot “control” the market anyhow. The market has no opinion of you or itself. It is a neutral object. It makes no sense to waste energy by thinking about the market or getting annoyed by it. The market is the market – end of story.
A trader, who embraces that realization, will have an open mind and heart towards the feedback of the market. Then they need to remain consistently flexible and open towards the market’s criticism in order to thrive. A trader equipped with that philosophy and mindset can embark on the journey of everlasting improvement.
To summarize: an ability to listen carefully to the market slowly evolves when traders are willing to accept losses. Also a higher level of alertness becomes apparent. Traders can then in turn pick up and interpret clues during trading quicker and process them faster without fear hindering their analysis.
Working on Detail: Evaluations
As a rule of thumb it is better to make evaluations of one’s trading day at the end of the day; not during the day. Although the goal is always to make our trading better and better, our primary goal during the trading day is implementing the trading plan.
Traders want to avoid making ad hoc decisions that do not align with their trading plan during the day. After the trading day is over, traders can evaluate and analyze their implementation of the plan and perhaps find points for improving their trading plan.
A trader can create a substantial edge in trading when they are able to focus on price action in relationship to their trading plan and when they are able to avoid getting distracted by losses, market movement, and social media.
Your engagement in working on your own evaluations is crucial for starting your journey successfully. Of course, it is easy to skip this step and move on to the next daily activity, but working on evaluations means that you are taking the important first step.
Most Forex traders know that evaluations are ‘supposedly’ important, but still do not take the time and energy to seriously complete their sheets. Many Forex traders simply dislike filling in their evaluation sheets after the trading day is completed. Here are probably the 3 main reasons why:
- For most traders completing evaluations is boring;
- The task becomes especially annoying when losses have occurred;
- Reviewing losses also confronts us with our mistakes, which is unpleasant for our mindset.
The best and greatest traders are like professional sportsmen, they learn from every kick, pitch, and throw. Here is why evaluations are the real path to improvement:
- Traders can recognize if they made a mistake in implementation of the trading plan and can evaluate the real performance of a strategy once their own implementation mistakes are removed;
- Traders can group together mistakes and try to understand what circumstances, behavior, and situations are at the root of the issue;
- Traders can assess the performance of a strategy or even multiple strategies, and evaluate various statistics, drawdown levels, equity curves, etc;
- Traders can implement improvements and monitor these.
Forex traders can make great progress when they start to deal with evaluations as seriously as they take entering a trade. Each trade offers a ton of information and learning potential: go out there and capitalize on it!
Here are some practical tips that could help improve the consistency with filling in the evaluation sheet:
- Keep a scorecard keeping track if you filled in the sheet or not;
- Have a target (95% for instance) for filling in the scorecard for the month and year and update target as your progress;
- Provide yourself with a bonus if the target is reached;
- Give yourself a warning if the target is missed (you are your own boss!);
- Mark trades as correct, inaccurate, mistake or blunder, depending on your assessment;
- Have a target for each of the groups and update targets as you progress;
- Have a weekly review (Friday’s and Saturday’s are best) of the trades and identify learning points for the future;
- For trading the new week go through the weekly learning points and the trading plan;
- Review learning points at the end of each month on a day you do not trade (perhaps on a big news day or lack of news depending on how you trade);
- Make sure the strategy and psychology are in sync;
- Change the mental mind set: celebrate and embrace losses as much as the winners;
- Change the mental mind set: view losing and failed trades as an OPPORTUNITY to learn and improve;
- Change the mental mind set: do NOT see losing trades as a failure;
- Start implementing NOW and do not postpone action. Postponement ultimately leads to never.
Ultimately Forex traders can only improve if they take time to evaluate and actively implement the improvement points. It boils down to:
Testing – making a trading plan – implementing the trading plan – reviewing trades and statistics – evaluating, analyzing and learning from trades and streaks – finding improvements – testing improvements – decision whether to keep strategy or not
Traders must limit inaccuracies, needless mistakes and costly blunders by having a solid defense of management (risk, money), psychology (patience, discipline), and planning (strategy, entry, exit). Once this is setup, then you need to focus on consistency and capitalizing on our edge and strengths. The latter is a gradual progress and emphasis should be on small increment of gains, not home runs. Traders need to put themselves in a positional advantage, not hope for the lucky big win.
Working on Detail: Focus
Forex traders face a major mental challenge when trading. Their goal is to remain focused on the NOW and not let their thoughts, attention and actions become altered or misdirected during trading sessions. Sounds easy? Guess again!
All traders drift away from current reality because their thoughts and energy are drained by past mistakes, losses, unrealized profits, and unexpected price movements.
Did you ever start out a trading day with a ton of energy? Did you ever start out a trading day where you were fully focused and ready, but as the trading day progressed you lost all of those good intentions?
Snow can disappear quickly in a strong blistering sun; and so can a trader’s focus when losses occur.
On top of that, the market provides a multitude of distractions due its ability to continuously make retracements. Traders also get sidetracked by social media, email, TV, phones, advertisements, and our private lives.
No wonder traders have a tremendously tough time maintaining their discipline.
When looking at other branches of business and sport, there is a ton of material helping managers, entrepreneurs, and professionals to optimize their focus and efficiency. Lower attention could have devastating consequences for Forex traders.
Obviously traders must be fully focused to improve their decision making capabilities. Here are some practical tips how to increase the attention span.
1) Give yourself a score for today’s trading implementation (attention and focus). Setup a minimum desired grade/mark that is passable. This way you can easily keep track and compare the number of successful versus non-successful implementation days.
2) Minimize distractions. It is a best practice to remove as many distractions online and offline as possible so that you are able to focus with a clear mind and head.
3) Keep checking your mood and establish boundaries for it. It is useful to keep an eye on one’s mood during the trading day. If you notice unwanted and annoying behavior that crosses the threshold, stop trading for the day.
4) Stand up, take a break and/or step away from the PC screen. Emotions decrease when a trader is physically further away from the pc and it could help to regain the balance.
Working on Detail: Adjusting the Mood
The sharpness and focus of a trader is particular vulnerable when traders have moods. How does a mood impact the trading?
A mood is a prevailing emotional tone or attitude. When a trader has a mood swing, the trader is less able to fully focus on the information which the market is providing because:
- The mood distracts their concentration away from present reality. In other words, the trader is absent minded and thinking about past decisions, mistakes, and missed profits OR about future developments;
- A ‘negative’ mood adds a bias to the interpretation of information. The trader creates a pink lens, which distorts they way information is being perceived. Did you ever look at back at charts and wonder how you could have missed important clues during trading? Your mood could have been the culprit!
Bad mood spells can draw away substantial energy and focus from interpreting the charts and implementing the trading plan. And it is clear that the trader must be fully concentrated to benefit from the market communications as much as possible.
A mood blurs the neutral, open and responsive view and lens of a trader towards the markets and price action. Now that we know that a mood will have a negative impact on our trading, why do traders actually get them in the first place? What triggers a mood?
Forex traders are especially vulnerable to psychological ups and downs because of the outcome of their trades. Their mood is impacted as their performance experiences winning or losing trades. It is at times as simple as this: a losing trade leads to a worse mood; whereas a winning trade translates into a better mood. The particular mood in turn influences the accuracy of implementing their trading plan.
1) A better mood leads to over-confidence, which in turn means that a trader could be over-risking, overtrading, or not following their own plan;
2) A worse mood leads to insecurity, which in turn means that a trader could be avoiding setups, revenge trading, or not following their own plan.
The question lingers: why do traders let themselves be impacted by a win or loss so heavily?
The real reason why traders have these moods is simple: Forex traders want perfect track records, want to have fun during trading, and/or are too lazy in focusing on the process and implementation. I am sure plenty of other reasons exist too.
Let’s make a comparison with the business world and assume we are a business owner of a retail store. Would the retail store owner risk their entire operations based on one bad day? Would the retail owner perform less well because yesterday was a day with less customers?
- They focus on improving their processes so that they have good days that outperform the bad days. They avoid risking it all because of one suboptimal decision, or due to a bad mood. They perform consistently because they have controls and checks in play that allow them to treat their store as a business.
Forex traders must do the exact same thing: treat their Forex trading as a business. Forex traders need to be tougher on themselves and realize that with Forex trading comes with wins and losses. The real mission for Forex traders is to implement the trading plan correctly and consistently, which should provide the edge.
Of course the matter becomes more difficult when losses and wins appear in streaks. Eventually traders are able to get used to handling a single win or loss. This changes when trade losses and wins come in streaks, as the magnitude of all the emotions quadruples when a trader encounters streaks. In principle, the same concepts mentioned above are valid: focusing on the implementation and process of trading will ultimately lead to winning results. Also evaluate the root cause of the losing streak or trade. A trader can determine the actual strategy performance by understanding which losses were due to implementation mistakes.
Working on Detail: React, Do Not Predict
Forex traders should always try to trade with the flow. They should not be impacted by their opinion on what price should do, but rather focus on what price could be doing. Traders always want to remain flexible in their mind and actions. Never do we want to trade a prediction and ‘hope’ that the market confirms our analysis.
Because this creates emotions, which in turn makes Forex traders feel imbalanced during the execution of their plan. We have to accept the fact that we, as traders, cannot ‘control’ the market, which means that we are always unsure about our trade developing (but we don’t have to be unsure about our trade!).
Forex traders are more like road map readers: they are trying to find the quickest and safest way on the map from point A to point B. The graph is a trader’s compass and candles, patterns, trends, support and resistance are clues that traders find along the way. The system how we use those clues depends on our plan. There is no need and time for second guessing and second doubting.
The best approach is establishing zones of interest and waiting for triggers to confirm a trade setup.
As price actually reaches the zone of interest, many traders get into emotional storms that disturb their balance. The best solution is to identify a clear trigger for entering the trade, and once it shows up take the trade without hesitation.
Here are the 3 rules for what you want to keep an eye on:
- Define exactly what you must see on the chart before trading it (trigger);
- Do not stare at the chart and look at each small increment of price change, which will make every trader nervous and jump into any trade;
- When the trigger occurs (1st point), take the entry without hesitation. It is too late to second guess the setup as you have done all of the analysis beforehand plus it is not possible to have a perfect trading scorecard anyhow.
Establishing trading zones provides a Forex trader with a sense of peace and calm: only when price reaches lower and/or higher levels is the Forex trader on guard and ready to take a trade.
This removes the endless, vicious circle of doubt whether to take a trade or not when price is stuck in the middle of nowhere. Most often traders just lose patience and discipline during this process and are unable to avoid taking a trade setup, which ultimately ends in a nightmarish entry and often an even worse exit spot.
With a clear plan in mind, the trader can clearly execute the trade. Setting up zones of interest helps deflect our impatience.
The next step is waiting for a confirmation of our levels. The best plans often incorporate a confirmation signal, such as a candlestick pattern, a pullback or even a breakout, to ensure that price indeed is reacting at the zones of interest.
Part 4: Other practical tips
This part focuses on general tips and recommendations.
Practical Tip 1: Removing nervousness when trading
Traders want to avoid nervousness during trading. One of the main tips is to avoid zooming into lower time frames. This often happens once an entry is made because they can keep an eye on price action and the development of the trade. The problem is that when a trader takes a setup on a 4-hour chart and then zooms in to a 15-minute chart, the price action is NOT relevant for their decisions. The 15-minute chart will only distract them from the ultimate goal: following the trading plan.
Remember, there is absolutely nothing wrong with zooming into a lower time when hunting for a trade entry. But do not zoom in to lower frames once the trade is taken. If a trader wants to keep an eye on the price movement, it is a best practice to watch price action on the same time frame as the entry or even 1 higher (unless a trader has specifically tested strategy that zooms in).
Another tip is to look less at the charts. Once a trader is in a setup it is recommended to reduce the time spent reviewing the currency pair that is traded. Reviewing the trade over and over again will only lead to doubts and fears. A better approach is to analyze different pairs OR even to walk away from the computer. Traders must avoid the habit of mindlessly following each tick movement, which will only lead to difficulties in executing the trading plan.
The 3rd practical tip to improve the nerves is by taking small levels of risk when starting your trading career. Lower levels of risk also help traders overcome their fear. The importance of a win or loss decreases when only a reasonable amount of capital is lost on one single setup. This helps increase the ability of a trader to “live” through the cycle of a setup. Once the confidence matures and the experience increases, the risk can be increased to a normal level of risk.
One more tip is to focus on higher probability setups. If you are having trouble with staying in a trade, then focusing on higher probability setups means that less losses will occur on average. This in turn will help the confidence level.
Practical Tip 2: Trading conditions you want to avoid in Forex market
Here are some practical situations that you as a Forex trader want to avoid.
Chasing the market!
This happens when you had a trade idea but failed to execute, and then see the trade develop as you expected/planned. Do not try to correct a past mistake by taking the trade too late.
Jumping the gun!
This happens when you have a trade idea but the circumstances have not yet lined up. Do not try to take a trade before you have the actual confirmation. Forex traders love jumping in trades… The idea of making profits and pips pushes their excitement to the max which is soon replaced by anxiousness when the trade is entered but it does not develop as expected. How many times are they rudely awakened to reality that price moves up and down? It becomes much easier for a trader to stay in a trade when that trader enters a trade setup which has a lot of confluence (technical and/or fundamental) and a good probability of success. The natural ups and downs of the market will not scare you the trader when you find a setup with lots of potential.
In need of trading!
Avoid trading Forex if you feel imbalanced. Needing a trade and taking it any cost is a bad business decision. Take a trade on your own terms, not when you feel forced to take a trade due the market pressures/price movements. We need to take trades with higher probabilities.
Proving yourself right or the market wrong!
Trading is not a battle between you and the market. Remember that it is the market which offers you the opportunity to trade. Trading performance is a scorecard of the success of your business model and trading plan.
Not mentally focused and ready!
Social media, internet, commercials, TV and our environment can distract you while trading. Traders must ensure that their attention is fully focused on trading to ensure optimal performance of their business and trading plan.
Trading without an open attitude!
Be open for the feedback of the market and your trades. If you are not in a receptive mode, it is best not to trade for a while. Traders want to approach the market with a learning attitude. You want to learn from every trade and each situation and if that vibe is missing, trading will be less profitable and certainly provide less learning experience.
Practical Tip 3: Consistency is the final step
Consistency and specialization are the final steps and are not elements that can be hurried. Developing these will take time and the learning process should be constant.
A trader can compare this process with a chess game. In chess, many victories are achieved due to one player gaining a positional edge over their opponent. This positional edge is not miraculously created in one move (unless the opponent makes a blunder or mistake), but by making a small improvement or better decision each step of the way. Eventually this creates an ever-increasing edge and at one point a crack in the defense of the opponent is found OR the opponent makes a mistake due to the mounting pressure. The same can be said for trading.
Small gradual improvements lead to a big advantage if applied consistently at each decision point (and we do not make a mistake or blunder along the way that removes our built up advantage).
Remember, it is all about long-term success. Take it step by step to enable a higher rate of success.
More ultimate guides from Elite CurrenSea (ECS):
- Ultimate Forex Guide on Support and Resistance (S&R)
- Master Guide on Candlestick Patterns
- Elliott Wave Patterns and Fibonacci Levels
- How to Use a “Wave Trend Indicator” for Price Swings and Wave Patterns
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Thank you for your attention and hope to see you soon.
Wish you many green pips!