Trading Psychology

           Trading Psychology in Forex. 

This is what everyone should master in any trading technique.

  Now here is a subject that you love to hate! Even though a lot of people will just

gloss over this and think it is not an issue in their trading, they could not be

further from the truth. 

It is important, and it is important to know how it affects your trading. The majority

of the human race has emotions and these emotions certainly come into play when

you have some real hard-earned cash on the line. I'm sure if you have been trading

for a while, you would have experienced a variety of different emotions, some good

and some not so good. I know I have.

I'm not sure where the figures come from, but they state that 90-95% of traders fail!

I guess if it was that easy, we'd all be doing it and making a killing. No one would

have to work, and if that was the case, we wouldn't have any financial markets to

trade. The success rate is low. So what makes you think you can be one of the 5-10%

that can make a go of this trading game? I'm not just talking about Forex here; I'm

talking about all trading.

Now, in my humble opinion, I believe 'Fear' and 'Greed' to be the main culprits that

hold us back from achieving our dreams. The way I look at it is that you are fearful

of losing out on the big move, so you stay in the trade, or you are greedy and want

everything from trade so again, you stay in the trade.

Let’s have a look at a simple example. Say we are looking at the 5-minute chart on

the EUR/USD. It is normally a chart that has a fair bit of action, moving up and

down throughout the day. Now the market can only do one of three things. It goes

up, goes down, or goes sideways. Now if you had gone long and bought the

EUR/USD, and it heads up, you are a winner. If it goes sideways, you don't lose

anything and if it goes down, you lose. So to keep things simple here, you have a

33% chance of losing money, which means you have a 66% of not losing money.

Okay I'm assuming that before you bought the EUR/USD, you thought that it was

going to go up according to the rules of your trading system. It doesn't matter what

the method you use to trade, as there are thousands to choose from, which in your eyes

will give you a higher probability of the trade moving in your preferred direction.

This is way too easy as we have a 66% chance of not losing and we have a method

that puts the odds well and truly in our favor to choose the correct market

  As soon as you enter, any of those three directions can happen, keeping in mind the

the market rarely moves in a straight line. Just because it looks like the perfect buy set

up at the time, this may not be the case where you bought at the exact high

for the day. This happens and the mind games begin.

One of my favorite sayings,

which I say aloud to myself several times a day, is 'Patience, courage, and discipline.

This mainly refers to my trading, but I guess you could apply it to a lot of everyday

events in your daily life.

Patience is obvious. You wait for the correct signal to enter a trade, or exit for that

matter. Don't be afraid of missing out on trade as there will be another potential.  

      

opportunity sooner than later. If you are in doubt, stay out. Sure, you may miss some

nice moves now and then, but so be it. You can't expect to catch every trade or

every market move.

Courage refers more to having conviction in your trading method and following it

through, during both good and bad times. You know the system works as you have

tested it and tested it again. You stick with the plan and see each trade through to the

end.

Discipline is the whole package. You have a tested trading method and you have

certain rules within this method. You have to be disciplined to follow the rules to the

letter. Without discipline, you will be tempted to change the rules mid-stream, which

will further confuse the emotions and lead to further problems.

They certainly all tie in with each other and can be looked at as a three-legged stool.

Without one of the legs, the stool is useless. That's how important they all are. This

is just my little saying that keeps me focused as they are words I use every day. You

may wish to come up with your way of thinking or dealing with trading

psychology.

Here are a few examples of how the market plays with your mind. You have just gone

long but as soon as you enter the trade, the market falls away, and it appears you

have bought right at the top. You then get stopped out to the exact pip, where the

market reverses and heads back in the first choice direction, past your original entry

point and beyond. This happens all the time, and no there isn't some sort of

conspiracy by your broker to clean out your stops. This sort of thing will frustrate

you, but if the market dropped and came within 1 pip of your stop and then reversed

back in your first choice direction, giving you a very successful trade, then you

would consider yourself lucky that your stop loss is held by one pip. Again, this sort

of thing happens all the time. One result will have you feeling like the whole world

is against you and the other result will have you feeling like the king of the world. 

     You may be trading more than one currency pair where you have taken a bit of a hit

on one of your trades. You are down 20 pips and you now have a nice trade on

another pair. Your rules state that you have a profit target of 15 pips, but because

you were down 20 pips on a previous trade, you ignore your rules and go for 20+

pips to make up for your loss. The trade goes well, gets up to +18 pips, and then

turns around and heads south quickly, stopping you out. Now you are 20 pips down

from the previous trade, and also down for whatever this trade cost you. Your

emotions are being tested because if you had followed your rules, you could have

taken the 15 pips profit as per your rules, and only been down 5 pips to date. This

sort of revenge trading is not recommended as you more times than not, will

dig yourself into a deeper hole.

There are many examples of what can go wrong like removing a stop or even

moving a stop further away, adding to losses, ignoring your target, ignoring

reversal or exit signals, cutting your profits too early, not concentrating, forgetting

about news releases, trading while sick (or after a few drinks), letting your ego

decide market direction etc etc etc. There are many reasons why things go wrong,

and when they do, your state of mind will be affected in different ways.

There is no simple answer to all of these potential problems, you just have to work

on your discipline and work out your way of dealing with these sorts of

issues. Get used to having losing trades and accept them as they are just a part of the

bigger picture. Also, get used to seeing potential trades come and go without you

being on them. You cannot expect to catch every move in the market. It is also an

advantage if you can control your own emotions, by treating every trade, whether a

winner or loser, the same. Of course, the desired outcome is to be profitable, so it

should also be taken fairly seriously. If you want to be profitable, stick with your 

    rules, concentrate, and keep your emotions in check.

Remember PATIENCE, COURAGE, and DISCIPLINE!

        A Bit More on Psychology

Most traders start in this business from, what most people would consider a

normal background. By this, I mean that you would have a normal job where you are

required to work 38, 40, 50, or whatever hours a week. At the end of the week, you

receive your paycheck, knowing that for every hour you have worked, you have

earned $25 (example only). So you may have this psych built into you that you have

to work your 40hr week to be entitled to your $1000 paycheck. I'm just talking

about Mr or Ms. Average here.

Now with trading, things are a little different, and it

does take a little getting used to. Traders trade in a variety of ways on a variety of

different time frames, with different objectives in mind.

So first up we'll go back to my Day Trader example, where I was chasing 

     

  pips a day scenario. Say I started trading at 2 pm local and had achieved my 20 pips

by 2.30 pm local. This does happen quite a bit. So it has taken me 30 minutes to hit

my daily target. Now what? The smart and disciplined thing to do would be to

shut down your trading platform and walk away. What do you think most traders

will do? They think, well that only took me 30 minutes to hit my target, so

imagine what I can achieve in a few hours. I have to justify my profits with some

effort! Guaranteed the next trade will be a loser. Then you have the problem of

chasing your tail for the next few hours just trying to get back to the 20 pip target.

At least you will get your 8 hours of trading, and still, end up with the same result. I did

this a few times in the past, as I was a bit of a slow learner but now, as soon as I hit

my target, stops are brought in real tight to lock it in, and if the market continues in

a favorable direction, then good luck to me, but once I'm stopped out, I won't enter

another trade. Walk away.

Another example I experienced, was trading with a group off the 60-minute charts

where we were in the market at all times. Your position had to be checked

at the top of every hour. We were trading 3 pairs and our overall target was +200

pips for the week. Once we achieved the 200 pips, we called it quits and then waited

for the following Monday. As you can imagine, monitoring 3 pairs every hour can

lead to sleep deprivation, marriage breakdowns, lack of social life, etc, but the good

news was, that most weeks we were finished by Tuesday evening. So we started

Monday morning and done by Tuesday evening, with our 200 pips safely in the

bank. It was very tempting to continue trading for the rest of the week to go for the

big kill, and initially, we use to do this, and like the 20 pip a day example, we would

end up losing a few trades dragging us back to where we started on Monday.

There was the odd week, where had to work right through just to get us to the

target (or close as possible) and they weren't pleasant at all. On a good week, we

would only enter a couple of trades and be done within a few hours. You don't

realize just how hard it is to sit on your hands for the rest of the week.

What I am getting at here, is just because it only took you a few minutes or hours to

earn what you would normally earn in a day or a week, don't think you have to

justify chasing more trades to account for your time. One of the main reasons we all

get into this is for financial rewards and time to enjoy those financial rewards.

Try to avoid the greed factor and just concentrate on taking small consistent profits

over time without wearing yourself out. Once you can achieve this, then it is just a

matter of letting the power of compounding do its thing. It may be slow going at

first and you may think it will take forever to achieve any real significant returns,

but once it cranks up like the snowball example, you will be rolling in it.

Looking for 20 pips on a $1,000 account is the same as chasing 20 pips on a

$500,000 account as long as your risk percentage remains

     

       mind that plays tricks on you when you start dealing with bigger numbers. If you are

not used to the big numbers, then it is sometimes a little difficult to wrap your head

around them. The plan is to build up the slowly but surely, and when you get to a level

you are comfortable with, then it may be a good idea to start enjoying your profits

and reinvesting money into other ventures such as charities, education, and family, or

even an Aston Martin. Whatever floats your boat.

Well, that's enough of the deep and boring, albeit very important, stuff. The next

chapters will go into a few trading ideas and where we can find these ideas, which

should be a little more exciting. But please be very aware of fear and greed and how