Tag: psychology

Categories
Forex Psychology

Do Not Let Your Losing Trade Chase You

Trading depends a lot on a trader’s mindset. It does not matter theoretically how strong a trader is. If he does not know how to deal with trading pressure accordingly, he will never be a successful trader. One of the biggest issues in trading is encountering losing trades. It diverts the traders’ mindset, which makes […]

Trading depends a lot on a trader’s mindset. It does not matter theoretically how strong a trader is. If he does not know how to deal with trading pressure accordingly, he will never be a successful trader. One of the biggest issues in trading is encountering losing trades. It diverts the traders’ mindset, which makes […]

Trading depends a lot on a trader’s mindset. It does not matter theoretically how strong a trader is. If he does not know how to deal with trading pressure accordingly, he will never be a successful trader. One of the biggest issues in trading is encountering losing trades. It diverts the traders’ mindset, which makes him make more mistakes and lose money in the end. We mostly choose winning trade setup in our trading lessons. However, we sometimes chose a trade setup that encounters a loss as a part of our trading psychology lesson. In today’s lesson, we are going to demonstrate a losing trade.

This is a daily chart. The price heads towards the North upon producing a C point. Look at the last candle. It comes out as a bearish engulfing candle producing right at the level, where the price had a rejection earlier. The H4-daily combination traders may flip over to the H4 chart to go short in the pair.

This is the H4 chart. The chart shows that the price heads towards the North with good bearish momentum. The sellers are to wait for the price to consolidate and produce a bearish engulfing candle to go short in the pair.

The chart produces a bullish inside bar. It seems that the chart may produce a short signal for the sellers soon. The H4-daily combination sellers must keep their eyes on the chart.

The last candle comes out as a bearish engulfing candle closing well below consolidation support. The sellers may trigger a short entry right after the candle closes. This looks like an A+ trade setup. It seems that the sellers do not have to wait too long to earn their profit.

Things do not go according to the sellers’ expectations. The chart produces a spinning top followed by a bullish engulfing candle. Some sellers may want to close their entry with some losses here. Let us assume that we let our trade run. Then, here comes the last candle. It looks good for the sellers again.

The chart produces a bullish engulfing candle again. This must be annoying for the sellers. Let us assume that we keep holding the position with the hope that it goes towards the South and hits Take Profit.

It does not. It hits Stop Loss instead. An A+ entry ends up being a losing trade. If you keep thinking about a losing trade (with your proven strategy) and do not look to find out new entry, it means a losing trade chases you much more than it should. You really have to find out a way to avoid it.

Categories
Forex Psychology

The Road to Become a Pro: The Trading Job Part 1

Except for elementary tasks, to do a job properly, it is commonly subdivided into several tasks or processes, each of them optimized to get the best results. To succeed in Forex trading, people need to think about trading as a job made up of several processes that the trader needs to do every day. 

Except for elementary tasks, to do a job properly, it is commonly subdivided into several tasks or processes, each of them optimized to get the best results. To succeed in Forex trading, people need to think about trading as a job made up of several processes that the trader needs to do every day. 

Except for elementary tasks, to do a job properly, it is commonly subdivided into several tasks or processes, each of them optimized to get the best results. To succeed in Forex trading, people need to think about trading as a job made up of several processes that the trader needs to do every day. 

There are three groups of processes a trader should do day, in day out plus another one that must be carried out periodically.

  • Preparation of the next trading session
  • The core trading processes
  • Post-session analysis 
  • Periodic review
  • Preparation for the session

Trading is like no other profession. Usually, when driving a car, the risk taken compared with the ability of people to predict where the vehicle is going is shallow, and even more so, when we think that it is in the interest of other drivers to avoid collisions against you. That is the opposite of what happens when trading the financial markets. Here, prices move to the direction of maximal pain, that is, pros and institutions, which have vast amounts of information about the trades of the rest of the crowd, move prices so as to hurt the most and profit from your “collisions.” Thus, even when just a few people recognize the fact, psychology plays a vital role in the success of the trader. 

Self-Assessment

According to Dr. Van K. Tharp, success is 60 percent self-control and 40 percent risk control. He also stated that the risk control part is 70 percent position sizing and 30 percent reward to risk ratio trades (cutting losses short and let profits run). Thus entries and exits, the basis of a trading system, account for just 12 percent of the total factors that make trading successful. That means traders need to work on themselves much more than on market analysis.

Traders also need to evaluate their physical and psychological conditions and prepare themselves before the opening of the session, since, as we saw, that they are the most crucial factor in their performance. Most top traders are aware that they must show a zen-like, emotion-free state of mind when trading. They call it Zero-state. 

Dr. Tharp contends that the propper psychological, mental state is the difference between profits and losses. That is quite true. Sometimes the edge a trader has over the market is tiny. That edge can be lost if the wrong mental state changes the equation, makes him modify or avoid a profitable entry or hold a losing trade too much, not following the rules.

Rate yourself

Before you start the trading session, rate yourself in your different facets (parts). Health, happiness, family relationships, economic condition, Self-image, your fear-greed state, your own market sentiment, and any other aspect you consider vital for you; and rate these aspects on a scale of 1 to 5 or 1 to 10. Make an index of all these and keep it. Check your trading performance in comparison with this index. Maybe you discover that trading below a certain level hurt your profits. You could make a rule not to trade unless your self-index is higher than a specific figure.

 Beliefs for Self-rating
  • I am crucial to successful trading
  • Being aware of how my brain works is a trading edge
  • Self-analysis can help my different mental parts to get in agreement
  • Trading with a self-rating below X hurt my profits
  • Success in trading is a measure of my mental performance
Best Mental States for self-rating
  • Honesty with yourself is crucial
  • Rational and meticulous
Mental strategy for self-rating
  • See yourself analyzing your condition
  • Identify and solve possible conflicts
  • Do the rating and judge if you are fit to trade today
  • if not, can you identify the part or parts with the lowest scores to improve them?
  • Yes? Go to Rehearsal
  • No? Avoid trading today.

Rehearsal

Rehearsal is a crucial element to improve almost any human activity. Visualizing the possible scenarios of future trades and identify your actions if one of them becomes real is key to success. Top athletes mentally rehearse his play before committing themselves to action. 

The rehearsal task is essential because your rational mind will be in command, and any fear or greed request sent by your subconscious (system one) mind can be easily spotted and analyzed if it is in collision with your planned course of action. That helps the trader avoid costly mistakes.

Beliefs for Rehearsal
  • Our capacity to process information is limited
  • Stress caused by our system one reduces that capacity further
  • Rehearsal helps our rational mind to take control of system one, which is irrational and primary
  • Better be prepared to act when needed, especially on disaster situations
  • Rehearsal will prevent mistakes and save money
The mental States for Rehearsal
  • Rational
  • Complete
  • Creative
  • Positive
Mental Strategy
  • Which unanticipated scenario can stop me from following the rules?
  •  For each trade: Plan the possible scenarios. Which stops and targets are optimal?
  • Mentally see yourself executing your solutions on every trade.

Further reading: Peak Performance Course Book 1 – How to use Risk, Van K. Tharp chapter V

Categories
Forex Daily Topic Forex Psychology

What does it take to Replicate Success?

Replicating something is done by taking a model and copying it. To become a successful trader, beginners should replicate, or model, a successful trader. But what does it take to replicate Success?

Replicating something is done by taking a model and copying it. To become a successful trader, beginners should replicate, or model, a successful trader. But what does it take to replicate Success?

Replicating something is done by taking a model and copying it. To become a successful trader, beginners should replicate, or model, a successful trader. But what does it take to replicate Success?

The Model

To replicate a model, we need first to define and subdivide it into sub-processes or tasks. According to Dr. Van K. Tharp, the needed subtasks required to master to become a successful trader are:

 The trading process

  1. The process of trading
  2. The process of developing a trading system that fits the trader
  3. The process of objective definition and risk management
  4. The process of a business plan as a document that guides decision-making.

Of course, to aim for excellence, we need to model the best traders in class. 

The first step is to subdivide the model into sub-tasks. Once the tasks have been defined, we need to attach beliefs, mental states, and mental strategies for each one. The purpose is to duplicate the way a successful trader thinks and acts. If we can achieve this feat, we are sure the results can be replicated.

The beliefs

According to Dr. Tharp, beliefs act as the first filter to transform the information coming from the world. Beliefs, meanings, categorizations, and comparisons determine how people perceive the real world. What a trader expects from the market depends largely on his beliefs about it. That which is called market sentiment is really “market beliefs.”

Since beliefs are filters to reality, it is wise to classify them, by asking ourselves the following

  • Where did this belief come from?
  • How useful is it?
  • How does it limit my actions?

This process helps us keep and improve valuable beliefs and get rid of un-useful ones.

Mental States

The next step to generate success is duplicating the mental state of top traders. It has to do with discipline and emotional control. When people carry their mental problems to trading their results usually come from an improper mental state, not suited to trading:

  • I’m impatient and always get in too early
  • I get mad at markets. They seem to know when I trade just to do the opposite
  • I’m afraid the market is against me now that I’m wining
  • I get too excited when I’m winning and don’t get out in time.

Controlling these states is not the solution to solve all problems. It is just one part of it. Dr. Van K. Tharp tells that in the ideal model to the trading success, each task has an optimal mental state attached to it. 

Mental Strategies

 A mental strategy is a sequence of thoughts that go from a stimulus coming any of your senses to output or action. Let’s create an example with two possible mental strategies for the same stimulus to better understand the concept.

Mental Strategy One:
  • perceiving a trading signal
  • realizing it is a known signal
  • Think about what can go wrong if you take it
  • Visualize the scenario
  • Feel afraid
Mental Strategy Two
  • Perceiving the Signal
  • Recognize it as part of your system
  • Feel good your system delivers you a new opportunity
  • Take it and trade

What do you think is the right strategy for trading? Could you take action and trade consistently using mental strategy one?

As in the case of the mental states, each trading task requires an optimal mental strategy to optimize the results.  That will be developed in future articles.

Further Reading: Peak Performance Course Book 1- How to use Risk, Van K. Tharp.

Categories
Forex Psychology

Trading Psychology -Are you a Trader?

What defines you as a trader? What is the secret ingredient that makes an ordinary person a trader?

What defines you as a trader? What is the secret ingredient that makes an ordinary person a trader?

What defines you as a trader? What is the secret ingredient that makes an ordinary person a trader?

Dr. Van K. Tharp, in his first Peak Performance, tells the story of Jack, a wannabe trader that, after more than ten years losing money in the markets he discovered a trader who had made consistent profits in the markets for 30 years. This great trader was willing to teach him if he was committed to learning how to trade properly.

Jack told him he wanted to be a trader, and he understood he, the old trader, was willing to teach how to do it.

The trader said, “yes, I’ll teach anyone, but most people are not fit to learn. All I ask is to do what I tell them to. Many people say he will, but most of them don’t even finish his first assignment.”

Jack told him about his failures and his inability to follow supposedly successful systems that somehow it didn’t work for him. Then, he asked the old trader about his secret to success.

“I am a trader,” told Jack.

“I know it, said Jack, but what is the secret?”

“I have told you: I am a Trader. You are a game player. When you’re fully committed to becoming a trader, you’ll understand. Are you really entirely committed to become a trader?”

Commitment

Commitment means a person is focused on and putting all efforts to accomplish a goal. To show you the difference between commitment and lack of it lets us understand the following cases:

  • Case 1 A Trader made a profit in the market but did not follow his strategy rules.
  • Case 2 A trader entered a position with his system but is continually fearing the market will move against him
  • Case 3 A trader has subscribed to a signals service supplied by a successful trader but, somehow, he cannot trust them, so he cherry-pick them.

Contrast these cases with the following ones:

  •  Case 4 A trader made a profit strictly following his trading strategy.
  • Case 5 A trader entered a position not knowing the outcome of the trade, but being sure his system will make him money each month if he followed the rules of the strategy.
  • Case 6 A trader is entering all the trades the signal service provides, because he trusts the service, and records all trades for analysis purposes.

We can clearly see the contrast between cases 1-3 and cases 4-6. In the first case, the trader felt unsure, and we see there was an inner conflict between what he should do and that he felt. In the last cases, the trader was in sync with the method. There was no conflict between theory and practice.

According to Dr. Van K. Tharp, conflict is the result of people being fragmented internally. The different parts that make the personality of a person trying to accomplish particular positive purposes by following certain primary behaviors. Not all of these responses are congruent; thus, they push the person towards different directions. For instance, a role that supports a trade decision might be in conflict with the inner part of the trader that tries to avoid risk.

Obstacles to Success

Traders think that to trade successfully is as simple as knowing when to enter and exit. The issue is, when they realize that having always winning trades is not possible, they find two main obstacles: 

  • Not reaching the profits they wish, or 
  • Try to avoid losses. In fact, both issues are related. 

When a person tries to avoid losses, she holds into the loss hoping it the price will reverse and come to his favor. Then when a small paper profit shows, she closes it at once on fear the price would reverse and become a loss. Finally, she is cutting profits short and let losses run, which is a recipe for disaster.

The truth is in there

The real problem lies inside the trader’s head. People tend to avoid working on themselves, as it’s too uncomfortable, so they shift their problems and blame the market. For example, people seldom record their trades for later analysis. Therefore, they are not sure if the system fails or is himself. Then, they have second thoughts about every trade, so they cherry-pick the trades.

Also, they don’t use predefined targets or stop-loss levels, so they decide to stay or get out of the trade solely based on his inner feelings. Thus, in the end, they succumb to their biases. What’s worse, his system is totally random on entries and exits. Finally, since they do not register their trades, there is no way to know the properties of his system or devise ways to optimize it on entries, take-profits, and stop-loss settings.

The end of it is, the trader will doubt or quit the system after a perfectly normal losing streak because he lacks the information needed to verify if the current performance of the strategy is normal or not.

Winning and losing

Many people that are attracted to the markets by their huge potential profits don’t accept losing. But, the reality is there is no sure system to trade the markets. There is an element of chance or risk; thus, some trades will inevitably be losers, and traders have to accept losing. If a person wants to only win, the markets are not the place to be. To be successful, there is no need to be right all the time. Not even 50% of the time. A scientist may spend five years in the lab doing unsuccessful experiments until the last one pays and discovers something worth all the effort and time. A trader may be successful just one every five trades and be entirely successful. In the trading job, a winning rate and Reward-to-risk ratio combination is the key to success. 

Developing Commitment

According to Dr. Van K. Tharp, developing commitment is a three-step process.

 Step 1

Determine your own obstacles. List them on a document. If you’re not sure about them, keep a diary of your trades, reviewing it every week. Look for the obstacles you are encountering.

Step 2

Analyze every obstacle and try to see what is going on in your mind, what is the common element. Not taking losses? Cherrypicking trades? Taking profits too early? Not keeping your diary properly?. Do some inner research, try to find out what’s inside your head. Doubt, fear, unsure about your strategy?

Step 3

This step has to do with dealing with whatever is inside you that is sabotaging your trades. You must make peace with your obstacles. One way to deal with them, says Dr. Tharp, is to go to the extremes. For instance, if your problem is with losses, imagine taking a huge loss. As you keep doing this exercise, you will find it easier to cut your losses soon.

You should find the parts of your mind that are key to the conflict and negotiate between the parts, to spot behaviors that could fit both parts in conflict.

Further reading: Peak Performance Course Book 1 – How to use Risk, Van K. Tharp

 

Categories
Forex Daily Topic Forex Psychology

Sentiment Analysis- An Introduction

 

 

 

Market Sentiment

The Market sentiment term is used in reference to the mood of the market traders. Sometimes most traders feel fear and pessimism, and at other times they feel overconfident positive and, even, greedy. Investors trade their beliefs about the market, and the beliefs are raised by its over-protective system one (Please, read https://www.forex.academy/know-the-two-systems-operating-inside-your-head/). Thus, they react emotionally to the market, and these reactions influence the market at the same time that the market is changing their emotions.

The two systems

In the mentioned article, we talked about the work of Dr. Daniel Kahneman and the Two-systems model to explain people’s behavior. System one is fast and closely related to the primal emotions and instinctive knowledge. In contrast, system two is slow and is the way people use in rational thinking, computations such as math operations such as counting. We also said that system two trust system one most of the time. That is the way we are programmed. System one is a warning system if danger appears. 

Market Sentiment is a Contrarian Indicator

But the marketplace behaves very differently from the real world where system one was trained. Thus, market sentiment is a contrarian indicator. That is because the majority of market participants are non-professional investors moved mainly by greed or fear. Therefore, when a large portion of traders shows expectations about the future curse of an asset pointing to one direction, the market tends to move in the opposite direction. That is logical. Let’s suppose that a large percentage of retail investors think the EURUSD is going to rise significantly. That means they are invested in or plan to do it right away. At the times when the crowd is the most bullish, it is when they are nearly fully invested. 

The market is fueled by the buyer side. When everyone has already invested in the EURUSD most of their funds, almost no fuel is left to lift it further, as they don’t have more financial capacity to continue investing. Thus the demand shrinks. Only the supply side is left, since professionals, who sold every available lot to the masses, are not willing to buy that high; therefore, the prices should fall.

The Market Players

There are three types of market participants: The informed, the uninformed, and the liquidity players. The informed players have insider information about the course of the fundamental drivers and can position themselves in the direction of the future trend. These are the institutional traders. They tend to sell at the top, when the crowd is mostly optimistic and buy at the bottom when the public sees no end to the drop.

 Uninformed traders are the majority of retail traders. They act moved by greed and fear. Their greed made them bet with disproportionate leverage at the wrong moments. Their fear made then close their positions at the worst possible time or close it with minimal gains so as not to lose. 

 Liquidity traders are professional traders interested in short-term plays, so they mostly do not affect the primary market trends. On the forex, Liquidity traders operate using technical analysis and price-action strategies, using money management schemes and systems that have been proved to be profitable.

Traders are their worst Enemies

  •  Everybody knows they should buy low and sell high, but the majority buy high and sell low.
  • Everybody thinks it is easy to be successful in trading and be rick
  • Anyone should know that panic selling is a bad idea, but nobody follows the advice.
  • The major part of market signals is worth less than a coin toss, but people still crave them and then overtrade and lose at the first slight market retracement.
  • Nobody takes seriously trading with reward to risk ratios over two. Instead, they prefer High percent winners with lousy RR ratios.
  • Everybody trades untested strategies. Thus, they ignore the statistical parameters of the system, and, even, they cherry-pick the signals.
  • Nobody knows about position sizing even when they want to trade at maximal leverage.

Advice for you

Market Sentiment is a contrarian indicator. If you consider yourself a uniformed trader ( and 85% of retail traders are), trade against yourself. A lot of brokers trade against you, and they are getting rich.

Instead of one impulsive trade based on greed, consider yourself direction agnostic by taking two opposing trades using 15-pip away stop orders and a 2:1 Reward: Risk ratio: 

Practical System Example:

Two simultaneous and opposing orders with a Reward/Risk Ratio of 2.

1 One LONG EURUSD position
  • Buy Pending Order: Current price + 15 pip buy stop order
  • Stop-loss: 20 pips below the entry price
  • Take profit: 40 pips away from the entry price
2 One SHORT EURUSD position
  • Sell-short Pending Order: Current Price – 15 pip Sell stop order
  • Stop-loss: 20 pips Above the entry price
  • Take profit: 40 pips below from the entry price

Using this kind of order, you let the price tell you its direction. One order gets filled the other not. Also, an RR ratio of 2:1 protects you against a decrease in the percent of the winners, since only one good trade every three is needed to be profitable. 

Money management

Finally, do not risk more than one percent of your total assets initially. On the EURUSD, we know that every pip is worth $10 on each lot. Thus a 20 pip stop-loss distance is worth $400. To trade a full lot risking one percent, your account balance should be $40,000. Therefore if you own just $4,000, do trade one mini lot, and if your account is only $400, you should use just one micro-lot.

Learning is hard. You will think that trading that way you won’t get rich quick, but just four things you must consider.

  1. Your initial purpose should be to learn your trading job and know how the system performs.
  2. The primary goal of a trader is to preserve the capital
  3.  Compounding is a powerful concept.
  4. You should know your risk and its characteristics.

References:

THE COMPLETE RESOURCE FOR FINANCIAL MARKET TECHNICIANS, THIRD EDITION, 2016. Charles D. Kirkpatrick II, CMT Julie Dahlquist, Ph.D., CMT

Thinking, Fast and Slow, Daniel Kahneman

 

 

Categories
Forex Psychology

Trading Psychology: Learn the Art of Getting Over a Floating Losing Trade

In today’s lesson, we are going to show an example of a trade setup, which tests our psychology and ask us a big question. This situation is something that often happens with traders trading on the major pairs. We try to find out the answer to what we shall do in such a situation.

In today’s lesson, we are going to show an example of a trade setup, which tests our psychology and ask us a big question. This situation is something that often happens with traders trading on the major pairs. We try to find out the answer to what we shall do in such a situation.

In today’s lesson, we are going to show an example of a trade setup, which tests our psychology and ask us a big question. This situation is something that often happens with traders trading on the major pairs. We try to find out the answer to what we shall do in such a situation.

This is a daily chart. The price finds its support after being bearish for a long time. It produces a bullish engulfing pattern followed by another bullish candle. Using the daily-H4 combination, traders shall flip over to the H4 chart to get consolidation and a bullish reversal candle to go long above the last swing high. Let us flip over to the H4 chart.

The H4 chart suggests that the buyers may take control soon. A massive bullish engulfing candle followed by an inside bar bearish candle may attract the buyers to go long upon getting another bullish engulfing candle. The buyers are to keep their eyes on this chart since the chart may produce the signal candle anytime.

It does not produce the signal candle immediately. However, after a while, it produces a bullish engulfing candle closing above the last swing high. This is an A+ trade setup as far as the daily-H4 chart combination trading is concerned. The price makes a deep consolidation and produces the signal candle afterwards. This is what breakout traders love to see. A long entry may be triggered right after the last candle closes. Let us proceed to the next chart to find out what happens afterwards.

This must be painful for the buyers. The trade setup looks very good, but things have not been going as expected. The price comes back within the consolidation zone. This looks ominous for the buyers. Since this is an H4 chart, the buyers have the opportunity to look after their trade. They may ask themselves whether they should keep the entry or close it manually? I let you think about it for a minute.

If your answer is the buyers shall close the trade manually, you may not be right. The reason behind this is, once a trade is floating on a loss, traders shall leave it and let it finds its own way. If it hits the stop loss, let it hit it. Traders are to calculate this risk well before they take entry. If a trade is running on profit but acts unusual or gets sluggish at a significant level of support/resistance, that might be a different case. Although the chart suggests that most probably, the price is going to hit stop loss, the buyers shall hold the entry and concentrate on other pairs. If a trader wants to survive in this market for a long time, he must acquire this skill of getting over on a floating losing entry and concentrating on a new trade setup.

Categories
Forex Videos

Forex Trading Psychology – The Key To Success Or Failure

https://youtu.be/gWnUFmsTyNQ

Trading psychology
You’ve probably heard of the old adage: if you don’t like the heat, stay out of the kitchen. Well, Forex trading is a regular burning cauldron

https://youtu.be/gWnUFmsTyNQ

Trading psychology
You’ve probably heard of the old adage: if you don’t like the heat, stay out of the kitchen. Well, Forex trading is a regular burning cauldron


Trading psychology

You’ve probably heard of the old adage: if you don’t like the heat, stay out of the kitchen. Well, Forex trading is a regular burning cauldron of fire and is certainly not for the faint-hearted.

One of the key areas that new Traders fail to take into consideration when starting out on the forex trading journey is the art of controlling their emotions. To be a successful Trader, you need to have a clear head at all times. You need to be making informed decisions, that are based on the economic market fundamentals and your technical charts, and not making rash decisions, such as trading to make up losses on previous trades, or trying to trade while your mind is otherwise engaged in other activities or trading on a whim. Ideally, traders need to be working in a quiet environment, without being impacted by external forces, such as family members, friends, TV, loud music, or other such distractions. All of these will affect your concentration and cause stress.


Trading is going to take all of your concentration because a lack of it will no doubt leave you making incorrect trading decisions, and, therefore, you will be losing more trades than you win. New forex Traders typically fund their accounts and begin trading without learning about how the forex market works. They will often have a minimum of education in this area and will often not fully understand about margin requirements, leverage, the implementation of stop losses, and, therefore, the inheritance risk that is associated with trading the financial markets. This lack of knowledge will greatly affect stress levels and whereby the overall psychology factors of trading are not taken into account.


The biggest area that is going to affect your state of mind when trading is the fear of loss. Taking losses on the chin is a prerequisite of trading psychology. Let the losers go, do not be influenced by losses when deciding on your next trade, and do not double up in order to chase losses. Just accept losing trades as a part of trading. You are not going to win every single trade, no matter how good you are. And one of the best tools that you will have in your armory in order to beat fear, is to use a stop loss on every trade. And the other important factors are to keep leverage at a reasonable level, and reduce losing trades to a small percentage of the account equity, so that should you have a few consecutive losing trades, you will still have available funds to allow you to keep trading. Most professional traders limit losing trades to 2 to 5 percent of their account balance. All of this is the only way you will know where your downside risk is, and implementing these tools will help to reduce the stress of trading.

Professional traders look for a minimum of a 2 to 1 win-to-loss ratio percentage on a deal by deal basis. That is to say, you should expect to lose, let’s say $100, with an expectation of winning $300. And with more wins than losses. And this should be at the back of a trader’s mind at all times. Trading is not a race. It’s a marathon. And it is most certainly not a get rich scheme.

And so when you think about it, psychology, or your state of mind, and particularly when trading, if controlled, will become an invaluable asset. Trading Forex is therefore not just about understanding how this market works, it’s not only taking into consideration the fundamentals when choosing to trade a particular currency pair, and it doesn’t matter how well your technical indicators are set up, if you do not have the right mindset, you are set up to fail.

Another way to help with the psychology of trading is education. Here at Forex.Academy, we supply all the education you will require in order to help you with your Forex trading journey. Therefore, soak up as much education as you can and learn what the market drivers are. Study your charts and identify why your losers happened. This will help you with your subsequent trading activity. And, if you are a novice, make sure you only trade on a demo account. Because, if you can’t be successful there, you will not be successful with a real money account.

Categories
Forex Daily Topic Forex Psychology

A Strategic Plan for Trade Management

I’ve already stated my view that most wannabe traders put their focus in technical analysis of the market and on trading signals, mostly provided by others, hopefully, more knowledgeable than

I’ve already stated my view that most wannabe traders put their focus in technical analysis of the market and on trading signals, mostly provided by others, hopefully, more knowledgeable than

I’ve already stated my view that most wannabe traders put their focus in technical analysis of the market and on trading signals, mostly provided by others, hopefully, more knowledgeable than themselves.

The issue is that any advice, no matter how good it is, is worthless to most of the beginners because the problem is 10% of the success as a trader is entries, 20% exits, including stops and targets, and 70% is the rest of overlooked themes. 

The overlooked themes, all of them has to do with the trader’s psychology:

  • Lack of a strategy
  • Overtrading
  • Not following the plan 
    • Skipping entries or exits
    • let losses grow to wait for a reversal
    • cut profits short, afraid of a reversal…

Every one of these subjects is critical, but if you make me choose, I’d say that overtrading is the worst evil that happens to a novice trader. Improper position sizing kills the majority of the Forex trading accounts. This trait is also linked to the cut profits short, let losses run character flaw, so let’s do create a basic strategic plan to help traders with a basic trade management plan.  

Emotional Risk

For the following plan to work, the trader needs to accept the risk. It is easy to say but challenging to do. Mark Douglas, in his book Trading in the Zone, explains that “To eliminate the emotional risk of trading, you have to neutralize your expectations about what the market will or will not do at any given moment or in any given situation.”

That is key. You cannot control the market. You can only control yourself. You need to think about probabilities. Create a state of mind that is in harmony with the probabilistic environment. According to Mark Douglas, a probabilistic mindset consists of accepting the following truths:

  1.  Anything can occur.
  2. To make money, there is no need to know what will happen next 
  3. It is impossible to be 100% accurate. Therefore there is a win/loss distribution for any strategy with a trading edge.
  4. An edge is just a higher probability of being right against a coin toss (if not, the coin toss would be a better strategy)
  5. Every moment in the market is unique. Therefore
  6. A chart pattern is just a very short-term approximation to a statistical feature, therefore less reliable than a larger data set pattern. We trade reliability for speed.

The idea is to create a relaxed state of mind, ultimately accepting the fact that the market will always be affected by unknown forces.

The Casino Analogy

Once that is understood and accepted, we can approach our trading job as if the trading business were casino bets. When viewed through the perspective of a probabilistic game, we can think that trading is like roulette or slot machines, where you, the trader, have a positive edge. At a micro level, trade by trade, you will encounter wins and loses but looked at a macro level, the edge puts the odds in your favor. Therefore, you know only need to manage the proper risk to optimize the growth of the trading account.

A plan to manage the trade

Lots of traders enter the Forex market with a rich-quick mentality. They open a trading account with less than 5,000 USD and think that due to leverage, they can double it week after week. This is not possible, of course, and they get burned within a month.

Our plan consists of three ideas

  • Profit the most on the winners, while let die the losers
  • let profit run, or even, pyramid on the gains.
  • Reach as soon as possible a break-even condition, for our mind to attain a zero-state as quickly as possible.

The Strategy and Exercise

Pick a forex pair.

Choose one actively traded pair. All major pairs fit this condition, but then choose the one that provides the best liquidity of your time zone.

Choose your favorite strategy, that you think it works and fits you.

The strategy must include the following components:

An Entry: The entry method should be precise. No subjective evaluations or decisions. If the market shows an entry, you have to take it. Of course, you can condition it with a reward-to-risk ratio filter, since this is an objective fact. Really, having a reward-to-risk ratio filter is quite advisable. A 3:1 ratio would be ideal, but 2:1, which is more realistic, can work as well.

A Stop-loss: Your methodology should define the level at which set your stop loss.

Timeframes: You need to choose a couple of timeframes: A short timeframe to create low-risk trades, and a longer timeframe to be aware of the underlying trend and filter out any signal that does not go with that trend.

Profit Targets: This is the tricky part. We will define at least three take profit points: One-third very-short, one-third defined bt the short-term timeframe, and the rest of the position specified using the longer-term timeframe.

The trade size: Choose a total trade size such that the entire initial risk is no more than 2 percent of your account. So if your account is $3,000, the total risk of the trade will be $60.

Accepting the risk. The smaller dataset needed to get any statistical information is 30. Therefore, you should accept the loss equivalent of 30X the average loss per trade. Think that to analyze and decide about changing any parameter, you must move in chunks of 30 trades.

How it works

 1.- Compute the trading size

      • Measure the pip distance between entry and stop-loss.
      • Compute the value in dollars of that risk
      • Calculate how many mini or micro-lots fit in that amount.

2.- Trade that size and mentally divide it into three parts

3.- take profits of1/3 of the position as soon as you get 5-6 pips profit or 10% of your main profit target. This will help you tame the risk if the trade is a short-term gainer that, next, tanks.

4.- As soon as you get a profit equivalent to the size of your risk (1:1), move your stop-loss to Break-even.

5.- Take profits of the second third of the position when your second target is hit

6.- Let the remaining 1/3 run until your third target (from the longer timeframe) trailed by your stop loss. Use a parabolic approach to the stop loss, as the risk-reward diminishes when approaching the target.

7.- Alternatively, use the profits of the last winning trade and add it to the risk of the following trade. That way, on a combination of two trades, you can gain 4X with a risk of just one trade since the added risk was money taken from the market.

8.- The next trade should start with the basic dollar risk, but computed over the newly acquired funds.

Reference: Trading in the Zone by Mark Douglas.

Categories
Forex Daily Topic Forex Psychology

Know The Two Systems Operating inside Your Head

In the introduction of his book, “Thinking fast and slow,”  Daniel Kahneman presents a face with an expression similar to the following image as an example of your mind

In the introduction of his book, “Thinking fast and slow,”  Daniel Kahneman presents a face with an expression similar to the following image as an example of your mind

In the introduction of his book, “Thinking fast and slow,”  Daniel Kahneman presents a face with an expression similar to the following image as an example of your mind working in automatic mode. 

By looking at the image, you’ll experience what is called intuitive thinking. In a fraction of seconds, you’ll notice it is a brown-haired young woman (not an old one, not a man or any other animal or object), and you instantly know she is upset. You feel also she is going to start saying harsh words in a loud voice. All that came to your mind automatically and without effort. It merely happened without you intending to do that assessment.

This is an example of what Dr. Kahneman calls System One.

Now look at this: 

28 x 13

Looking at it, you knew it is a multiplication immediately, but the result does not come to your mind instantly. You know you can solve it with paper and pencil or in your head, but you need to make a conscious effort to do it, and the solution comes slowly. If you engage in the process of solving it, you’ll experience the slow thinking process as you follow the steps you’ve learned to solve a multiplication operation. Dr. Kahneman describes this process as “deliberate, effortful and orderly.”

This is what Dr. Daniel Kahneman calls System Two.

System One is in charge of automatic activities such as 

  • Detecting if an object is distant or near
  • Finding the source of a sound
  • Complete the phrase “piece of c..”
  • Change the facial expressions
  • detect a warning or a hostile voice
  • Read 
  • drive a car
  • understanding a language

System One includes innate abilities. We are “programmed” to interpret the reality that surrounds us, recognize objects, focus our attention, and avoid dangers. System One also learns by the association of ideas, and also learn skills such as reading, driving a car, or pattern recognition, such as a chess player or a trader do.

The operations of System Two have one common characteristic: they require deliberate attention, and the process can be disturbed by a loss of concentration.

Here are examples extracted from the book:

  • Focus on the voice of a single person in a noisy room
  • look for a woman with white hair
  • trying to identify a surprising sound
  • telling someone your phone number
  • Count the number of times a word appears in a page

The Interaction between both Systems 

The usual situation when we are awake is that System One and Two both are active. According to Kahneman’s book, System One runs automatically while System Two works in “low-effort” mode, in which almost no effort from its part is needed. System one sends summary information to system two, and System Two has the final word.

Under this scenario, System One continually creates “suggestions” for System Two: impulses, feelings, intuitions, impressions, and intentions. When confirmed by System Two, these impressions become beliefs, and impulses turn into voluntary actions.

It is usual, under normal circumstances, that everything moves placidly. Under these situations, System Two adopts the suggestions sent by System One with small modifications, if any. We usually believe in our impressions and act on our desires.

When System One finds something it cannot solve, it asks for the help of System Two, as in the process of multiplying 28×13. We can feel this whenever we are surprised. That’s the activation of System Two. Surprises activate and orient our attention. That can be lifesaving. A hole in the road, a tiger, appearing 100 meters from you.

 

System two has been taught by our evolution to trust System One, as he is generally quite good at what it does: modeling familiar situations, short-term predictions, and initial reactions to challenges and dangers.

The Conflict

One limitation of System One is it cannot be switched off. Therefore, sometimes, there is a conflict between System One’s automatic reaction and System Two’s intention of control. Under uncertainty situations, System one triggers primary reactions such as fear or greed that System Two is used to believe and act upon. Even when the case does not call for such an automatic response, as usually happens when trading the Forex markets, System Two has a hard time to take control of the situation.

Since System One works in automatic mode, it cannot be turned off at will. Therefore errors due to intuitive thinking are very difficult to prevent. Also, biases cannot be avoided because System two is not aware of them, and when these biases are known, only by a System Two’s deliberate effort can be overcome. In the trading world that translates into people selling at the bottom and buying at the top. These people are making decisions based on the impressions generated by System One. Thus, System Two is inadvertently dominated by System One’s beliefs.

Final Words

If you find yourself reflected by the above scenario, you should establish the steps to break the dominance of your System One. 

  • Define yourself as a Soldier when trading. A soldier only obeys, never thinks. That is the task of your other self: The Planner. Plans are rational and are to be done before the trade opens, not during a live trade. After the trade is open, a soldier executes the plan decided by the Planner.
  • Start trading using risk sizes that do not trigger your primary fears 
  • Make a rational plan and build the discipline to follow it. You’re a soldier.
  • Before the market opens, rehearse trade situations from beginning to end. Establish how you’re going to react based on your trading plan when taking losses or profits. Visualize it in your mind. Look at your mental monitor screen and see the price moving and you making the planned decisions.
  •  Write down your feelings during the open trades. Check for inner conflicts, explain to yourself why you do what you’re doing.
  • Create a log of trade results, also annotating the maximum adverse and also maximum favorable excursions.
  • Grade your trades from 0 to 5 or 10 based on the percentage of the total possible profit you obtained.
  •  After your trading session ended, analyze the performance of your system in regards to the entry point, stop-loss, and profit target placements, and modify these parameters for the next session. But never change them while trading.
  • Compute your system’s performance and analyze if it is still performing as planned or there is a deviation from its past performance.
Categories
Forex Daily Topic Forex Psychology

Two Mistakes Novice Traders Should Avoid

On this article we are going to discuss two mistakes novice traders should avoid to succeed in the financial markets. Reading a book about trading or a strategy article on

On this article we are going to discuss two mistakes novice traders should avoid to succeed in the financial markets. Reading a book about trading or a strategy article on

On this article we are going to discuss two mistakes novice traders should avoid to succeed in the financial markets. Reading a book about trading or a strategy article on a website makes trading the markets seem easy, But that is far away from the truth.

Judgmental errors

“We typically trade our beliefs about the market, and once we’ve made up our minds about those beliefs, we’re not likely to change them” – Van K. Tharp

 

Joe Novice comes to the markets, after reading a marvelous book explaining to him how to win easy money in the markets. The book has beautiful charts describing how. Joe has learned a lot from this book. Now he knows what bull and bear candlesticks are. He has learned to distinguish patterns. Head and shoulders, double tops and bottoms, the Morning Star and its counterpart the evening star. He also learned some handy indicators such as the Stochastics, the RSI, and the MACD. Finally, he has also get acquainted with the concepts of support, resistance, and breakout. He thought that was key to succeed

Prices Move faster in real-time than on a book illustration.

Joe founded his account with his first $1,000 to experience the exciting world of big wins. Then he downloaded his MT4 station to begin operating. He created the setup recommended in the book and started looking for major pairs and decided that for his scalping purposes, he should use 1-minute charts.

The first thing that surprises Joe is that prices are continually moving. He was switching from pair to pair on his laptop, but nothing happened until he left the chart and moved to another one. The price action seems to occur only when he wasn’t looking! That made him think that he must concentrate on just a couple of charts at a time.

Also, Joe had a hard time making decisions. For some reason, the strategy explained in the book only was evident after the fact. The right moment to trigger the trade seemed never to show. He was late to pull the trigger most of the time, and when not late, the moment to pull it did not appear right.

Representation Bias

How can a trader make money using patterns and levels everybody sees?

The fact is that all technical analysts are able to spot support and resistance levels. So why people make money trading breakouts? Or don’t they?

People believe in charts as if they were truths. They believe that charts represent the activity of the markets. In fact, bars or candlesticks are just approximations to that activity. The issue is that what we see is the representation of past action, but we do not see the reasons why the price arrived at that place.

What if most traders really didn’t have the right information to make decisions. What if only a handful of privileged traders owned that knowledge? Let’s suppose that these smart guys have the privilege to see where is the real supply zone. The zone where they’d do the worst harm to the herd of dumb traders. Wouldn’t it be logical that they tried to stretch the price to that zone to collect the best available prices, then turn back and move the price to the opposite side?

Under that assumption, the next day or week, another technical analyst would see the price extension and figure out where the stop-loss should be. It will reason the optimal place to be just below that zone. However, the fact is that there is an action-reaction phenomenon in the markets. The actions of the market participants change history. The market is an experiment, on which the scientist influences the result with his acts. If he were to trade the previous day, he might have decided the same way as did those who were that day in the market, and, so, would be wiped as the others.

So, how should we proceed?

The strategy should have clear rules of entry, stop-loss, and profit-taking

Traders should back-test the strategy and optimize some parameters. Then they should forward test it in a demo account or using one micro-lot.

After a list of 30 trades, the trader should have a minimum of data samples to approximate percent winners and reward to risk ratio: The two most critical parameters of any strategy. We do not talk about drawdown here, because drawdown is a dependent variable: it can be computed knowing the percent losers and changes with position size.

When deciding about stop-loss placement, Do not use pivot levels. These are already known to the sharks of the market, and will inevitably fail.  The best stop-loss placement is using the Maximum Adverse Excursion technique, a concept by John Sweeney.

Of course, to be able to use MAE, you should record your trades accurately, recording also the MAE information.

 

Categories
Forex Psychology

The Importance of Mastering Trading Psychology

Introduction

We as traders tend to learn the technical stuff and focus our attention on improving our technical analysis. Which is ok, but often, learning trading psychology is neglected. And

Introduction

We as traders tend to learn the technical stuff and focus our attention on improving our technical analysis. Which is ok, but often, learning trading psychology is neglected. And

Introduction

As traders, we tend to learn the technical stuff and focus our attention on improving our technical analysis. Which is ok, but often, learning trading psychology is neglected. And at the end of the day, it is you who’s in charge of decision making, and you are the one entering your orders.

In my mind, mastering trading psychology is more important than learning chart patterns, complex wave theories, Fibonacci levels, etc. Even a layman can spot a trend, but then the decision has to be executed – do you buy or sell?

Our emotions govern decision making as they impact our rational thinking. You can do an exceptional technical analysis, but you may still lose money. You can do a poor technical analysis and still earn money.

The question imposes: why are traders who are knowledgeable about technical analysis still lose money?

The answer lies in the difference between real life and the markets and the ways we are conditioned to behave in real life vs. the mindset that is needed to be profitable in the markets.

Real-life vs. the markets

Cutting your loses 

In real life, people are not accustomed to losing. If your finger gets trapped inside the elevator hole, you would probably turn on the alarm, stop the entire building from using the elevator and call the fire brigade to help save your finger, right? You wouldn’t just cut it off and continue with your day because, in real life, fingers don’t grow back.

In the market, if your finger gets caught and you try to save it with your other hand, the other hand will get trapped as well, and you will lose both hands. So the solution would be to just cut your finger, as in the markets, fingers do grow back!

As you may have figured, the Finger analogy is when your position is starting to go against you. If you sit there and wait for it to bounce back, hoping you wouldn’t lose your money, you will lose more money. And the only solution is to cut your losses early on and have confidence that you will be in profit next time when you will be compensated for your losses and be in profit overall.

So this response has to be learned, as we have been conditioned to behave and think differently.

You shouldn’t be right, you should be in profit. 

Traders often feed their ego with their good analysis. Your ego tends to think that you should always be right and that being wrong is a very, very bad thing. That can sometimes create a bias rationale. For example, you have done tons and tons of research, and your fundamental and technical analysis; so, you have concluded that it’s a buy. You put your buy order.

After a day or two, you are in profit, good. But on the third day, the trade is starting to go against you. You keep saying to your self “it’s only a correction” I have done my research, and this can’t go down further. But it does. Even though you see you are losing money, you tend to keep your position opened. Why is that? Your brain creates a bias. It can’t even see an alternative bearish scenario, so you become loyal to yourself, as your ego also keep you congruent.

In real life, loyalty and congruency are great. If we didn’t have those traits, we would all be unreliable and spinless beings, and society as we know it would fall apart. But in the markets, you have to be able to adapt.

This is not about being right, you are not a fortune teller, you are a trader.

Numbing your emotions and the difference between knowledge and behavior 

Expanding your knowledge about financial markets and the ways of analyzing them is great, but you have to internalize it into your behavior patterns. For example, I smoke cigarettes, and I know that they are harmful. The knowledge about the harmful effects of smoking is not overpowering my internal emotions of the desire to smoke.

Another example is exercise. We all know that we should eat healthy food and exercise. But the fast-food tastes good, and our emotions are governing our decision making, and we end eating that burger. Our laziness chains us to our beds, and we hit that snooze button and sleep an extra hour, leaving us without any time to run in the morning.

That is why we, as traders, need to suppress our emotions of greed and fear that can impact our decision making.

Patience

In the modern-day world, we are bombarded with information through social media. If something doesn’t appear interesting, we are hesitant to watch it to the end. That conditions us to follow our attention and not to be in charge of it. And that’s ok in real life, as our attention is limited, and with so much out there, it would be impossible to keep track of everything.

But in the market, you have to leave that urge behind to know if it is a buy or sell, and get it over with. Trading is an activity.

Conclusion

The market environment is diametrically different from the real-life environment – it’s totally unpredictable, and we need a totally different mindset to overcome the challenges of surviving in that environment.

In real life, you would go to a train station ask a clerk where the next train is going, and if you like the direction, you would sit on that train, take a nap, and when you wake up, you would arrive at your desired destination. It is predictable, and we are accustomed to that predictability, and our behavior has been built around that predictability.

You would check your indicators in markets, make your projections, ask people what they think, where the train is heading, and still won’t have a definitive answer.

That’s why mastering trading psychology is so important. It is the way to help you find the right mindset to manage the unpredictable nature of the markets, and here at Forex Academy, we are here to help with our services.