Trading Psychology
Everyone that is trading wants to be consistently profitable, or to make money and to keep them. However, one of the major obstacles is trade execution. If you want to be consistently profitable trader you have to be able to execute your trades without making any errors and mistakes. You have to be able to trade without hesitation, reservation or initial conflict. Most of the errors we make while trading are result to lack of confidence or trading with fear. Trading without fear is a skill that everyone can acquire, and has to be developed. Trading without fear is the main difference between the professional and the typical trader.
Professional traders can make consistent money from trading alone. Trading without fear is a psychological skill. It is a skill that the professionals have developed and they have evolved beyond the average mindset of a typical trader, so that you can take full advantage of your trading methodology. It has to do with your state of mind.
Traders must constantly work to prevent their emotions from influencing their decisions. One good way is to trade the “I don’t care” size. Trade small enough so that you will not worry about losing. This allows traders to do what is right more often. The most important aspect of trading psychology is that traders should always strive to stay in their comfort zone. They need to be happy. It is also less stressful to take fewer trades and swing trade. Every trader has the goal of making money for themselves and their families, but it is important to not lose sight of the bigger goal of living a happy life. Learning how to trade can help traders achieve both goals! If you are going to be doing this for a long time, you have to enjoy it. Although you might be able to make more money by pushing yourself to your emotional and physical limits, you will probably hate what you are doing and be unable and unwilling to do it for decades.
There are three main types of traders.
The second types of traders are the Boom and bust. Almost always when they go to the bust cycle they blame the market of what happened, which is definitely not the case. The result is of trading errors.
Bottom line results
In this section we are going to cover the underlying nature of the mental skills. At the end of the section we are going to put skills within the context of the 3 developmental modes that you can trade in. First, we are going to examine the mechanical mode, then the subjective mode and finally the intuitive mode.
The 4 most common trading misconceptions are:
To believe that traders make money primarily as a function of analysis. That is definitely not the case, trading is execution.
People often find themselves thinking there must be a way to trade without having to take a loss.
I would not put on a trade if I was not sure it was going to be a winner. (I do not know if any trade is going to be a winner, I do not have to know)
To be a successful technical trader you have to determine what the market is going to do next (You do not need to know what the market is going to do next in order to make money).
When you trade with care free state of mind, everything about trading changes. Trading without fear is a trading skill that can be developed.
You do not have to have any skills in order to experience a winning trade.
What skills are required to experience a winning trade?
Do you need an edge?
Do you need a plan?
Do you need the discipline to execute the plan?
Do you need a good reason to enter a trade?
What characteristics distinguish the pro from the typical trader?
Professionals plan their trades.
They execute their plan without error.
They can move in and out of their trades with an ease and effortlessness that would astonish the typical trader.
What do you need to achieve consistent results? You need to be able to identify an edge(trading method).
Components of Consistency
1. Have a trading plan on how to utilize the edge
Risk Parameters.
Money Management (Position Size).
Profit Objectives.
2. Be comfortable with trade execution
The ability to execute trade flawlessly, so you can utilize your trading plan to its maximum potential. In the next 20 trades you do not know which one is going to win and lose in advance. There is no way to find out. There is a random distribution between wins and losers. If you have 70% success rate that mean that you should have 14 wins out of 20 trades and 6 loses. You may have 3, 4 lose in a row even if you are doing everything right. When the negative forces start to build up inside you, you either have to neutralize them or stop trading.
3. Develop the ability to recognize if you have crosses the threshold form normal self-confidence into a state of euphoria.
What gives professional traders the ability to execute their trades without error?
They are confident.
They no longer have the same fears that trouble the typical trader.
Trading without fear is a learned mental skill. Learning to trade without fear, hesitation or internal conflict is a function of.
Believing that you don’t have to know what is going to happen next on a trade-by-trade basis to win or make consistent money.
Thinking, assuming or believing you know what will happen next creates an unrealistic expectation in a specific outcome.
Typical trading errors that the professionals have evolved beyond:
Do not define the risk in advance of putting on a trade.
Define the risk, but do not take the loss and it turns into a bigger loss.
Pre defining your risk require that you gather evidence why this may not work.
Trading errors
Hesitate – getting in too late.
Jump the gun – get in too soon where the signal never actually develops.
Get out of a winning trader too soon – leave money on the table.
There is a distinction between trading trade-by-trade and trading over a series of trades.
Let a winning trade turn into a loser without having taken any profits.
Move a stop closer to an entry point, get stopped out, and the market trades back in your favor.
The professional trader is no longer susceptible to these typical trading errors because he has learned to think in probabilities.
The benefit of thinking in probabilities becomes evident when you understand the relationship between how prices move and the mathematical formulas and price patterns that makes up a trading methodology. This understanding helps you quantify that price movement into tradable edges.
The 3 development modes of trading
1: the Mechanical stage:
Rigid criteria define your edge.
All execution decisions are made in advance of market activity.
The market either confirms to the definition or not.
Execute based on your plan.
Be limiting you variables you are better able to find out what does and does not work.
You also find out if your personal psychology is consistent with you objectives.
The mechanical stage is to learn skills, not how much money you are making. Mechanical trading gives you all this information. What works in the market and what works and does not with you?
2: The Subjective stage:
This is a broader, more flexible mode of trading where you use everything you have learned about the nature of price movement to determine your edges.
3: The Intuitive stage:
This is the most advanced mode of trading. It would be the equivalent of getting a black belt in martial arts.
It is when you find yourself “In the Zone” tapped into the collective consciousness of the market. This gives you a sense of the flow.
In this section we are going to discuss how prices move and who the players are behind it. When you understand how traders make prices move, then how you need to think to generate consistent results will start to become clear to you.
There are only two ways you can make money in this business. No matter what strategy you are using, no matter how complex they are. The first one is to buy something at a low price and sell it back at higher price. The second one is to sell something at a higher price and buy it at a lower price.
Everyone is trading to make money. Every trade that exists, there are two people even in the stocks.Every trade that is made there are diametrically opposing believes of what the future is going to be.
The Dynamics of price movement, how prices move
All price movement has to result from an imbalance in the degree of conviction between the traders who believe prices are going up and those who believe the prices are going down. The only way price can move is through an imbalance of convictions.
There are two main types of traders is the market.
The first one is the dynamic traders.
The dynamic traders will purposefully do things that will draw the typical general public into the other side of their trades. When in fact what they want to do is the exact opposite.
The dynamic players
Whenever possible, they will use that knowledge to move prices in a way that will extract the most amount of money form the largest number of traders.
The passive players: Characteristics of technical traders
They are usually mystified by price movement.
They would not think about trying to cause price movement. As a result they typically can not conceive of anyone else doing it either.
The typical passive trader does not realize that it only takes one dynamic trader somewhere in the world to negate the positive outcome of his edge.
Technical indicators and price patterns
The patterns are observable, quantifiable meaning they can be measured and repeat themselves with statistical reliability.
The patterns basically measure the collective mind of the market indicating when there is a higher probability of one thing happening over another represented as an edge.
Because the patterns edges show up in every time frame, technical analysis turns the markets into an unending streams of opportunities to enrich oneself. Not on a trade-by-trade basis, but rather as a percentage over a series of trades.
Technical analysis does not nor ca it get into the minds of any particular individual trader who has both the financial and psychological resources to either move prices or defend certain price levels.
The relationship between the math and the movement is the primary characteristic that separates the professional from the non-professional trader.
Professional traders can make consistent money from trading alone. Trading without fear is a psychological skill. It is a skill that the professionals have developed and they have evolved beyond the average mindset of a typical trader, so that you can take full advantage of your trading methodology. It has to do with your state of mind.
Traders must constantly work to prevent their emotions from influencing their decisions. One good way is to trade the “I don’t care” size. Trade small enough so that you will not worry about losing. This allows traders to do what is right more often. The most important aspect of trading psychology is that traders should always strive to stay in their comfort zone. They need to be happy. It is also less stressful to take fewer trades and swing trade. Every trader has the goal of making money for themselves and their families, but it is important to not lose sight of the bigger goal of living a happy life. Learning how to trade can help traders achieve both goals! If you are going to be doing this for a long time, you have to enjoy it. Although you might be able to make more money by pushing yourself to your emotional and physical limits, you will probably hate what you are doing and be unable and unwilling to do it for decades.
There are three main types of traders.
The second types of traders are the Boom and bust. Almost always when they go to the bust cycle they blame the market of what happened, which is definitely not the case. The result is of trading errors.
Bottom line results
In this section we are going to cover the underlying nature of the mental skills. At the end of the section we are going to put skills within the context of the 3 developmental modes that you can trade in. First, we are going to examine the mechanical mode, then the subjective mode and finally the intuitive mode.
The 4 most common trading misconceptions are:
To believe that traders make money primarily as a function of analysis. That is definitely not the case, trading is execution.
People often find themselves thinking there must be a way to trade without having to take a loss.
I would not put on a trade if I was not sure it was going to be a winner. (I do not know if any trade is going to be a winner, I do not have to know)
To be a successful technical trader you have to determine what the market is going to do next (You do not need to know what the market is going to do next in order to make money).
When you trade with care free state of mind, everything about trading changes. Trading without fear is a trading skill that can be developed.
You do not have to have any skills in order to experience a winning trade.
What skills are required to experience a winning trade?
Do you need an edge?
Do you need a plan?
Do you need the discipline to execute the plan?
Do you need a good reason to enter a trade?
What characteristics distinguish the pro from the typical trader?
Professionals plan their trades.
They execute their plan without error.
They can move in and out of their trades with an ease and effortlessness that would astonish the typical trader.
What do you need to achieve consistent results? You need to be able to identify an edge(trading method).
Components of Consistency
1. Have a trading plan on how to utilize the edge
Risk Parameters.
Money Management (Position Size).
Profit Objectives.
2. Be comfortable with trade execution
The ability to execute trade flawlessly, so you can utilize your trading plan to its maximum potential. In the next 20 trades you do not know which one is going to win and lose in advance. There is no way to find out. There is a random distribution between wins and losers. If you have 70% success rate that mean that you should have 14 wins out of 20 trades and 6 loses. You may have 3, 4 lose in a row even if you are doing everything right. When the negative forces start to build up inside you, you either have to neutralize them or stop trading.
3. Develop the ability to recognize if you have crosses the threshold form normal self-confidence into a state of euphoria.
What gives professional traders the ability to execute their trades without error?
They are confident.
They no longer have the same fears that trouble the typical trader.
Trading without fear is a learned mental skill. Learning to trade without fear, hesitation or internal conflict is a function of.
Believing that you don’t have to know what is going to happen next on a trade-by-trade basis to win or make consistent money.
Thinking, assuming or believing you know what will happen next creates an unrealistic expectation in a specific outcome.
Typical trading errors that the professionals have evolved beyond:
Do not define the risk in advance of putting on a trade.
Define the risk, but do not take the loss and it turns into a bigger loss.
Pre defining your risk require that you gather evidence why this may not work.
Trading errors
Hesitate – getting in too late.
Jump the gun – get in too soon where the signal never actually develops.
Get out of a winning trader too soon – leave money on the table.
There is a distinction between trading trade-by-trade and trading over a series of trades.
Let a winning trade turn into a loser without having taken any profits.
Move a stop closer to an entry point, get stopped out, and the market trades back in your favor.
The professional trader is no longer susceptible to these typical trading errors because he has learned to think in probabilities.
The benefit of thinking in probabilities becomes evident when you understand the relationship between how prices move and the mathematical formulas and price patterns that makes up a trading methodology. This understanding helps you quantify that price movement into tradable edges.
The 3 development modes of trading
1: the Mechanical stage:
Rigid criteria define your edge.
All execution decisions are made in advance of market activity.
The market either confirms to the definition or not.
Execute based on your plan.
Be limiting you variables you are better able to find out what does and does not work.
You also find out if your personal psychology is consistent with you objectives.
The mechanical stage is to learn skills, not how much money you are making. Mechanical trading gives you all this information. What works in the market and what works and does not with you?
2: The Subjective stage:
This is a broader, more flexible mode of trading where you use everything you have learned about the nature of price movement to determine your edges.
3: The Intuitive stage:
This is the most advanced mode of trading. It would be the equivalent of getting a black belt in martial arts.
It is when you find yourself “In the Zone” tapped into the collective consciousness of the market. This gives you a sense of the flow.
In this section we are going to discuss how prices move and who the players are behind it. When you understand how traders make prices move, then how you need to think to generate consistent results will start to become clear to you.
There are only two ways you can make money in this business. No matter what strategy you are using, no matter how complex they are. The first one is to buy something at a low price and sell it back at higher price. The second one is to sell something at a higher price and buy it at a lower price.
Everyone is trading to make money. Every trade that exists, there are two people even in the stocks.Every trade that is made there are diametrically opposing believes of what the future is going to be.
The Dynamics of price movement, how prices move
All price movement has to result from an imbalance in the degree of conviction between the traders who believe prices are going up and those who believe the prices are going down. The only way price can move is through an imbalance of convictions.
There are two main types of traders is the market.
The first one is the dynamic traders.
The dynamic traders will purposefully do things that will draw the typical general public into the other side of their trades. When in fact what they want to do is the exact opposite.
The dynamic players
Whenever possible, they will use that knowledge to move prices in a way that will extract the most amount of money form the largest number of traders.
The passive players: Characteristics of technical traders
They are usually mystified by price movement.
They would not think about trying to cause price movement. As a result they typically can not conceive of anyone else doing it either.
The typical passive trader does not realize that it only takes one dynamic trader somewhere in the world to negate the positive outcome of his edge.
Technical indicators and price patterns
The patterns are observable, quantifiable meaning they can be measured and repeat themselves with statistical reliability.
The patterns basically measure the collective mind of the market indicating when there is a higher probability of one thing happening over another represented as an edge.
Because the patterns edges show up in every time frame, technical analysis turns the markets into an unending streams of opportunities to enrich oneself. Not on a trade-by-trade basis, but rather as a percentage over a series of trades.
Technical analysis does not nor ca it get into the minds of any particular individual trader who has both the financial and psychological resources to either move prices or defend certain price levels.
The relationship between the math and the movement is the primary characteristic that separates the professional from the non-professional trader.
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