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The Trading Psychology -vs- Trading Method

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The Trading Psychology Viewpoint

No discussion about trading, or the consideration to begin trading, can be done without a harsh realization - the vast majority of all traders lose.

It is said that the reason that most traders lose is because they are not psychologically prepared to trade, that is they are not prepared to accept financial risk for something of which they have no control over the outcome. Trading is much more of a psychological problem then a methodological one, only the traders who have first accepted this have a chance of being consistently successful traders. Without an understanding of trading psychology and the various issues that circumvent method, there will be virtually no chance to overcome the fear, confusion, and despair that can be inherent in trading. Ultimately, after a series of consecutive losses, method becomes replaced with a feeling that it is impossible to do anything right; if for no other reason than this situation, trading psychology is more critical than trading method.

New Trader Scenario

Consider a scenario where a trader develops a method for day trading an index future. The method gives 15 trades per day, and the trader has gotten to the point where they are able to paper trade with the following results: 9 wining trades averaging $85 each, and 6 losing trades averaging -$65 each – thus giving $375 average daily gains. The trader has achieved these results for three consecutive months; their paper trading goals have been met and it is time to start trading real money.

Real money trading begins, but things quickly change. Instead of trading their method like they did when paper trading, the trader starts ‘skipping’ trades trying to pick the winners instead of accepting the 40% losers; of course, they invariably pick more losers than winners. Trying to then correct this problem, the trader decides that maybe they are entering their trades too late. So now instead of letting the setup complete and then doing the trade, the trigger is anticipated so the trade can be entered earlier - the losses get worse.

With the continued losses the emotions take over: “What is wrong, why am I such a pathetic loser? Maybe it’s not my fault, maybe the method just doesn’t really work.”

The problems get worse with each trade, more emotions and more loses - the trader quits trading. The trader now decides that their paper trading results weren’t really adequate to begin real money trading. They will go back to paper trading and studying again.

Thoughts that are going through the trader’s mind now: “Maybe I should try different trading methods until I can eliminate those losing trades – then I will be ready to trade real money again. Really, maybe I should just quit trading altogether – maybe I am just a loser, and that’s why I can’t trade.”

The Trading Psychology Plan

What should be very apparent from this scenario is that the trader never traded their paper trading method plan after transitioning to real money trading. Unfortunately, the trader is unable to realize what they have done, instead their emotions first place blame on the method thinking that it really doesn’t work, and then on themselves for being “such a pathetic loser”. The final result being that the trader quits trading, and if the real underlying reasons for what has happened aren’t accepted and changed, this trader will never be able to trade real money even if their paper trading results become 100% winners, which of course is not going to happen.

The trader had a trading method plan, but they did not have a trading psychology plan. They did not have a way to make the transition from fear and emotion directed trading to actually trading the method as designed. They did not have a plan to objectively access and understand their given non-method actions, and then define a 'setup' for replacing them.

The trading psychology plan must begin with an honest assessment and acceptance for what really happened: the trader never traded their method plan; there is no other blame to be placed, or excuses to be made. There is nothing wrong with the trading plan, and regardless, the trader has not traded it in order to be able to make that evaluation. As well, traders cannot internalize trade loses where they lead to their viewpoint of themselves – you are not a loser because your trade is a loser.

Trading Psychology Plan Components

  • Accept that losing will be a normal part of trading. Not only is it impossible to be perfect, it is not an objective or necessary to be a profitable trader.
  • Replace the focus of winning and losing with the objective of following your plan. This was not done while paper trading, as the trader had a specific profitability goal that they used to tell them when they were prepared to trade real money. They did not understand that the reason they achieved this goal was because of how they followed their plan.
  • Remain neutral and non-judgmental towards yourself. If profitable trading is ever going to be possible, this is mandatory. There is no way that you are going to be able to trust yourself to manage risk while you are also telling yourself that you are ‘stupid’ or a ‘pathetic loser’ each time you lose or feel that you have done something wrong.
  • Eliminating your emotions is not the objective; I actually do not think this is possible. Emotions are always going to enter into trading – learn to control the emotions, instead of having them control you.
  • Accept that emotions are a part of life; they aren’t by definition good or bad, and actually if you can shift the focus of what the emotion represents, they can be very beneficial for the trader. For instance, if I am feeling confused and that causes an emotional response or hesitation, I want to feel that emotion. This emotion becomes a warning to me that I should wait and try to find more chart-market clarity before taking a trade, something that can be very typical when markets are in congestion.
  • Start slowly – this may be the most important component of your plan. For instance, begin trading real money for an hour at a time, and then assess what you have done, always asking yourself the question: did I follow my plan, or did I take non-method trades.

Granted, you will not be able to approximate your paper trading results as the expectancy of that plan was achieved by averaging 15 trades per day. However, not only will this help further to shift the focus from how much money did I make to did I follow my plan, it will also allow you to acclimate to the logistics of real time-real money execution, and the related initial emotions, where all of a sudden the market feels like it is moving considerably faster. By doing this you will ‘build-up’ to trading your full plan at a pace that won’t cause you to become so overwhelmed by the process, and immediately cause you to avoid what you had intended to do as fear and emotion becomes too strong.

You have a great trading method and trading plan. You have profitably paper traded, and you ARE now ready to start trading real money – just be sure that you have a trading psychology plan that is as good as your trading method plan, and that you realize that neither will be of any use to you without the other.

The Trading Method Viewpoint

It is said that trading is 90% psychological and 10% methodological. Does this then imply that regardless of trading method, a trader that has control over their emotional issues will thus be a profitable trader, or will it be impossible to ever control emotions without the proficient implementation of method? The trading method viewpoint will suggest that not only are these statistics not the case - trading psychology does not exist. Trading method will be the determinant of profitability, and this will be done through: (1) the ability to understand the method's inherent strengths and weaknesses (2) the ability to maximize these strengths and minimize the weaknesses.

Trading psychology has become so widely discussed and promoted through books and consultants that it has become a very convenient rationalization and excuse for losing. Why take the responsibility for a lack of work ethic and trading without any concept of plan, an honest assessment which would be a ‘hit’ on the trader’s self-esteem – when you can just blame it on trading psychology instead?

Trading psychology is ‘something’ that a trader creates from existing personality traits that are not initially related to trading, but surface from trading without method understanding. The outcome of course is fear, but wouldn’t this be the case when doing anything that was perceived as ‘dangerous’, and which was being done without the necessary understanding and skills? Trading, with its inherent characteristic of accepting financial risk while participating in unknown outcomes, is certainly ‘dangerous’, and thus the more preparation and understanding that is needed.

Trading Scenario

Consider the a trading plan which has the following three setup types: (1) initial which your intended trade entry (2) first continuation which is used to enter a trade in case you have either missed your initial entry, or you decided that you wanted more confirmation because it was a counter direction trade (3) second continuation which is intended as a trade addon setup, but is also one ‘last’ chance to enter a trade.

You get an initial sell setup that triggers, but you do not take the trade = trade1. The trade breaks cleanly and goes to what would have resulted in a partial profit, and then before price goes down further, it retraces back to the area where the sell was done. This price holds so the swing remains short, and from this hold of what is now resistance, you get the trigger of your first continuation setup BUT you don’t take this trade either = trade2. Why wasn’t the trade taken? You decide that after missing the initial entry that you have missed the trade; your emotions and biases tell you that the ‘move’ has gone too far. Again, this trade breaks cleanly, not only adding to the gains of trade1, but also giving a partial profit on trade2.

Price now consolidates between the lows and the price resistance that you would typically be using to stay short if you had taken either the initial trade, or the first continuation trade. Instead of the swing reversing after consolidating, it continues down again, and with this continuation your second continuation setup triggers = trade3. AND AGAIN - you don’t take the trade. After all, if you didn’t take either of the first two trades, how can you possibly take this trade; maybe you were wrong when you thought that the move had gone too far to take trade2, but certainly that’s the case for trader3.

Like trade1 and trade2, trade3 is a profitable trade. This swing has really turned into a great directional move, with each break holding on weak retests – a textbook example of the strengths of your trading method, but YOU have never entered a trade. You are going nuts! You are getting into this damn swing - you just can't take it any more. Another retrace holds as a lower high. You don’t have an entry setup, but that doesn’t matter, the other three trades were profitable after a lower high. Isn’t it interesting, the same emotions which wouldn’t let you enter your plan trades, are now ‘forcing’ you to take a non-plan trade.

Instead of YOUR trade going to a lower low and to a profit, it instead goes to a higher low and then reverses into an initial buy. Bad just got worse, you also don’t exit when the swing goes into buy. After what you went through to finally get into the trade, you have to try and make it work, and after all the trend is down – right? TraderA uses this initial buy to exit their profitable sell and sell addon; they decide that they want more confirmation of swing reverse before trading the counter direction. A first continuation setup triggers and they go long, the swing has reversed, and this trade reaches its first profit target.

TraderB finally ‘gives up’ and exits THEIR short, although with a two point loss instead of the intended one point, and without any consideration of taking their next plan trade, the first continuation buy. This trader is done for the day, but at least they were ‘right’ all along; the swing had gone too far to enter, and their fears had been warranted – this was a losing trade that they should not enter.

Is this a trading method or trading psychology issue? What ‘message’ is TraderB going to take from what has just happened. Will they take the attitude that they should not be blamed, they just can’t trade because of trading psychology? Or, will they acknowledge that the method did win, that the resulting loss was not a method trade, and even if it was, the loss would have been offset by the prior winners. Will they acknowledge that THEY made their worst fears come true and not only turned this into a losing trade, they also increased he size of that loss, and then avoiding another method winning trade.

Granted, psychology was involved with what has happened in the described trading scenario, but that is a function of the individual’s ‘core’ personality, and would most probably be an issue regardless of what was being done; if there is ‘risk’ involved, there will be an ‘emotional’ response. Thus, it is first necessary to separate personal psychology from trading psychology, and the use of this concept as an excuse for trading actions. Then, if trading psychology is going to be controlled, this will be done through the development and implementation of a tested plan that the trader is willing to follow. Do not trade with ‘built-in’ excuses for failing, you will have lost before you begin, and will continue to do so with a continued ‘snowballing’ of emotion to the extent where trading will no longer be possible.


Fear: A Trader's Thought Demons
Daniel M. Gramza
copied from Stocks Futures Options
The business of trading can be fertile ground for negative thought choices. If you let them, these negative thought choices can become your demons and sap your positive mental energy. By identifying and understanding the realities of these thought demons, a trader is better able to redirect energy away from them and diffuse their power.

The most common thought choice demon for traders is fear. Traders encounter opportunities for fear on a regular basis. If allowed, fear will confuse and emotionally paralyze a trader.

A fear can feel overwhelming and difficult to handle when it is being consciously or unconsciously experienced. Fear can create the envelope of our reality because it can determine what we do and avoid doing so as not to experience the fear.

Fear is a reaction to a memory of a past experience, which leaves the thought, “I will never do that again.” It can also be the anticipation of an unknown, future event, or a “possible” future outcome. It can range from apprehension to dread. The intensity level of a fear is directly proportional to the amount of energy we choose to feed it.

Thought choices that support fear provide a great example of how we create our reality and what we experience. For example, a trader sees a wonderful trading opportunity but is frozen in fear and does not take it. His fear could be a memory of a past trade that didn’t work, or as protection against a “possible” losing trade and what he perceives will result in emotional pain if the trade does not work. However, what the trader doesn’t realize is that when he was frozen in fear, he was experiencing exactly what he was fearful of – emotional pain at that present moment in time. He was experiencing his fear in the present, not in his anticipated future. His fear was emotional pain, and he is experiencing, consciously or unconsciously, this pain at the moment he was frozen in fear and unable to make the trade.

It is important when sensing fear, to pay attention to breathing. Often, when a person experiences fear he tends to hold his breath or to breathe in short and inefficient shallow gasps of breath. Both of these breathing approaches will increase intensity and heighten his fear and anxiety. Taking slow deep breaths is very important in assisting the trader to control his fear reaction. The deep breathing will allow more oxygen to circulate to the brain and will help the trader stay focused.

Let’s examine and de-energize some of the most common trader fears

Losing Money

If a trader chooses to be afraid of losing money, there are two things he should consider:

Any time money is used to make money, there is a level of associated risk. The intent of a trading business is to have money make money. Therefore, there is an associated risk of losing money in trading. If the idea of losing money is very uncomfortable for the trader, he should examine this fear. If the trader cannot get beyond this fear, the conclusion may be that he should not be trading.

In any business, not every business decision will make money. This is also true in the trading business. There is a high level of certainty that no matter what trading techniques are used, not every trading business decision will make money. Therefore, by the very nature of the trading business, a trader will have losses. Keep in mind that it is not the profit or loss from one trade that determines the success of a trading business. Rather, it is the total trading profit from a series of trades.

Because not every trading decision will make money, the key is having appropriate risk management parameters that do not overexpose trading capital to any one trade. Since the trader never knows with absolute certainty which trades will be profitable, only trades that completely comply with every aspect of the trader’s strategy should be entered. In this way, every trade has an equal chance of being successful.

Lack of Control

A trader who doesn’t understand the difference between the aspects of trading he controls and those he does not is in for a rude awakening. In general, people try to control a situation in order to get what they want or in order to avoid surprises and the experience of a fear.

This approach does not work when applied to trading. The trader soon finds out he does not control the market’s behavior. Even a large trader’s influence on the market is only temporary. The fact is, no trader can control the market, and this lack of control can be unsettling for some. A trader may hesitate putting on a trade, or feel that he is out of control and doesn’t know how to take the next step.

As a trader, you need to focus on what you do control, instead of what you don’t. As you can see, the aspects of trading you do control far outnumber those you don’t. It is not necessary for the trader to be in control of the market to establish a profitable business.

Failure

Many traders consider failure to be a missed trade or a monetary loss. Fear of failure, as they define it, causes them to hesitate when putting on a trade, or not making the trade at all. Some traders may even take an unproductive trade personally and believe that they are the failure.

The fact is, missed trades and monetary losses are part of trading. True failure for a trader is not following his trading game plan.

This means not entering a trade or not taking profits or taking losses when required by his trading approach. The trader who chooses to take the results of a trade personally has put energy into the belief that the outcome of a business decision reflects who he is as a person. This is a mistake and deadly for a trader.

The good news is that these are all areas you, as a trader, control. It is your acceptance of the risks associated with trading, your understanding that each trade is a business decision and nothing more, and your discipline and consistency in applying your trading strategies that will determine the productivity and success of your business.

Emotional Pain

Instead of taking responsibility for their trades, some traders believe that the market is intent on causing them emotional pain with each losing trade. They forget that no matter what source of information they used to make the trading decision (broker, newspaper, newsletter, hot tip or their trading system), the trade is their responsibility once it is executed.

The fact is that the only emotional pain a trader can have is self-inflicted. There is no emotional relationship with the market, except what the trader imagines. The market is an entity that brings buyers and sellers together and that’s it. It does not know that you, as a trader, exist. Nor does it care about who you are, your feelings, your social status or how much money you have. This makes the market your perfect, unbiased trading partner.

Taking responsibility for trading decisions and consistently following your trading game plan are key to eliminating the potential for self-inflicted emotional pain.

Missing a Trade

Many traders fear the missed trade. No matter how great the trader thinks the missed trade was, there will always be another trade, just as good, at some point in time. The chance of a trader missing a trade drops dramatically if he is trading in the present moment with an awareness of his markets and consistently following his trading strategy.

Hesitating to Enter a Trade

A trader may hesitate or abandon entering a trade because he senses his own fear. His conscious or unconscious interpretation is, “If I am sensing fear, then I should not be doing this trade.” The bottom-line reason why a trader hesitates is because he is not totally confident in his trading strategy or in himself. He can change this by properly researching and understanding his trading strategy and by practicing the techniques in this book to help increase his confidence.

Stay in a Profitable Trade Too Long and It Becomes a Loser

The major reasons why a trader fears overstaying his welcome in a trade and allowing a profitable trade to become a losing trade are:

The lack of predetermined profit exit criteria. The trader never determined under what circumstances he would capture profits. Whether it is a change in fundamentals, a magnitude objective or a change in technical analysis parameters, the decision of when to exit a trade must be determined before a trade is entered. Otherwise, the trader runs the risk of letting profits slip through his fingers, as well as providing himself with an excuse to become emotionally involved with trade.

The fear that if he exits a profitable trade, the market may continue and he won't capture “all” of the profits. The trader is forgetting that if he establishes parameters for re-entering a trade, he can get back into the trade if the trend continues. He is also forgetting that profitable trading occurs by
consistently following his personally researched trading strategy, not by always buying the exact low or selling the exact high of a market.

The trader becomes comfortable, lazy and emotionally attached to the trade. He forgets that a trade is a business decision and nothing more. When exit criteria are reached, the trade is exited. Period. There is nothing to think about or discuss.

The trader held the position through other pullbacks, and it eventually continued in a favorable direction. The trader's approach worked because the pullbacks were profit-taking moves and the trend continued in the previous direction. There will be times, however, when the pullback is not profit taking, and the market will change direction. The trader must be prepared for all contingencies. (A profit-taking move occurs when prices temporarily move in the opposite direction of the current trend. For example, a bullish trend is in place, moving prices in an upward direction. A downward bearish countertrend move is caused by sellers who previously bought and were long the market, and now want to take profits. To do this, these traders exit their positions by selling and closing out their previous long positions. If there are enough sell orders from long traders selling to overwhelm the buying orders coming into the market, a bearish countertrend will begin, moving prices downward. This bearish countertrend will sustain this downward movement as long as this profit taking action is in place. Because the cause of the countertrend movement is the profit-taking actions of long traders, the overwhelming sell orders will stop when they finish taking profits. At this point, there is no reason for the countertrend move to continue, and the bullish trend will continue in its original upward direction. The opposite is true when sellers are buying to take profits in a bearish trend.)

Greed drives the trader to hold onto the trade. A greedy trader will never be successful because he will never be satisfied with his profits. This trader will over-stay his welcome in the trade because he will want more than the market can give at any point in time.

The trader begins to think about how he will spend the trade’s profits and refuses to exit as he sees his spending plan disappear. He forgets that the profit in the trade is not his until he closes the position.

The trader steps out of his trading strategy profit exit and begins to hope for more profit than his trading strategy can provide. The trader forgets that his hope is irrelevant to his trade. The price behavior and his trading strategy are his guides, not his hope.

Panicking and Staying in a Losing Trade Too Long

The major reasons why a trader fears panicking and staying in a losing trade too long are in some cases very similar to why he stays in a profitable trade too long and then watches it become a loser:

The lack of predetermined risk management loss exit criteria. The trader never determined under what circumstances he would exit a trade with a loss. Just as with the profit exit, whether it is a change in fundamentals, a magnitude objective or a change in technical analysis parameters, a decision of when to exit a trade must be determined before a trade is entered. The worst time to decide when to exit a losing trade is when the losing trade is occurring. If the market is moving quickly or slowly, the trader can become emotionally involved with the trade and frozen in inaction as he sees money being drained from his account.

The trader is emotionally involved with the trade and cannot bring himself to take the loss, learn from it and move on to the next trade.

The trader forgets that not all of his trades will make money. He continues to stay in the trade hoping the loss will change to a profit. He forgets that a trade is a business decision and nothing more. When exit criteria are reached, the trade is exited. Period. There is nothing to think about or discuss.

The trader thinks exiting the trade will somehow mean that he has been “wrong,” so he continues to hold on to the losing position. The trader forgets that trading has nothing to do with being right or wrong. A trade is either a profitable or unprofitable business decision.

Greed drives the trader to hold on to the trade. A greedy trader will never be successful because he will never be satisfied with his profits.

The trader steps out of his trading strategy and begins to hope the trade will work. He is not consistently following his trading and risk management strategies and he is setting himself up for disappointment, frustration and inconsistent trading results.

Uncertainty of the Future

Successful traders know that the market can do anything at any time. They realize they cannot predict the future, so they don't waste their time trying. They also understand that the results of each trade are independent of each other. They do not carry emotional baggage from the outcome of profitable or unprofitable past trades. Instead, these traders focus on the opportunity the market is presenting at the present moment, and the application of their trading strategy. If applied correctly over time, the trading strategy will provide them with a profitable result.

Being Embarrassed and Losing Face The only embarrassment in trading is what the trader creates. Remember, the market is the ideal, unemotional, non-judgmental, impersonal trading partner.

Some traders, whether on the floor surrounded by other traders or behind a computer screen and talking to a broker, let their egos interfere with running their trading business. They fear embarrassment or losing face and allow their perceptions of what others may or may not be thinking to determine how they manage their trades. Such a trader may not exit a losing trade because he just put the trade on and he feels it would be embarrassing to exit so soon. Instead, he stays in the trade, suffers an even greater loss and exits the trade only when his pain from the loss is greater than his fear of embarrassment. He thinks he has shown them that he's tough, he can take it, and he showed the market who is boss.

This emotional baggage is totally fabricated by the trader. The only thing he has shown is that he is not a very good businessperson, and he has emptied the money from his account trying to prove that he is right. The business of trading is not about being right – it is about making money. His focus should be consistently applying his trading strategy.

Being Wrong

The concept of "being wrong" implies there is a personal connection between a trading decision, which is an impersonal business decision, and the outcome of a trade. It is dangerous to make a personal connection to the outcome of the trade, because it mixes the trader's self worth with an impersonal business outcome. A trade is only a trade. There is no personal connection to the outcome of a trade unless the trader consciously or unconsciously creates one.

The fear of being wrong is further magnified when a trading decision is not productive and the trader takes it personally. He begins to feel that he is incompetent, a bad person or an unworthy person, and he stops trusting himself. The result is that at the next good trading opportunity, the trader hesitates to enter the trade, and an opportunity is missed. The trader then sees the profitable results from the missed trade and, instead of bolstering his confidence in the fact that his trading strategy works, he becomes frustrated and less confident.

This trader is not afraid of the market. He is concerned with his ability to trust himself. Instead of thinking in terms of "right" and "wrong," he can describe the results of his trades as productive or unproductive, profitable or unprofitable, or cooperative or uncooperative. This depersonalizes the trade results and keeps them in the proper perspective.

As a trader, what fears have you created? We create our fear by using past experiences or anticipating and imagining what the future will hold. We do not control the past or the future. We do control our reaction to the present moment. If we spend our time thinking about what has happened or what may happen, we are not in the present moment and we are not exercising our control over our reaction to the current situation. The result is that our fears become our reality, and this reinforces our fear belief system.

Overcoming fear is self-empowering, and it builds confidence to deal with future challenges. Remember, the only limitations you have are the limitations you impose on yourself.

Samurai warriors were without a doubt some of the fiercest fighters who ever existed. The key to the samurai’s incredible fighting ability was the complete elimination of their fear of death and their complete focus on being in the present moment. They did this by entirely de-energizing their fear of death. If a person in a fighting situation is distracted by thoughts of being hurt or dying, he will be the loser. Samurai warriors were unencumbered by these fears and were courageous in the face of the unknown. In short, they were empowered by a lack of fear, and this allowed them to completely focus, react and stay in the present moment. They fought without hesitation and with complete confidence. This is exactly the mindset of the successful trader.

OK, so you’re not ever going to be a Samurai warrior, but there are still ways to deal with fear and eliminate it from your trading experience.

Face Your Fears

The first step in controlling fear is to face it. If you are not willing to face your fear, then fear, not you, will control your life. When you are afraid, use deep-centered breathing, acknowledge the fear, and face it head-on. Tell yourself, “I am stronger than my fear, I control my fear, and I can overcome my fear.”

You will become more comfortable in the presence of a fear by decreasing your sensitivity to it. As you repeatedly face your fear, you will realize that your energy in the fear will decrease.

Courage is moving ahead even though you’re afraid. There is a wonderful true story of Ishi, the last living member of a Native American tribe. Ishi and his tribe believed trains were monsters that ate people. One day, Ishi found himself in the position of having to take a journey by train. When he boarded the train, he was asked by a person who understood the beliefs of his tribe how he could even step onto the train. Ishi responded, “Since I was little, I was taught to always be more curious than afraid.” Use fear as an opportunity to learn and progress.

Acceptance of Responsibility

A critical element in dealing with fear is to accept that you alone are responsible for the creation and intensity of your fear. You must realize that you are responsible for your thought choices and the amount of energy you feed them. This recognition alone can put fear in perspective, diminish the energy in the fear and prepare you for the acceptance of new thought choices.

Accepting responsibility for your thought choices puts you in control of your fear not the other way around.

Identify the Thought Choice

Our fears are created by our thought choices. In order to eliminate our fears, we must change the thought choices that create them. For example, if a trader fears losing money, he is unconsciously saying to himself, “ I choose to experience the fear of losing money.”

That same trader can choose not to feed energy to this fear choice and make a different, conscious choice. He can say, “I choose not to fear losing money, and I accept that losing money is a part of the trading business.”

Until you identify your fear thought choice, you cannot change it, and you keep the fear alive. Allow yourself the freedom to make this new choice without judgment. Exercise your positive, conscious thought choice whenever the old fear choice returns. Each time you do this, you drain the energy from the old fear, and you create the change for which you are striving.

Acceptance of Risk

It is very important that the trader completely and honestly accept the risks involved in trading. Trading is a business of percentages. Not every trade will make money. If a trader cannot accept the risk, he cannot fully commit himself to the trade. If he cannot fully commit himself, taking the next trade can be a frightening experience. He will lose confidence and become frustrated and locked in a cycle of fear and doubt.

On the other hand, if the trader has complete acceptance of the risk and all possible results, then he can be optimistic, committed and realistic about the next trade and its outcome. He can now move aside the interference caused by fear and confidently deal with any future outcome.

Eliminate Self-Sabotage

Every trader has a level of comfort and familiarity with trading. To go beyond this level of comfort usually requires taking a risk. This is when fear, as an unconscious act of self-sabotage, can creep in. This fear is actually misguided self-preservation, intended to protect the trader from the fear and anxiety he may experience if he leaves his level of comfort and risks the possibility of things not going his way. A trader may fear that he would suffer embarrassment and personal devastation if he tried his best and failed. Fear as self-sabotage becomes the trader’s excuse to maintain his level of comfort and the status quo. The easiest way to protect himself is not to try.

He can also self-sabotage his trading by initiating a trade that does not meet his trading strategy requirements. In this way, if the trade doesn’t work, he can tell himself that it wasn’t his best effort because it wasn’t his main strategy. He unconsciously has protected his comfort zone and his false mental perceptions.

The bottom line with self-sabotage is that the trader is linking his self-worth to trading. If the trader doesn’t meet his own expectations of what being a successful trader means, his self-esteem will suffer. To avoid this blow to his ego, the trader trades carelessly, doesn’t give it his all, and then uses the excuse that he didn’t really fail because he wasn’t really trying. This trader doesn’t realize that a trading decision outcome has nothing to do with his self-worth, but is merely a profitable or unprofitable business decision.

The first step in eliminating self-sabotage is to recognize it. The trader must ask himself: Do I select trades that imply illusions of grandeur? Do I select trades with total disregard for my trading strategy? Do I feel that the trade is too much to handle, and I just want to get it over with? A “yes” would indicate poor trade selection and lack of a risk management exit, both of which imply a total disregard for his trading strategy.

Second, the trader must re-center himself with deep breathing and focus on the strict application of his trading strategy.

Reality Check

As a trader, if your greatest fear came true, what is the worst that could happen? Your honest answer can help you examine and deplete the energy of your fear.

Visualization

Visualization is a powerful tool that allows a trader to identify, examine, experience and de-energize a fear. It allows him to mentally envision solutions to his fears in a non-threatening way. Visualization will reduce your anxiety and prepare you if you’re faced with the fear-producing situation again.

Fear Lead Up

It is possible to stop fear before it gets started by identifying the conditions that immediately precede the fear and by changing your reaction to the fear-producing situation.

For example, a trader has a solid, well-researched trading strategy. The trade entry and profit or loss exit is completely established before the trade is entered. However, once the trade is initiated, the trader watches every little price movement of the market. Eventually, the trader gets emotionally involved with each price move, becomes afraid, and feels a sense of urgency to exit the trade. The result is that the trader exits the trade before either its profit or loss price objective is reached. He never gave his well-researched trading strategy a chance to work for him.

The trader’s lead up to fear was his watching of every movement of the market. In order to de-energize his fear, he changes the fear-producing conditions: once he has entered a trade with the appropriate profit and loss orders in place, he does not continually look at that market. Instead, he periodically checks the trade. This change eliminates the anxiety associated with every price change and gives his trade and his trading strategy an opportunity to actually work for him.

Trading Plan

A solid trading plan is crucial for any trading business. It provides the trader with strategies for trading in any market condition, and a solid foundation for a successful trading business. It also can protect a trader from one of the things that can destroy a trading business, or any business for that matter - the surprise event. A well-planned trading strategy, including capital allocation parameters, and defined entry, exit and risk management criteria will allow the trader to trade without fear, knowing he is prepared for any potential event.

Learn From It

Fear can be an opportunity to learn and progress. Learn from it and move on. Visualize solutions where you calmly and confidently act out the right solutions. This will prepare you and reduce your anxiety if you’re faced with that fear-producing situation again. If you forget about yourself and your fears and completely focus only on what needs to be done, you will neutralize your fears. They will never stop you.


Trading Psychology - Considering The 80% Losing Trader Statistic
Barry Lutz
Tactical Trading
The statistics state that at least 80% of all traders lose, and I have no reason to doubt those statistics. So with this statistic, and what would thus appear to be overwhelming odds against becoming a successful trader, I become very interested in the following:

WHY do 80% of all traders lose?

WHAT does the other 20% of traders do that is different?

WHAT percentage could the 80% be reduced to?

WHY do 80% of all traders lose?

Two predominant reasons given to answer the question of why so many traders lose are: (1) trading is more psychology then methodology, (2) trading is impossible without a plan. I agree with these reasons, but they are general reasons that need multiple and specific solutions. As well, these reasons do not address the remaining questions; what do the 20% winning traders do differently, and what percentage of losing traders could become winning traders. Trying to further understand and evaluate these questions, has led to the primary objectives of Tactical Trading, both for a base trading method, as well as for the attempt to teach trading in the context of that method.

Psychology is extremely diverse and far encompassing; much of a trader’s general personality and beliefs can ultimately surface as a trading psychology problem. We all try to avoid pain and insecurity, yet trading continuously makes the trader confront losing and failing, which when internalized challenges the trader’s self esteem and self worth – as if winning or losing is a determinant of who or what a trader is as a person.

A major problem that is specific to trading is money, and the further emotional implications and pressures from the money objective. Granted, making money is the objective and reason to trade, but when this becomes the primary focus it will most probably lead to loss. There is just too much emotion involved with money, especially in our environment and way of life. The psychological impact of the money objective sets the trader up for failure, and in some cases the trader may actually sabotage themselves, by subconsciously losing intentionally as a way to finally ‘blow-out’ their account and have to stop trading, in order to eliminate the resulting pain.

As a solution, shift the focus to implementing and managing the trading plan. This is certainly a more neutral focus, that doesn’t attach emotions to it in the same way the money objective does; making money becomes a plan result instead of the trading focus. However, this solution typically doesn’t get to present itself, as the second primary reason for traders losing is that they are trading without a plan – this is quite a dichotomy, as a solution to a problem isn’t available, because it is also a problem.

To these two reasons, I add one more that I think is equally as important, and that is trading without a base trading method that includes adjustment for varying market conditions. Consider the use of indicators in trading, which is fine, however indicators are simply tools to describe what price is doing at a given time, which ultimately is determined by the market conditions that are occurring. Thus, the idea that the same indicators can be used identically, regardless of market conditions, shows a lack of understanding of a given trading environment that is being traded, and this leads to losing.

WHAT does the other 20% of traders do that is different?

When I consider what the other 20% do that is different, I don’t think that they comprise a select group that doesn’t have trading psychology issues, or has eliminated all these issues; I think that they exist for everyone. However, these traders have become able to control their trading psychology through their development and focus on a trading plan, this trading plan includes flexibility and discretion to adjust for the change in market conditions through out the trading day.

These traders know their method – they know its strengths and weaknesses, and know them in the context of market conditions, where this becomes what they respond to - instead of being controlled by money and emotion. These traders don’t try to predict market movement, and they don’t try to beat the market – they accept that they can’t. They accept that they can never really know what the market is going to do, and they really don’t care. However, what they can do is know what they are going to do, both in response to market conditions, and in managing their plan and the resulting trades.

Additionally, these traders ‘know’ and ‘accept’ that trading entails dealing with a variety of situations that the trader cannot control. They know that the market doesn’t care, and they know that no person or no thing cares. The 20% doesn’t compete against the 80%; the trader wins – the trader losses, these traders are honest about accepting responsibility and accepting blame.

Accepting Responsibility

  • the method doesn’t work
  • it’s my data-broker-platform-etc fault
  • wishes and excuses -vs- planning and doing

Consider: why do traders buy so many mechanical systems, why do traders buy so many books, why do traders join so many different trading groups, why do traders continue to search for the ‘latest and greatest’ – is it in order to educate and learn OR is it to deflect responsibility, where the trader always has something else to blame other than themselves?

Accepting Risk

  • being different and not part of ‘the herd’
  • being in the market – being out of the market
  • evaluating risk in the context of odds and reward

Accepting Loss

  • possibly the most necessary trading issue to understand and deal with
  • losses are part of trading - 'good' trades lose
  • failure and being wrong - as continued learning and the willingness to make changes and still be wrong

WHAT percentage could the 80% be reduced to?

This is the critical question – what can the 80% be taught/learn, and then as a result be able to reduce the statistical failure rate.

Learning Objectives - Increase The Odds Of Success

  • perfection is not an objective - the 50%-70% measurement
  • understanding the method/psychology interrelation
  • understanding yourself and your own psychology
  • understanding the difference between trading a method and trading a system
  • understanding the impact of other trading methods upon your setups
  • learning how to understand and improve trading through non-random discretion
  • understanding odds and expectancy – repetition
  • market sensitivity – not trading in a vacuum
  • market conditions – all indicator setups are not the same
  • chart conditions – focus on movement across the chart -vs- ‘right side – last price’
  • price sensitivity
  • setup -vs- trigger – where the trigger includes timing
  • necessity of accepting loss
  • necessity of accepting responsibility
  • trade management and execution focus

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Commodities trading carries a high level of risk so you should only speculate with money you can afford to lose.