These two topics are closely related but we will initially deal with them separately due to the subtle different ways they manifest themselves so need to be approached
This is one of the most important subjects regarding trading psychology. Once you get to really understand and accept this fact, you will start trading with ease and psychological factors will no longer obstruct your thinking process as trade opportunities develop.
Our goal as traders is to achieve consistent profitable results. We don’t want to make a killing trading, we don’t want unexpected gains (i.e. trading during news announcements). If we are serious about trading, our objective must be to obtain consistent profitable results. The only way to pay the bills consistently is by generating consistent results in our trading.
Why is it that unexpected gains won’t make us better traders?
The reason for this is because we cannot achieve consistent results with this kind of trading. These are more like random rewards. Some traders look for random rewards because this way he or she can blame someone (or something) else when the market does not behave as he or she expected, and of course, the trader would take all credits when the trade is successful. This is similar for traders who trade poorly planned trades (they don't face risk).
Also, trades that are taken randomly cannot be replicated, if they cannot be replicated then we can’t make a system out of them. And if we don't have a system then we will never achieve our trading goal: generate consistent profitable results. When we intend to trade for a living, this kind of risks cannot be taken. Remember only one big mistake can wipe out your trading account.
Now, most trading mistakes traders are likely to make are generated by fear and greed (close to 100% of mistakes). If fear is present in our minds, we will make costly mistakes. But, how do we operate in a fear free state of mind? Learn to accept and embrace the risk.
Have you really accepted the fact that you are a risk taker?
Accepting this fact means that you have accepted deep in your mind the consequences of your trade without emotional discomfort. It means that we are not afraid of losing or leaving money on the table. Also, our mind is not affected by the past 3, 10, 20 or 50 trades. If we lost our last 10 trades, we don’t lose confidence in ourselves or our system. If our last 10 trades were winners, we don’t get overconfident. When you accept the risks involved in your trading you won’t perceive any market information as threatening, and if you don’t perceive information as threatening, there is nothing to fear.
How do we really get to accept that we are risk takers?
When we created our system, we did evaluate several scenarios, added several indicators, tried different concepts, and finally, decided to choose those factors that increased the odds of our system.
You need to remember that there is no perfect system. There is no system that is right 100% of the time. And the truth is, we don’t need our system to be right 100% of the time in order to make money in the market. If we have a system that is right about 50% of the time with a risk reward ratio above 2 to 1, then we will be profitable. So, we don’t have to worry about the losing trades, we know that in the long run the probabilities are going to play by themselves and we are going to make money. The only thing we need to do is take every single trade signaled by our system. And this is it: learning to trust our system will put us in the right state of mind because we will be accepting the risk on every trade we make, so our edge (system) could make its work.
In order to make money, we need to take risks. The risk we take as traders is the possibility to lose the trade we have entered. If we don’t take this risk, we are not going to be able to make money.
Now, if we trust our system, we don’t have to worry about the outcome of single trades. We need to think bigger, at the overall results of our system, the outcome of whole sample period.
If we spent time developing our trading system and a trading plan, and we followed it rigorously, our system will make money for us, just trust it.
If we trust in our system and take the risk, then there is nothing to fear. If we are not afraid, we can take our trades easily, making ourselves available on all the opportunities the market offers us to make profit.
Willingness to take calculated risks
A lot of your success will depend on your willingness to take calculated risks. The more comfortable you feel taking these risks, the best results you will have in your trading career. This also applies to other aspects of life.
Don’t get me wrong here, I’m not talking about taking foolish risks (i.e. taking a trade when your system doesn’t signal it, but you have a feeling that it will work), the idea here is to take only calculated risks.
You may be wondering, what do I mean by “calculated risks”?
• That we need to know our chances of success (system accuracy)
• That we are aware of the possible cost and reward of taking a particular trade (risk and reward ratio). That is, how much are we going to risk? And how much is the reward on a particular trade?
• That we need to review our strategy. We need to know exactly what to do before and during a trade.
All this, relies on the following: Develop a well thought system and trading plan and follow it rigorously. This is the only way to take calculated risks.
One final thought: “Remember successful traders are wary, but not afraid to lose. Trades that didn’t turn out to our thinking is part of the game”
Facing Market Uncertainty
What are the markets?
Markets are no more than people willing to bid prices higher or offer them lower. They do this based on their expectations of the future and their belief about what is high and low. In other words, the extremes of a trading range are limited by the beliefs of traders about what is high and what is low. At any point in time, you can see who is winning the battle. If the price is going up, then buyers or bulls are winning the battle. On the other hand, if the market is heading lower then sellers or bears are winning the battle.
All these traders that the market consists of are responsible for price changes and behavior. These traders as a crowd tend to behave similar under similar circumstances creating repetitive patterns. These patterns give us opportunity to profit from the market. Notice that I used the word similar, not equal or identical patterns. And there is a very good reason for this.
In order for two patterns to be identical the same traders involved in the first pattern need to be involved in the second pattern. But also those traders need to be in the same mood (this will make the traders behave exactly in the same way on both patterns). We know this is almost impossible, because only one trader (who might be your neighbor or someone on other part of the world) could negate this possibility. We also need to take in consideration those traders that are waiting in the sidelines but are willing and waiting to enter the market.
This is the reason patterns are just similar, and this is also the reason a trading system or strategy cannot be right a 100% of the time.
Consistent profitable traders understand this concept very well. They know without the slightest doubt that anything can happen on any given pattern or trade. They have released themselves from any expectation. They put on a trade, and the only thing they expect is that the market will go somewhere. The only thing they know is that if the trade was taken following their system’s signal, the odds are in their favor and the probabilities will play their part. They don’t know what the outcome of a particular trade will be, but they do know that in the long term, they are going to be ahead.
Since they don’t know the outcome of each trade, nor try to predict it, they always use stop loss orders and take profits in a systematic way, because following ones plan and system is the only way to make consistent profits.
What is interesting here is that both problems of accepting risk and facing market uncertainty can be solved in the same way: trusting and gaining confidence in your trading system. We have to create a well developed plan and system so we get to trust it and take every single signal generated by it.
Although every single pattern can have different outcomes, the outcome of a series of patterns is consistent. This means that even though the outcome of any given pattern is random, the outcome of 100 similar patterns is predictable and statistically reliable (system accuracy).
So when you enter a trade you need to be released from any expectation about where the market is heading. If you release yourself from any expectation, whatever the outcome of the trade, you will be able to make yourself open to the next trading opportunity.
Successful traders are entirely confident about their success, and are committed to take every signal generated by their system. Their market frustration has ended, and they know that in the end, they will be ahead of the game due to the undeniable proven mathematical nature of probability in their well designed system. We at StraightForex can help you with the system and give you advise on the habits and psychological approach – but it is entirely up to you to implement them – good luck!