Having done your market analysis, you identify a good trade that could potentially yield 20% return within a week. However, (perhaps because of fear - due to a past mental experience -), you manage to convince yourself out of the trade. “The price is too high or low to get into the market now”....“The market conditions do not look good”..Fast forward a week, your call appeared to be a winning trade, you are now on the sidelines watching in despair, wishing you made the trade! Have you found yourself in a situation similar to this? How can you overcome this barrier that stops you from taking action?
This is but one of the many MANY problems we face as a typical trader; this book proves to be particularly useful in addressing problems we face, explaining the psychological aspect as well as how to tackle those problems in order to become a successful trader.
And so, we have dissected the books into its major key points for you!
1. Common Mistakes Made
John starts off his trading career with a winning streak. “I am making $15,000 a day, I can’t believe it!” He exclaimed, dancing in glee as he watches his bank account balance grow in size Confident, unafraid and fearless, he executes his trades flawlessly with no internal argument or conflict. With little to no skill, this winning streak makes him feel like a champion; it was as though the market was following his command. He becomes bolder and experiences a few more winning trades. “Man, trading is so easy!” he thought to himself as he turned off his computer for the day. “At this rate, I’m going to be a millionaire in no time!”
However, one afternoon, he experienced this trade: He entered a long trade on EURUSD and put his stop loss 20 pips below price. In a matter of minutes, prices shot down 15 pips towards his stop loss. At this moment, John was on his knees praying for a recovery. It bounced back 10 pips below his entry, currently drenched in cold sweat, John decided to exit the trade at a loss. As if the world was playing a cruel trick on him - almost immediately after he got out, the market shot up 40% in the direction of his trade, but alas, he was out of the market. He sat there agonising over the $10,000 he could have made if he held his position for just another minute. Currently in a state of emotional pain - he is filled with betrayal, disappointment and fear.
“How the heck did the market know I was going to cut my losses? I bet there’s some inside trading going on that is betting against me. There must be a secret to avoiding such painful stupid losses!” - John blames the market for robbing away his winning feeling by subjecting him to that painful loss. Determined not to be wrong about the market anymore, he becomes overly obsessed with market analysis. He spends at least 5 hours a day studying fundamental and technical analysis. “If I can read the market well, I will never make another wrong trade”, he thought. Having just experienced his first loss, John now carries out his trades in fear. To his dismay however, he yield nothing but disappointment as he saw his account balance shrink, wiping out all his previous profits. Confused and upset, he could not understand what was happening.
So what went wrong??
- John was overconfident and became reckless.
After a few wins, John perhaps started to think that he was the market!! He got too consumed with the easy money and became bolder and bolder.. He placed more money each time and watched the market too closely. When the trade went south, it was not what he expected and he panicked!
It is when you are winning that you are most susceptible to making stupid mistakes. You become overconfident and start over trading, putting on too large a position, violating your rules, or generally operating as if no prudent boundaries on your behavior are necessary.
Lesson Here: For a trader, winning is extremely dangerous if you haven't learned how to monitor and control yourself.
- John began trading with a very unrealistic concept of the inherent risk involved with his trades and therefore felt emotional pain when he started to lose.
Especially with the multiple wins he had been experiencing, he definitely thought to himself, “since I’ve been winning without any skill, maybe I have this gift all along, I might actually be a trading genius!” With that mindset, he enters every trade expecting to win. So when he eventually came out of the trade with a loss, he simply couldn’t believe it. Obviously not a trading genius now, John is unprepared to accept this loss and in shock and disbelief.
The typical trader won't predefine the risk of getting into a trade because he believes( or hopes to believe) that his next trade (and every trade) will be correct.There is a huge psychological gap between assuming you are a risk-taker because you put on trades and fully accepting the risks that comes with each trade.
Lesson Here: If you are unable to trade without the slightest bit of emotional discomfort (specifically, fear), then you have not learned how to accept the risks inherent in trading.
- John immediately assumed it was the market that did this to him and went on to become obsessed over market analysis in hope to predict future outcomes.
So now that John knows he isn’t a trading genius and that he isn’t the market.. He thinks to himself.. “Maybe if I analyze every move of the market, I would be able to predict what’s going to happen next.. Then I’ll make every trade a winning trade again!!”
Typical traders crave the sense of certainty that analysis appears to give them. Like we mentioned above, they crave it because they want to be right on every trade. But it is impossible to get this certainty out of analysing markets. Why?
1. A common misconception is that many believe the market is consistent, because at any given moment, the market may look exactly the same on a chart as it did at some previous moment. But, the actual consistency of the market itself from one moment to the next will never the same.
2. For any pattern to be exactly the same, it requires every trader who participated in that previous moment to be present and interact with one another in the exact same way - the odds of this happening is simply nonexistent.
Lesson Here: Market analysis is not the path to consistent results. It will not solve the trading problems created by lack of confidence, lack of discipline, or improper focus. When you operate from the assumption that more or better analysis will create consistency, you will be driven to gather as many market variables as possible into your arsenal of trading tools. But what happens then? You are still disappointed and betrayed by the markets, time and time again.
- John started trading in fear, causing his defense mechanism to kick in, inhibiting himself from making a proper decision
Initially when John started trading, he was fearless. However as his positions got bigger and his expectations of himself got higher, he started to fear. As he saw the EURUSD trade going the unexpected direction, his defense mechanism kicked in to “protect him” causing him to divert from his original trade and exiting at a loss. After his first loss, he became more fearful and carried out every other trade with the same fear in him. So now not only is he not a trading genius.. He is a bad trader!
95% of the trading errors stem from 4 primary trading fears:
1) attitudes about being wrong, losing
3) missing out and
4) leaving money on the table.
John possessed all 4 fears.
When you are fearful, other possible opportunities made available through market information get blocked and you don’t act on them properly. Why? Because fear is immobilizing. You won't think about all the rational things you've learned about the market until you are no longer afraid (which is only when you have closed your position) And then you think to yourself.. “WHY DIDN’T I DO THAT?!?”
Lesson Here: It is essential to have internal discipline or a mental mechanism to counteract the negative effects of euphoria or the overconfidence that comes from a string of winning trades. You are not to be impacted (either negatively or too positively) by the outcomes of their last or even their last several trades.
Therefore, in conclusion: The consistency you seek is in your mind, not in the markets. It's attitudes and beliefs about being wrong, losing money, and the tendency to become reckless, when you're feeling good, that cause most losses—not technique or market knowledge.
2. Traits of a Successful Trader
- They think differently from the rest.
- They have attained a mindset that allows them to remain disciplined, focused and confident in spite of the adverse conditions.
- They not only take risk, they have also learned to accept and embrace that risk
- They aren’t afraid.
- They have attitudes that prevent them from getting reckless.
- They hold no expectations of market movements and view trading as a game of probability
What can be done?
First and foremost, you need to understand that “Making Money” shouldn’t be the objective of trading. A series of winning trades can require absolutely no skill - as seen from the example above with John. It is creating consistent results and being able to keep what we’ve created that requires skill. Making money is the byproduct of acquiring and mastering mental skills.
So how do you achieve CONSISTENCY?
- Develop a carefree and objective state of mind
Just like the example above, John was able to carry out a winning streak in the beginning of his trading career because fear has not gotten into him and his attitude was positive and carefree. Carefree means confident, but not euphoric; you won’t feel fear, hesitation or compulsion to do anything - why? Because, you have effectively eliminated the potential to interpret market information as threatening.
And how do you achieve that?
- You have to accept the risk of the trade completely and learn to think of it in probabilities
To fully accept a trade it means that you will not feel any emotion when you lose, you will be indifferent about the outcome of the trade. And the only way to do it is if you think of a trade in probabilities.
Imagine you and your best friend lying down on the sofa after an exhausting 10km run. Both of you are dying of thirst but no one wants to go to the kitchen to get 2 glasses of ice water. You guys decide to make it fair and toss a coin. Heads - you’ll get the drink. Tails - she’ll get it.You guys toss the coin and head appears. Dragging your body to the kitchen you probably thought to yourself... “Damn it!!!!”. A wrong call it is, BUT you aren’t filled with regret and anger. Why? Because everyone knows the outcome of a coin toss is random; which is an implied acceptance that we don’t know what the outcome will be, this keeps our expectations neutral and open ended. This is exactly how we have to see a trade.
When you think of a trade in probabilities, you will not trade from a right or wrong perspective. You will be at peace with the outcome and your emotional responses will be no different to your emotions when you flip a coin.
There are 5 key probabilistic mindset a trader should have:
- Anything can happen.
- You don’t need to know what is going to happen next to make money.
- There is a random distribution between wins and losses for any given set of variables that define an edge.
- An edge is nothing more than an indication of a higher probability of one thing happening over another.
- Every moment in the market is unique.
- You have to accept the risk of the trade completely and learn to think of it in probabilities
- Make Yourself Available
Imagine yourself as a fresh graduate with no stake in the stock market. When you are at home watching the market and everything starts to crumble, you aren’t bursting in pain because you have nothing at stake and and there is nothing for your pain avoidance mechanism to exclude or distort from your awareness in order to protect you. You are therefore able to make yourself available to perceive everything you have learned about the way the market moves and probably think to yourself.. “If it was left to me… I would will probably hold on to all my stocks because the market should recover after it gets over this state of shock” This calm and objective state is the exact state of mind is exactly what you would want yourself to be in when you are trading.
This means trading from a perspective that you have nothing to prove or nothing to lose.. You aren’t trying to win or avoid losing or take revenge on the market. To put it simply, you come to the market with no agenda other than to let it unfold and be in the best state of mind to recognize and take advantage of the opportunities it makes available to you.
- Trade in the “Now Moment”
Do you ever have one of those times where you are so absorbed in what you are doing that your parents had to yell at you to get out of the room during dinner? Take that focus and use it on trading, be present in the moment itself so that you are not clouded by emotions on your positions.
Trading in the "now moment" means that there is no potential to associate an opportunity to a trade with a past experience that already exists in your mental environment. The key to this is to always focus on the present moment without linking it to past experiences (whether good or bad) or the future. This allows you to concentrate on gathering evidence on whether the variables you use to define an edge are present at any given moment.