The Inner Game of Trading
I had some free time, so I thought OK, let's write something about the mental side of trading.
This is yet another attempt to share some of my knowledge, and what I have learned during my trading journey. I hope that some people will find this info useful.
The info might be a little bit disorganized...but after all I'm a trader, not a writer...
I will start with a few basic things, than later I'll try to add more advanced stuff. I know that most people are not very interested in these topics, but I also know that most people lose their shirts in trading so.....Lets see what we can do here.
"The game of speculation is the most uniformly fascinating game in the world. But it is not a game for the stupid, the mentally lazy, the person of inferior emotional balance, or the get-rich-quick adventurer. They will die poor." Jesse Livermore
In sports most athletes perform very well during training, some even break records, but often under perform during the actual competition.
Same thing in trading. Many traders make consistent profits on demo but on the live account they fail. This tells us only one thing - the inner game is the most important part. Many people try to automate their strategies, but that's just another excuse not to work on the inner game, and their skills.
Most people don't 'like to face the problem. Instead they look for escape. They search for shortcuts.....and this always ends the same way...... Sooner or later people come to the ultimate conclusion - in this business there is no shortcuts! You have to do the work.
Call it the Holy Grail or the number one reason for failure, no matter how you look at it, when it comes to trading, psychology (the inner game) is the elephant in the room.
In the end of the day, its the mindset that separates winners from losers! Not the strategy or anything else......Yeah, yeah, we all know about the 3 'M's of trading (Mind, Method, Money Management) but the mind is the most important! Anyone who has been long enough in this game knows this, although some people deny it, and prefer to search for all kinds of external reasons for their failure.
The reality of trading is something like this:
10% Money management.
Even if you have almost mediocre strategy/methodology, and only average skill, you can still join the top 5% if you have rock-solid mindset.
But if the mindset is weak, nothing will help you. No method, no strategy, no tools, no resources.... Everything becomes useless.
If the mindset is your weak side, the failure is almost guaranteed!
Now I will try to dissect the whole problem and to analyze the different components, relationships and connections. I also made a few pictures to illustrate the principles.
Let's start with the obvious.
Trading is part art, part science, and part common sense. But it's also performance oriented discipline, very similar to individual sports.
Every day the trader has to deal with all soft challenges: to analyze in real time the news and the price action, to make fast decisions, to manage positions and risk, to maintain focus, to control emotions, to deal with stress and to adapt constantly to the ever changing market conditions. Multiple very demanding tasks and they all come at the same time.
Psychologists have found that the human brain can deal effectively only with certain amount of information - about 110 bits of information per second. It may sound like a lot, but it's not! Only for example - decoding speech takes about 60 bits of information per second.....
This means that in order to achieve maximum performance (results) we have to focus 100% on the task! All external unnecessary distractions have to be eliminated.
The trader has to achieve optimal emotional and psychological balance between skill and challenge in order to find the sweet spot - the Zone! This is where the magic happens.
In psychology the term for this is called flow.
Several conditions need to be met in order for a person to enter the zone:
1. One must be involved in an activity with a clear set of goals and progress. This adds direction and structure to the task.
2. The task at hand must have clear and immediate feedback. This helps the person negotiate any changing demands and allows them to adjust their performance to maintain the flow state. Short term trading (intraday) is more likely to induce a flow state.
3. One must have a good balance between the perceived challenges of the task at hand and their own perceived skills. One must have confidence in one's ability to complete the task at hand.
The necessary components in short summary:
Knowing what to do (your game plan, strategy)
Knowing how to do it (your skills, experience)
Knowing how well you are doing (your journal)
High perceived challenges (sink or swim situations!)
High perceived skills (confidence in your abilities)
Freedom from distractions (focus ONLY on the task)
Not all activities can induce flow state, but as you can see, trading fits perfectly!
This is the standard flow model and the relationship between challenge and skill.
OK! So far, so good. Many traders are able to reach this state(the zone) and ultimately to generate some profits. But here comes the next big challenge - How to keep the profits, and how to repeat indefinitely (how to grow the account exponentially)?
Many people make profit, then hit some invisible ceiling and then they crash. (Blow up the account) Most of you know what I'm talking about here don't you? Do you know why it happens? Do you know how to fix this problem? Most people have no idea!
Here is what happens:
When you trade profitably, your confidence grows together with the profit, until it reaches a peak, a critical level where you become too greedy and cocky (you feel that you are very good trader) and you start to pay less attention, and maybe you start to violate your own rules.
At this point a small mistake can turn into disaster. And a chain reaction will occur. The small drawdown leads to revenge trading, end eventually can make the situation even worse as more and more emotions get involved. (Fear, frustration, disappointment) At this point it is critical to close everything, to step back, and to take a break, so you can clear your mind. Because otherwise, you will enter the blow-off phase!
You have to have high confidence, but not too high. It's a matter of optimal balance.
If your confidence gets too high, you will enter the danger zone and eventually you will blow up your trading account. Or at least will enter deep drawdown.
The best way to prevent all this from happening is to constantly monitor your own emotional state.
If you notice that you get too cocky and greedy - decrease trade size!
Also after very successful (profitable) period, take a break (small vacation). And after that, trade small for a while. Don't increase your trade size immediately. Play defensively! Play smart against your own emotions.
Also use this tactic to recover after bad day (or period). If you lose some money, don't try to make it back immediately. Revenge trading leads to more loses!
Remind yourself the strategy (the rules, the plan) and why you even trade in the first place (the goal). Go back to basics and start small.
Some people understand most of these principles, but they face another common problem - Fear of loss and mental freeze during stressful situations.
Very common problem and it really kills the performance.
Common symptoms are:
-Strong hesitation in the presence of obviously good opportunity (according to strategy)
-Closing profitable trades too soon (out of fear) without any real signal.
-Strong response from the body during trading - adrenaline rush, very high heart rate, blurred vision, tight stomach.......
All these are signs that you're reaching your psychological limit. You experience too much stress, and sometimes too high challenge (exceeding your skill level).
Almost everyone has experienced this problem. And if you haven't experienced this or if you think that Im exaggerating and you are not affected by this problem - just wait until you start to trade large size ($50 - $100 per pip or more...)! Actually this is also one of the solutions to this problem.
Very small trade size = small stress! But its not the best solution because it leads to low performance, and a lot of unused potential.
You will never grow if you trade too small!
If you are serious about trading and want to grow, sooner or later you will have to trade large lots. (There is no escape from this)!
Another factor contributing to the problem is the strong attachment to money.
Detach yourself from the value of the money! Imagine that money = score!
It's just numbers, like in a video game. If you play well - you earn more points.
If you play bad - you lose points... It's really that simple! Focus on the points.
Stress is essential component for good performance. You need stress but in average" dose. What is considered average dose? That depends on how much you can handle.
You see, here is the problem. Most people have very low limit when is comes to stress.
They just cannot handle it. This is very important part, and one of the main reasons for underperformance. 90% of people just don't know how to perform under pressure.
Without special training most people who live in the civilized world are too soft mentally. And they don't even know how soft they are until they face some real challenge. Trading is a serious challenge (for the mind)! That's why most traders lose. That's why so many smart and intelligent people lose. Because intelligence is not enough in trading! Mental toughness is what counts the most.
Most people live very comfortably and they get used to the comfort zone.
But that's a big problem. In trading this comfort zone is your biggest enemy!
If you are serious about trading and want to make real money, you have to step out.
This is the only real solution - you have to stretch your limits! You have to acquire much higher level of mental toughness.
If you do this, I guarantee you that you will take your trading to the next level. (You will be surprised by the result).
You must challenge yourself with something big outside of trading. Do what you are afraid to do!
Extreme sports, Jump with bungee, sky diving, public speaking, talk to strangers on the street, join some boot camp for civilians (military style), live in the wild for a few weeks.......I mean, anything that will increase your mental toughness.
Then later in trading you will no longer be constantly on the limit. The limit will be much higher.
I'm not going into much details about the exercises because there is countless info and a lot of good advice on the web on how to increase mental toughness. Just search in google.
Most of the best advice comes from sport. There are excellent exercises there.
Also physical training is a very good way to stimulate the mind. Regular exercise will make a real change in your trading performance (and in your life)! Running, cycling, swimming, mountain climbing, hiking.... these are excellent outdoor activities. Go and do these things as often as possible. Push yourself! Your physical limits will reveal your mental limits.
This is for now. I will add more later.
They always say “The first step is admitting you have a problem.” I admit I have problem to handle emotions in trading.
And I'd like to thank you for this thread especially for the first post. It showed me it's worse than I thought. I hope you'll write more things later. As you said you're trader but I really loved reading the first post so don't abandon the thought about writing!!Now I'm gonna search the web about increasing mental toughness.
So keep it up and keep it comming. I'm subscribed
That's really true and awesome. I have personally fell a victim of emotions and cost me a lot. I appreciate for your efforts in starting this thread. Keep it up.
hats off to you sir!
you struck gold with this thread
the single most important piece in any endavour , even or actually nothing else but life , is oneself! if you are fully aware of you and your mind
you can prettymuch excell in all aspects of life...
you know , people tend to throw in "selfdiscipline" when it comes to trading .. but where does selfdicipline come from ? how is it achieved?
it doesnt just pop up out of nowhere because you "need" it to be a profitable trader.. its a core principle one has to develope and it goes hand in hand
with selfresponsibility> selfrespect>selfawareness>selfacceptance>selfesteem
you see everything is linked together somehow, and one HAS to start at the very core , to get where one wants to be ... and that is oneself..
and it just has to be a small start to get the ball rolling it can be easy as , exercising regulary , mediation etc.. one small thing will start to affect other things in life over the course of time just like a chain reaction.. ie. gaining a new habit.. a good one
Great Topic AO,
Federer realized that, in order to become a champion, he had to first begin thinking like one - and this made all the difference to his career. This is actually the opposite of how most players think - as most believe that once they start winning lots of matches, "the belief will come", which will help them win more matches.
But this is not how it works - because as Federer discovered, it's actually the other way around. The secret is that you have to first create the belief, before you will begin winning lots of matches.
So how do you increase your belief? The same way as you master anything else - you develop your belief by practicing it regularly. Here's a few things that help increase belief:
Regularly visualize yourself winning matches by running powerful, vivid and emotional images of success through your mind, seeing yourself playing brilliantly in every department of the game.
Never talk yourself down, and make sure all the inner dialogue that constantly goes on in your mind is positive and upbeat, rather than critical and negative.
Reinforce your belief by regularly reminding yourself of all your past victories, rather than completely forgetting about them as most players do.
Apply the Federer method to your own game whenever you are playing a match, and simply refuse, from now on, to ever give up - ever again. Hang in there, keep playing, and see what happens.
If increasing inner belief can make such a major impact upon Federer's game, just imagine what it can do to yours.
"The Mind controls the body, and the Mind is Unlimited"
- The best of success, Craig Townsend
Michael Phelps started swimming when he was seven years old to burn off some of the energy that was driving his mom and teachers crazy.
Michael was a restless and hyperactive kid. One of his elementary school teachers impatiently complained to his mom I just dont ever see him being able to
focus on anything in his life. In 6th grade, he was diagnosed with Attention-Deficit Hyperactivity Disorder (ADHD).
And yet, today we know him as the Michael Phelps the most decorated, legendary Olympian of all times who has to his credit 18 gold medals (twice as many as the
next highest gold medal holder!), 2 silver medals and 2 bronze medals.
Ever wonder how Michael may have gone from a hyperactive kid to a laser focused Olympic gold winning phenomenon?
Bowman believed that for swimmers, the key to victory was creating the right routines habits that would make him the strongest mental swimming in the pool.
He didnt need to control every aspect of Phelpss life. All he needed to do was target a few specific habits that had nothing to do with swimming and everything to do
when creating the right mind-set. He designed a series of behaviors that Phelps could use to become calm and focused before each race, to find those tiny
advantages that, in a sport where victory can come in milliseconds, would make all the difference.
the nights before his Olympic events, Michael would lull himself to sleep visualizing his perfect race just as he did every night back at home. Next morning he
would wake up at 6:30am, the same time as every other day and have breakfast. Later, exactly two hours before his competition, he would start his stretching
routine, a regimen that he had worked through so many times before that his ankles were more flexible than that of a ballerinas.
Next, came the warm-up laps, a routine that lasted exactly 45 minutes. And then it was time to gear up and head to the competition pool. There he would hook up the
headphones to his ears and crank up the same hip-hop mix that he listened to before every competition since the age of 12.
When his name was announced, he would step up on the block and then step down. He would swing his arms thrice, step back up on the block and get into stance and
wait for the gun to fire indicating the start of the race just as he did every time, no matter how big or small the race was.
When the gun fired, he would leap into the pool and swim. Every minute of the routine until this point was well orchestrated and carried out to perfection. The race
itself became an extension of the routine. There was no room for doubt, fear or any other form of distraction.
Michael swam the perfect race hed visualized. And in the process, he created history again, and again. Michael Phelps had found a secret that most of the athletes
who go on to become legends, irrespective of the sport, rely on on game day, you dont think, you execute. You let the routine that you have spent years practicing to perfection, carry you to success.
Thanks for your Article!
I hope the penny will start dropping for many who are yet to understand the underpinning of this Trading Game!
Thanks for your solid comments
I can attest to this with my own experience in this and other fields.
I believe at various times in our lives we would have done this ....believe something and the result came to match the belief...I think by failing to realize what happened "the magic" escaped the many.
But we all have the potential to be and do great things by understanding and following the great fundamental principle of life you outlined.
Once you get this you will never sleep again!
alphaomega, well said! This is 100% true.
Also want to add, one of the most challenging things in trading is to stick to your plan during a losing streak.
You have to have a trading plan with clear rules, without it, you cannot survive drawdowns.
Before trading, accept the fact that you will have losing streaks no matter how good you think you are.
4-5 or even 10 consecutive losers are absolutely normal and will happen again and again (depending on your win rate).
Backtesting or demo trading over a longer period gives you an idea of the distribution of winners and losers.
What happens in such a situation is that the mind will cheat you by trying to find every possible reason why the next setup is not that good, be it the upcoming news, or weekend (fear of gaps), or the candle is too big/small, or you read a post on FF where someone is taking a position against your expectation etc... And then you realise that the missed signal was in line with your trading plan and tourned out to be a great winner.
The solution to this problem is to accept losing as part of the business and to understand that the outcome of each trade is absolutely independent of the previous one. Don't be attached to the outcome of each trade. Instead, given that you have a proper strategy, look over a large series of trades and you can be sure to come out with profit because of the statistical evidence (edge)...
Mastering the mental side of trading requires to be 100% confident in your strategy and being able to stick to your plan, no matter what.
Now to be honest, even after trading for 3 years, sometimes the mind still deceives me
Thanks alphaomega for putting the effort in writing the most vital points related to forex trading.
Revenge trading has killed me several times.
Not accepting small loss has killed me several times.
Not following my own rules after making huge profit has killed me several times.
Not following my own rules after incurring a few losses has killed me several times.
I have experienced most of that you mentioned, I know all these, but I'm still suffering from all of the above.
Oh I must be dead by now. Dead man not giving up?
During my 13 years around trading forums, I've read dozens of interesting "psychology" threads, and have expressed my opinions many times (e.g. here and here).
I don't want to get involved in yet another discussion on methodology vs psychology semantics, so I'll simply say that everybody is different, and leave it at that.
Hopefully this thread will continue to offer worthwhile discussion, and provide some practical solutions to psychological issues. FWIW, some of the most helpful things for me have been:
(1) having a trading buddy (two heads are better than one; keep each other motivated, focused and disciplined; provide encouragement and moral support);
(2) semi-automated exits (reduces the temptation to meddle with open trades);
(3) establishing, and trading well within, my position size threshold (emotion-wise), and/or funding accounts only with money that I can afford to lose.
The mind game - psychology.
IF you 'know' something is going to happen in the future, the psychological stress is much less. Eg. you 'know' eu will rise from current price 1.07 to 1.10, then putting on a long trade does not give you stress. The psychological problem arise because deep down you know that you don't know if price will rise to 1.10 from here as you have guessed it to do so. The more you don't 'know' the higher the stress level vv.
So, weak psychology is not the culprit. Not 'knowing' is the source culprit. But our ego prevents us from admitting this state of no knowledge. To suggest improving or reinforcing our psychological strength is to solve a normal reactionary psychological state which we heap blame on it when it merely results from a simple lack of knowledge. We are misdirecting our focus and efforts instead of simply accepting this reality then confront and solve an existing real problem. Whether this source problem of lack of knowledge can be solved or not is another matter. Acknowledging this state will point us in the correct direction, then we can concentrate our efforts to solve real problems and not blaming and fighting shadows. Our huge ego stands in the way blocking us from doing the right thing, much more than many of us would like to admit.
Therefore it takes a person - whatever his/her competency level is - who is prepared to be honest with him/herself to say to him/herself that 'I don't know', a simple brave step before he/she can start his/her work to find out answers to all those stuff he/she does not know. Funny isn't it that when no one is preventing you yet this is the hardest thing to do to gain knowledge about a business which we hope to derive gains from?
This is the simple PSYCHOLOGY battle every trader/wannabe trader encounters and battles within him/herself.
For me I find the following has helped me enormously:
(1) Small position size as you mention (0.5% of account or less). I have been able to generate very satisfactory returns with this amount
(2) Trading multiple systems across a very large range of instruments (30+ currency pairs & 30+ commodities). The key rule being only 1 position at risk per system (when stop moved to BE or above I can add). This focuses me on only selecting the very highest quality trades within my rules and to practice patience as I do not want to waste my allocation to sub standard entries when I can see possible better ones forming.
The above 2 rules have transformed my trading.
Excellent post.MAny many thanks for your time and effort.please keep continue it.
Thank you all for the comments.
I see some good points are mentioned, especially about the need for daily routines, and the creation of right habits. I will write about this.....later.
I like the Tennis analogy with trading forex.
1). You have to absolutely love what you are doing. ( passionate ).
2). You are not phased by set-backs. (you have total belief in yourself & your abilities).
3). Losing a point or a game does not matter, try to win a set first. (you have to keep your emotions in check).
4). Take on one opponent at a time. ( you must master one currency pair).
5). Master your techniques through endless practice. ( demo & live practice with small stakes).
6). Keep learning new techniques and add them to your game.( coaching/research ).
7). Preparation for tournament. ( mental rehearsal / meditation/ positive attitude).
Do you definitely know if you will win the match ?
Do you just give up even before the first serve ?
How quickly can you overcome setbacks ?
Have you done the work to have that winning mentality ?
The Flow diagram is really good, I think that you can be in any of 3 states, ""Flow, Control or Relaxation", note that the "Skill" level is high in all 3 states.
If you are on the left hand side of the chart, you need to work on your Skills.
We all exploring materials analysis, type analysis, tools.
At the same time, all agree 100% about psychological component of the market.
So why no one as obviously not learn materials to support the mental state? Everyone thinks that it's not necessary. They're wrong.
Waiting for next installment. Thank you.
"I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick 10,000 times." - Bruce Lee
Have you noticed how when you start to learn some new skill, at the beginning everything feels unnatural, and you tend to think too much about it? And no matter how much effort you put in, and how hard you try to calculate every step, your performance is still the same.
But then, as you practice more and more, you start to think less and less, and your performance gradually improves until you reach the point where you no longer think about it - you just do it! You somehow perform on autopilot. (Or at least it feels that way)
Im sure everyone has experienced this. For example, when you learn how to drive. (Especially if you learn to drive stick).
It's all about repetition and routine. Doing the same thing day in day out until it becomes part of you. This is the process of creating a mental map in your subconscious mind. Like building a software.
You want to automate your strategy? This is the best way!
In psychology this process is known as "The four stages of competence".
1. Unconscious incompetence
The individual does not understand or know how to do something and does not necessarily recognize the deficit. They may deny the usefulness of the skill. The individual must recognize their own incompetence, and the value of the new skill, before moving on to the next stage. The length of time an individual spends in this stage depends on the strength of the stimulus to learn.
2. Conscious incompetence
Though the individual does not understand or know how to do something, he or she does recognize the deficit, as well as the value of a new skill in addressing the deficit. The making of mistakes can be integral to the learning process at this stage.
3. Conscious competence
The individual understands or knows how to do something. However, demonstrating the skill or knowledge requires concentration. It may be broken down into steps, and there is heavy conscious involvement in executing the new skill.
4. Unconscious competence
The individual has had so much practice with a skill that it has become "second nature" and can be performed easily. As a result, the skill can be performed while executing another task. The individual may be able to teach it to others, depending upon how and when it was learned.
Try to learn something new and practice every day. Break down the big goal into smaller steps.
You know how they say "Practice makes perfect"? This is only partially true!
Only perfect practice makes perfect! Because if you practice the wrong thing, you will create wrong mental map, and wrong habits. And the habits are very hard to unlearn.
You have to learn from your mistakes as much as possible. That's where the journal comes. Analyze your trades.......especially the bad trades (the ones where you lost the most). Identify what went wrong, and try to avoid this type of situations in the future.
Same thing with the good trades. Identify the correct actions leading to profitable trades, and try to do more of these good trades.
IMPORTANT! Use the demo to find what works for you, and to build your strategy, and methodology. Find what trading style fits your personality best.....
But the moment you realize that you are able to make consistent profit (when you see the potential) - switch to live account (start very small).
Do not use the demo to practice your strategy! Use live account! It all goes back to my first post....remember? The comfort zone is your biggest enemy! Step out of it!
The less time you spend on demo - the better.
And don't try to make a lot of money. Understand that it's a process. It's not about who makes the most money today, but who will stay longer. Small steps, small steps every day!
Most people want to make the big money immediately.....trading doesn't work this way.
First you learn to crawl, then to walk, then to run, then jump, and eventually you will fly in the sky.
(Exponential growth - the most powerful force in the universe).
Be smart and learn how to use the force.
© Forex Factory