It's A Heart-Mind Game... Are You Ready?

I want to use this thread to discuss the ways we can overcome the challenges that can overtake us as traders...the ones we may not even see coming. Many times we don't even understand how our minds and emotions can be working against. So much to discuss here and so many good books out there. I hope this thread will be a good go-to spot, source of encouragement and hands-on reference for traders who finally understand that the road to success happens once you've mastered yourself (fears etc.)...assuming that you already have the right tools. Will be posting some trading scenarios...even some dialogs so we can see/hear ourselves. Maybe it will even be a mirror to some.

Feel free to chime in...

FX4Newbies...and others too

P.S. As a man is thinking in his heart, so is he.

When I meet people who want to get into trading, one of the things they often say is, "If I just had someone to really teach me, I KNOW I could do this." Of course they also have in their minds all the money they plan to make.

The first place they go is to find a method or trading system which is not a bad place to start, but they don't even understand how they react to making or losing money.

Prime example:

Had a friend who never thought she would ever trade. She learned her method well, but was afraid to put on her first trade...in a DEMO account. After several weeks, she finally did.

I got a call around 10:30 pm one night that went something like this:

Me: Hello Jane (not her real name)
Jane: Oh my gosh! Oh my gosh! I can't get out; I can't get out!!!
Me: What's going on?!
Jane: I can't stop this thing, oh my gosh!
Me: Stop what?
Jane: I put on a trade, and I can't get out! I forgot what to do.
Me: Calm down Jane. Are you losing money or making money?
Jane: I'm making money but it's going so fast. I can't remember how to close this thing. Now I think I just bought again instead of selling...twice.

This went on for about 45 minutes before I could get her to calm down enough so I could walk her through it. We talked about it for a while. Now she sits there cool as a cucumber.

We just don't know how we are going to react. She for one never thought she would panic like that when she saw herself making big money that fast...which was what she hoped trading would do. Her mind wanted one thing, but her emotions had to develop to support/facilitate that idea.

More scenarios and tidbits to come.

FX4

Recently read a statement from a great trader that went something like this:

I could post my trading rules in the Sunday paper and hardly anyone would follow them.

What a statement!!!

Another example:

Taught a newbie...actually a group of them and specifically stated DO NOT TRADE POUND/YEN as it is too volatile for you just starting out. One adventurous student got started live. He told me he would call me to let me know how his first live trade(s) went. Thought he would call after the very first trade. No call, so I waited.

On Friday afternoon I got the call. Joe is not his real name.

Me: So, there you are. How was it?
Joe: Well, started off well. I was seeing what I needed to see etc. but....
I waited....
Joe: I have to confess...I traded Pound/Yen. At first I was up a few pips and I thought, "Yes, I have this thing down." And then it just tanked and before I knew it I was down 35 pips.

Why do we not follow rules? Why don't we want to follow rules? That is something each trader needs to find out and work on. Many traders don't even follow their own rules. One trader told me...

Trader: With the system I have, I KNOW I can start with $1,000.00 and turn it into about $10K in maybe 4 to 6 months, but I won't follow my rules (laugh, laugh).

He'd been trading for about 4 years at least at the time we talked. Sometimes it's time to stop the trading system shopping and start cleaning our trading house. It shouldn't take forever to find a system. You'll be amazed what some traders who have mastered themselves can do with just a trendline.

FX4

So what's a trader to do...start where?

1. Ask yourself some simple questions like:

i. What does money mean to me? (one word answers)

ii. How do I feel when I lose or make money?

iii. How/where did I learn the value of money?

iv. How/where did I get the money I will be trading with?

You must understand your emotional attachment to money very early.

2. Have a very clear-cut set of trading rules that you force yourself to follow. They should be as specific as possible. Hopefully your method (trading edge) has a good success percentage. I guess I should mention here that sometimes doing the right thing does not always feel right.

3. How are you wired? Right Brain vs. Left Brain...take the test:
http://www.perthnow.com.au/fun-games...-1111114517613

Through repeated actions (the same way every time) you will program the associative pathways in your brain. Remember: perfect practice makes perfect. Over time you want the right response to be as automatic as possible. That would be difficult to develop if you are haphazard in your trading method.

More to come...


FX4

the first hurdle (which is no easy task) is learning what actually works.
then how to stay alive.......then sticking to it.

trading is not for everyone, and it involves hard work. Research, and knowledge.
speculation has a great degree of luck, and skill, as well as flexibility. we try to be objective and do continuous analysis but leaving margin for volatility. React fast but not over react.

it goes against our psychological need for habit, comfort, and certainty.

all traders are losers, but it's the net result that separates the few.

Gotta start off laughing on this one.

About two years ago, I was stalking this trade. Everything was there for a sell...and I mean everything!!! I said to myself, "They're not going to get me on this one. It's a set-up to bait me." Thought I was going to outsmart the market. So, I bought. Might have been trading about a year then. The thing tanked. What did I learn...and still learn? TRADE WHAT YOU SEE WHEN YOU SEE IT!!!! Period. Even if you are wrong doing that, you'll be right more often than not, and when you are wrong, just fix it. Sometimes though, that is not so easy...especially if you want to be right. That's another can of worms for another day.

FX4

the first hurdle (which is no easy task) is learning what actually works. So true...and what works on every level, not just a trading system or an MM strategy...everything's gotta work together, and that takes time.

Yes, trading is not for everyone.

it goes against our psychological need for habit, comfort, and certainty. It does put us in a fix for sure...some traders aren't even aware how their minds are wired against them succeeding.


all traders are losers, but it's the net result that separates the few. Interesting. Alexander Elder in his book Trading for a Living said he got some insight when he went to an Alcoholics Anonymous meeting as he watched these people stand up and say, "I am an alcoholic." He thought, "If as a trader I can stay sober (not lose money) one day at a time..." Don't think he was there for a drinking problem by the way, but you get the idea.

Thanks for posting your thoughts, but there is more to succeeding at this than any system can give.

FX4

Don't know if this is just me...

You tell yourself you're going to trade between this time and that time. For some reason, thoughts of doing other than that start popping up...send that email; make that call....it'll only take a minute. And with that focus is broken.

The mind needs to be focused to absorb what price is really doing...evolving candles tell so much. Can't feel the market with broken concentration.

DISCIPLINE is key...ALL THE WAY!!! A disciplined mind to say....no phone calls, no emails. One guy said if his wife needs help with anything during that time, the answer is no, and he'll get her flowers later. Of course they discussed the seriousness of it all before, but in the event that she forgot...."...and here's some flowers dear."

And with that, I've gotta go for now.

FX4

depends what you mean by system.........however this has been discussed ad nausseum, and i don't want to high jack your thread with mental masturbation.
but a system is not necessarily a rigid set of rules with static parameters, a system is also mental thought process derived from past experience. There is a reason for everything we do,and according to knowledge which are memories of past experiences we make decisions.

so a system ALWAYS EXIST, whether you can write it down or not, can have many variables to any given scenario but a thought process is always present with triggers, observations and implementations = system.

Good idea for me to define what I mean by a system. When I use the word here, I just mean a specific recipe you use every time you trade...your habit, your routine. What you need to function optimally. It could start with....

Get up at 5am and take a quick shower. Some people just can't start their day any other way.

Get a cup of coffee or tea and turn on the computer.

Turn on some trading music or motivational tapes and meditate on trading rules and goals etc.

Once charts are up, and updated, they're looking for X,Y,Z to tell them A, B,C.

or...

For some, it starts with their trading method/trading system...they look for X,Y,Z as soon as they get up. Finding the mental/trading balance is important.

a system is also mental thought process derived from past experience.

Yes, and the more conscious and deliberate we are about as much of what is happening on the mental side as possible, I think the better off we would be overall. Association impacts us on a subconscious level in so many ways and then we implement from those associations and are totally unaware and clueless at times.

Thanks,

FX4

Now, which trader in their right mind wouldn't want to do that? Yet we KNOW that 90% or more of traders do just the opposite. Why in the world? Is that mental or what?

Clifford Bennett made a powerful statement when he said that it takes more courage to stay in a winning trade and do nothing but let it run. Why is that? Maybe it's because you have to fight against not wanting to take the profit you worked so hard for. Not to mention, if losing seems to happen to traders more than winning, and you're winning ...and then you can't take it? Oh boy. Also, the fear of what might happen to that profit if you don't take it causes you to take it: fear of the unknown.

Fear of loss again could be why we don't cut losses. Instead of biting the bullet we start hoping. Hope helps us not feel the pain of a loss as much (like an aspirin) but once hope sets in...it cements us to that bad situation. Hoping without reason/justification from price action will kill your account, and develop destructive habits in your mindset. Many traders say that once they know they are in "hope mode" that it is a sign to get out of that trade.

The other issue is that in this business if you lose money, you failed. Failure doesn't feel good and begins to attack confidence etc. Maybe some questions to ask are:

"What do I think/feel about myself if I fail?"

"How do I think/feel if I am proved wrong?"

Thoughts and feelings drive our actions. A good habit to note these in your journal...any thoughts and feelings you may have.

In the next post (not the next response) we'll see what pointers I come up with to help with this major dilemma of letting profits run and cutting losses.

Take care,

FX4

FX4,

If the only barrier to successful trading is your emotions, why not simply use an EA?

Programming an EA to (1) enter any emerging move, (2) cut losses short and let profits run, and (3) use sensible position sizing, is child's play. An EA will trade 24/7, executing that strategy flawlessly, consistently, tirelessly, emotionlessly. It removes the trader, his mindset, and any lack of self-control, from the equation altogether. An EA automatically guarantees all of the following: Adherence to strict MM rules. Perfect accuracy of execution. Endless patience. Unwavering discipline. No fear, greed or hesitation. Immunity from hunches, guesswork or outside ‘noise’. No missed opportunities. Around-the-clock trading that’s unaffected by tiredness, illness, stress, negative attitudes. No data entry errors. Recreational time for the trader, away from his PC.

In short, an EA solves just about every problem you've listed in this thread. So build yourself an EA, and effortlessly become a FX millionaire........


....... if only it was that simple. So what is the problem? Given that the EA executes perfectly, then the problem must lie with the strategy: "enter any emerging move, cut losses short, let profits run" is apparently just not good enough.

Hence I agree with the redlion. To be successful at trading, you first need to know how markets work, what drives price, or - at the very least - the price patterns that (on the balance of probability) are created. Then construct a strategy of entries and exits around that. Then test that strategy extensively until you're totally convinced that it's significantly profitable. Familiarize yourself with its strengths and weaknesses: how and when to optimally apply it. Then the longer you trade, your experience increases, and your confidence grows with your account balance. As you taste success, disciplined trading will follow as a matter of course.

As with anything in life, if I know what I'm doing, and it keeps on working for me, then I'll simply keep on doing it.

One final point: don't over-leverage yourself emotionally. If trading minilots makes you sweat bullets, shift down to microlots. Find your tolerance to pain, and stay well within it.

Don't over-psychoanalyze. Learn how to trade, and keep it simple. Just my 2c.

Best wishes for 2012,
David

Hello Hanover,

Thanks for your comments. First I would like to start this reply with a quote from the first post:

"....for traders who finally understand that the road to success happens once you've mastered yourself (fears etc.)...assuming that you already have the right tools...". The text in bold is assuming that you already have what you described...a strategy, entry-exits etc. etc. It is obvious that one cannot trade without them. This thread is to discuss the other component of successful trading: the trader. Too many times traders focus on the trading strategy; the tools etc., and neglect what I think is the most important part (maybe 80% or more) of the equation: the psychological and emotional aspect. Why? Because once you have the system, the tools etc., your success for the rest of your trading life will depend on you. And that will never change...mho.

I know a trader who was hired to find the most effective EA/auto trading system out there. He went through everything worth checking on the market at that time, and found something that was over 80% successful. However, at certain times, when it seemed like the risk was too high or the account had dipped a bit, he would intervene. He finally told his boss, "The next time I do that, you need to fire me." He was trying to put a strong motivational force in his mind to keep him from doing it. I don't know of anyone that would use an EA, robot or whatever that they could not control or turn off at will. I don't know of anyone that will put the larger portion of their money on the line using an EA or robot and never keep an eye on it.

This paragraph is key David:

Hence I agree with the redlion. To be successful at trading, you first need to know how markets work, what drives price, or - at the very least - the price patterns that (on the balance of probability) are created. Then construct a strategy of entries and exits around that. Then test that strategy extensively until you're totally convinced that it's significantly profitable. Familiarize yourself with its strengths and weaknesses: how and when to optimally apply it. Then the longer you trade, your experience increases, and your confidence grows with your account balance. As you taste success, disciplined trading will follow as a matter of course.

I tried to highlight here these essential parts you listed in this very powerful and succinct paragraph that so often go overlooked. The YOU factor is everywhere. They all include or involve mental/emotional processes. Is it any wonder that some, if not most of price action, seems geared at getting the trader on an emotional/psychological level? I am not trying to say that the emotional-mental side of trading is the only thing needed to be worked on to be successful. For traders who understand the game already and have their tools (strategies, EAs etc.) then they are the make it or break it component at that point. The time it takes to test a strategy to be totally convinced will vary for each person based on their mental and emotional make-up. That is what this thread is more focused on: helping traders overcome in those areas. I have another thread in the Trading Journals section on technical analysis, so that means I'm not all emotion with this thing.

By the way, I have heard that auto-trading EAs and robots tend to fail after a while because the market changes as time progresses, not to mention the kind of risk and standard deviation percentages involved. Is that so? Also, are there limitations to the kind of strategies and trading that would be more suited to an EA? Some funds and banks use EAs etc., but they still maintain discretionary traders as these tools cannot surpass the capabilities of the human mind and eye. Any thoughts on how to make allowances for that?

Now this part I agree with 150% :

One final point: don't over-leverage yourself emotionally. If trading minilots makes you sweat bullets, shift down to microlots. Find your tolerance to pain, and stay well within it.

Yes and yes!!! If you trade within a comfortable level emotionally for your account size, your trading mind will tend to remain more objective and logical, and the trader will not be as susceptible to the emotional impacts of the market on their psyche....the trader will have a better chance to remain composed etc. thereby making "better" trading decisions.

Thanks for the good post David. Really appreciate the heart-felt input. Best wishes to you as well for 2012.

FX4

P.S. By the way, I worked with someone once about putting together a tool for me. Once they got the details of what I wanted, and saw how they could profit, they told me they couldn't do it (and we were almost there), referred me to others, stopped taking my calls and within weeks had it on the market. No joke. And they were supposed to be reputable. And yes, I do know about NDAs...Non-Disclosure Agreements etc. etc.

Here are some thoughts on how to let your profits run...

Now I think it is "obvious" that every trader wants to make money in this business. The only way to make that happen is to make more than you lose either daily, weekly or monthly...and do so repeatedly. So, why is it that the majority of traders do just the opposite and get the opposite result of what they want? In part 1A, I want to deal with the first half: Letting Profits Run.

Well, first off, is the trading method they are using effective enough to produce more winning trades than losing ones? This point was also made by one or two other posters here. The only way to know how effective your method is (the ratio of wins to losses that your method produces) is to back test it. You need to convert your trading system into information (facts and figures) that your mind can use to beef up your emotional equity for trading.

In order to back test it, you need to have a clear edge going in and a clear exit strategy. How long should you test it? Minimum: 3 months. Some funds won't even look at a strategy unless they have at least 5 years of results to examine. Producing back-tested results is boring as heck and time-consuming...most traders won't do it. A caution here: no cherry picking . Test your system as objectively as you can.

So, let's say you are one of those zealous traders willing to do what it takes to complete 3 months of back-testing, and determines that the method being used should generate at least 70% of winning trades. Hopefully, you should be able to "trust" that what you are doing has enough credibility to put some confidence behind it. If not, do more until you're comfortable and satisfied. If your results are too low, you may need to modify your trading methodology. Let me say here that a trader with a method that produces even a lesser percentage of winning trades and but has excellent money management skills can still make money.

Next step. You have your method/edge/trading system; you have your trusted platform and trading tools, and you're trading a market and using a time-frame that is suited to you. So how do you go about letting your profits run?

1. Trade ONLY when you see your edge. Trading is a "game" of varying probabilities. Only the high probability set-ups and entries produce winning trades consistently. Consider entering with a scout first: a small position to test the waters. That way if you were wrong it should not be an emotional hassle to take the loss as it should be insignificant enough to you and to your account. A scout also helps you to "feel" the market and energizes your trading mind and can cost only pennies if you use a micro-lot. Taking only the best trades will also help protect your emotional equity.

2. Have your risk/money management system in place. Whether you use stops, price alerts, rescues, foreign capital etc....be prepared.

3. Once in the trade, do NOT trade your P/L. By that I mean, do not make trading decisions based on what your P/L is doing. Discretionary management (changing your mind once in the trade...and for the wrong reason) is probably the number one reason traders lose. If you have a good system you were probably right the first time. Give your trade time to mature: to go toward your anticipated target area. If you can't stand the fluctuations walk away for a bit. Don't allow yourself to become emotionally involved to the level that it would force you to make illogical and irrational decisions. If necessary, get one of those devices that can tell you if you have left the logical zone and entered into an emotional zone. I think it checks your pulse rate etc. You can also pay attention to yourself to see if you start exhibiting any of the fight-flight responses: sweaty palms, heavy breathing etc. You know how we get when we are terrified or nervous . If you allow yourself to get there, your built-in defense mechanism will want to kick in to save you from whatever is causing the increased tension. Then, once you're out and calm again, you'll say, "Now why did I get out. I knew it would......". How many times have you said that!!?

4. If price is progressing as expected and not coming to or closing beyond the price area that would invalidate the trade (be as specific as you can be here with that price), LET IT RUN. Sit on your hands if you have to, but DON'T EXIT YET!!! Either price is going to your target or it is going the other way. So, if it is not going the other way, leave it alone. Pure logic here. Leave the room if you have to so price can perform...unless you are scalping every two or three minutes or something. The big losses that most traders are used to (according to statistics) happen because traders hold a losing trade too long.

So, it stands to reason, if you are in a trade that is going to your target, just hold it and you'll end up in profit. It takes COURAGE (strength in the face of pain or something that threatens your security...something you deem dangerous) to hold the trade, and that is what the market rewards: COURAGE in the direction of price, despite the fear tactics along the way! That is where it starts and the courageous warrior traders get paid over and over and over again. You can't get confidence without it. Confidence just makes it easier the next time around. By the way, no trading system as far as I know can make you courageous. It is something you have to make the decision to BE, and having some credible results help you to be strong when you feel like bailing out. When you start feeling the knots in your stomach as you hold a winning trade, you're on your way .

5. Every time you are tempted to close the trade and take profits SAY TO YOURSELF WITH CONVICTION, " I "KNOW" that X% of the time, price goes to this target so I am not closing until it gets there or price invalidates my entry strategy...PERIOD!!!" Your emotions will be talking to you to exit early and you have to talk back with logical and factual information.

6. Start over from Step 1 every time you trade until it becomes second nature: a reflex...automatic, with minimal thinking and hopefully no second-guessing. Just keep doing it...doesn't have to feel right. Just keep doing it.

In part B, I will discuss Cutting Losses Short: What to do if price invalidates your entry. Remember our goal is profits .

FX4

P.S. Would love to hear comments on how other traders let their profits run.

Hi again traders,

For those looking for Trading Challenge 1B of Letting Profits Run - Cutting Losses Short, I will try to have it up by Wednesday of this week.

Will do my best,

FX4

P.S. Will also be making a comment then about the Psychology of Random Rewards.

hmm..trading challenge? interesting. Looking forward to this

Hmm...

Not an actual square-off sort of challenge with traders. It's just Part B of the article to help traders get beyond trading challenges that keep them from their goals . You probably did get that already, but just want to be clear in case others take it the wrong way. Might be something to think about though .

Take care,

FX4

Not a great test as it changes direction anyway - watch her arms and legs - her right arm and leg are up and she's spinning on her left leg, she then changes direction spinning on her right with her left arm and leg up.......but apart from that, a great thread.

The only thing you have to understand about markets is that they go Up and Down - how they work and continuous research is not needed, but awareness is.

EA's don't work because the market changes - therefore the only system or method that works is one that adapts to the market conditions, therefore discretion and awareness is required.

Hundred percent agree with you FX4, even with a decent method, it's all about greed and fear.

Glad you like the thread BackTestDummy.

Strange thing is... as hard as I have tried, I can only see her going one way. Others can only see her going opposite of the way that I do. Some see both directions.

(Auto-Trading and Tech Analysis) EAs have their limitations for sure.

In the final analysis, it's all about the trader, MORE than the system, but most traders focus on the system more. Hope they get it. If you read the Market Wizards books, there is very little focus on a trading method, more emphasis is given to the other stuff.

Thanks for posting. Good insights.


FX4

The idea of Random Rewards has to do with psychological reinforcements and conditioning methods.

An experiment was done with monkeys (sorry, don't have specifics now). There were two test groups. The first group was given a reward EVERY TIME they did a certain thing. When the rewards were stopped, the monkeys stopped performing.

The second test group was given the reward randomly. They kept performing even when the reward was not given. Of course, they kept going with the hope that the reward would be forthcoming at some point. This is how these casinos and gambling institutions keep people sitting there just putting money in and pulling that handle: like they're programmed to do so.

To be successful in trading, you need to get as much out of your trading method as possible. You don't want to be a trader like the monkey in the second test group, where you keep putting in effort and dollars for an occasional reward...the carrot so to speak. BACK TEST your system, so you get as much back for the effort you put in. Even the person who just puts on a trade blindly, knowing nothing, and does so for a year will get something...if they have enough capital to keep doing so. Make sure what you get back is more than just something, cause if you're gambling, you've already lost because the game is stacked to favour the house. In trading you have the advantage of variable probabilities, not so with casinos: it's fixed. Pick the trades (via your method) with the best probabilities so you come out ahead...then work on YOU the rest of the way. If your method is lacking some, fix it or change it. But you won't know if it is broke so you can fix it, unless you test it and get some reliable results. Hopefully with some minor modifications you'll be going all the way to the bank. Chi Ching!!! .

All the best,

FX4