Hello everyone,
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:
70% Mind
20% Method
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.
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:
70% Mind
20% Method
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.
Now I'm gonna search the web about increasing mental toughness.
