The Keys To Your Trading Success
For the subject of this week’s article, the keys to your trading success, I thought that I would take the time to explore the thought process behind most trading decisions we make during our FX speculating. As you may already know if you have read previous articles written by myself or my colleagues, we all drive home the importance of formulating and then following a detailed and actionable written trade plan, so as to remove any underlying emotions from the decision making process and thus enforce ongoing discipline in our trading activities. The less the trade becomes about us and more about our rules and plan, the more we have steered ourselves towards achieving success in the markets on a consistent basis. The plan tells us what to do, as opposed to us looking at a chart and guessing what we should do.
Controlling our emotions during our trading is perhaps the toughest obstacle we face in making our goals a reality. Every single time a candle on the charts moves up or down, we can be easily tempted to click the buy or sell button on a whim, without any real reason to be entering at all! In the early stages of my trading education, I remember reading that candlesticks and trend on a price chart are nothing more than simply a representation of people’s emotions when they buy and sell. Rising prices are an illustration of greed in the markets and when prices are falling, we are seeing the picture of fear taking over. Greed causes prices to rally and fear causes them to fall…or so they say.
The difference between the way most retail traders think and act when they place trades and how some of the biggest banks and funds act when they trade, is hugely different. Think about this for a second: when a fund manager places an order to enter the market to take a position, do you think that they are worried about losing the trade and how it will make them feel? Or do you think that they find it easy to pull the trigger because firstly their superior has already given them their risk parameters and secondly because the money at risk is not actually theirs? To the fund manager, taking the trade is nothing more than their job and like any other job, they need to get on with it on a daily basis.
On the other hand, let’s think about the retail trader sitting at home and taking the same trade but with a much smaller size. Even if they were taking the trade at the same time and in the same direction as the fund manager, do you think that there is a possibility that their thoughts may be a little different than the fund manager’s? For most retail traders I would say absolutely, and why might you ask? Well for a start the retail trader is trading with their own money, not somebody else’s money, which will automatically have a different dynamic in itself, meaning that whatever the outcome of the trade, it will directly impact the retail trader. Secondly, the retail trader is doing a job also but they have no guarantee of an income at the end of the month, unlike the fund manager or trader who works for an institution. This person will no doubt still earn at the end of the month as long as they follow their instructions and trade plan as outlined to them by their superiors.
I have come to understand that the completely different environments in which retail and institutional traders work in, dictate clearly the challenges that can be faced for most retail speculators out there. I do not believe that the emotions of fear and greed work the same way for the small trader, as they do with the larger trader. In fact, I would go as far as to suggest that greed does not even become a factor in the potential success of the retail trader because if you ask most people who want to trade for themselves what they want more than anything else in their trading, they will normally say, consistency. They just want to be able achieve their goals with low risk trades and slowly build upon this. It does not become about greed at all. It is the fear which tends to be the biggest challenge of all.
It is fear which stops us from taking a solid setup in the markets because we have been on a losing streak, only to see it work out well and the opportunity missed. It is fear which causes us to not follow the trading plan to the hilt and make irrational changes all the time because the odd trade fails to work. It is fear which causes us to get out of a trade far too early with a small profit because we are scared to hold on in case it becomes another loser and it is fear which makes us search over and over again for the perfect strategy which does not exist, simply because we think there is always something out there we are missing out on or don’t know about. Fear my friends, is the biggest hurdle any retail trader has to face and will hold you back more than anything else ever will. Recognize that fear needs to be controlled with a plan and discipline. Once the consistency comes, then the fears will subside over time. Oh, and for those of you who were wondering what I feel about greed’s place in the market, well that is an easy one. Just ask yourself a quick question: Why do people become greedy? Because they are fearful there will never be enough…
See you in two weeks,
“Success is not final, failure is not fatal: it is the courage to continue that counts.” — Winston Churchill.
Part of the definition of “rule” is that it is a “governing action” or “procedure.” When you consider governing action, it really encapsulates the way that rules-based trading relates to results-oriented trading. This is because rules are essential to the trading process. Actually, if you are trading either without rules, or if you are not following the rules that you have established then you are gambling. Trading rules can be said to govern because they represent the procedures and parameters of your thoughts, emotions, behaviors, strategies, setups, entries, stops, money management, trade management, and exits. In this way well thought out rules make the difference between being successful and blowing up your account.
Now, the other thing to consider as we discuss rules is that humans live by the stories that they have constructed from early in life much like a script to a play. These stories or scripts can be termed rules as well. They form the foundation of your behavior. In fact, as humans grow, they develop a set of typical response patterns to reoccurring events. These typical responses or patterns of behavior could be termed a list of rules that you live by. For example, if you incur a debt, you are expected to pay it back. If you are driving, there are rules to follow for both safety and the orderly movement of traffic. These lists of “rules” are reflected in your every decision. These rules or life stories also involve the lessons learned from the earliest years, and those lessons have created the lenses through which the world is seen and judged — rules about money, privilege, power, worthiness, winning, and losing. So, not only are rules essential to trading, it is also important to have rules that are in your best interest.
For the most part, core, belief connected rules are out of your awareness. You make important choices based upon these life rules and when you get results that you don’t want, changing those results can be very difficult if you’re not also changing the rules that those results were based upon. In other words, if your choices go unchallenged then the awareness of why you made the choice remain out of conscious touch. However, once the rule is identified, it can be challenged and modified. Also, as you challenge each rule you uncover other assumptions that were based upon that rule to be myth rather than truth. The interesting thing about mythology is that if you believe it to be real, it is not mythology, it is truth to you, even as it doesn’t serve you. Consider this example: trader Dan believes in “taking advantage of every opportunity in life.” This belief becomes truth in his mind and generally may not be a problem for him. However, in the markets if at every turn of the price action you are looking to impulsively enter then there is a distinct susceptibility to the disadvantage of overtrading. In fact, this simple yet powerful “myth” can cause your downfall in trading even though it can serve you in other parts of your life. This ineffective rule leads to behavior that is not your A-Game. It can be termed a “Fool’s Rule.”
Other “Fools Rules” or trading myths:
· Trade at least 50 positions a day to make a ton of cash
· Do not use stop losses
· Try to use economic news releases as trend indicators
· Keep all of your losing trades open and add to your losing positions until the market comes back and get out at break even or small profits
· Only try to catch market tops and bottoms and do not trade in the middle of a trend
· Trade just before the news to make hundreds of points in a couple of seconds
· On a price action pattern, jump in early to make the most profit
· Make sure your position size is big in order to make big money
So, it’s important to ensure that your rules support your A-Game, your highest and best trader while in the markets. That’s why you’ll want to have a list of rules that are geared toward your Internal Data (thoughts, emotions, and behaviors that underlie your trade) as well as your Mechanical Data (setups, price action, indicators, news, economic reports, etc.). In other words, you want to support your trading mind-set and emotional stability in order to focus with laser precision on what-matters-most in the trade. Below are a number of rules that are designed to support your Internal Data
Move: Flexibility is the key (both literally and figuratively). Learn to change if necessary. If you always do what you’ve always done, you’ll always get what you’ve always gotten. And, if you always think what you’ve always thought, you’ll always do what you’ve always done.
Learn to exit when necessary: If you find that you are violating a rule, exit the trade…even if you are making a profit. If you stay in you are only reinforcing bad behavior. Especially if you are making a profit.
Hope is a 4 letter word: Refuse to take that trader drug “hopium.” It means that you’re gambling and putting your hard earned money up to pure chance. Remember, there is a reason why Las Vegas is full of casino high rises. They don’t call it “Lost Wages” for nothing.
Know your risks: Always calculate your risk to reward ratio and stick to the parameters. This is the way you can have a 33% hit rate and still be profitable.
Be accountable for your performance: Set goals and document your thoughts and emotions (Internal Data) and as well your Mechanical Data (the mechanics of the trade). You are responsible for your own decisions. Own your mistakes.
Mind-Set: Learn to manage your negative emotions and harness your positive emotions (ex. Determination, inspiration, passion, joy, etc.) and understand the emotions of those around you. Always remember what General Patton said: “If everyone is thinking the same then someone isn’t thinking.” Also the famous Buffett quote: “Be fearful when others are greedy and greedy when others are fearful.”
Your Tribe (the what-matters-most in your life): There is more to life than trading and investing. Don’t live to trade. Trade to live. Being the richest man or woman in the graveyard does nothing for your quality of life.
Remain Consistent: Do not adjust a strategy, a rule or principle in order to conform to the market. Instead, let the market conform to your strategy. Have a target, set a rule, let a particular part of the market conform to this rule, follow the rule without deviating. “If you stand for nothing, you’ll fall for anything.” Alex Hamilton
Remember, your A-Game and trading from your highest and best self is all that matters to your trading results. The trading trenches are not a place to venture into unprepared and unfocused. Trading is a 90–95% mental game and if you don’t have mental and emotional tools it is like driving without a steering wheel — you’ll crash and burn without it. So, let your rules be the keys to your trading vehicle that has everything you need…especially the steering wheel to drive consistent trading results. On the whole, to be a consistently profitable trader, rules are the keys to your trading success
Written by Dr. M. Woodruff (“Woody”) Johnson, Online Trading Academy Mastering the Mental Game Instructor.
Dr. M. Woodruff Johnson has actively and successfully traded stock options, forex and futures since 2000. He is the former Executive Director of the Kaiser Permanente, Watts Counseling and Learning Center. He holds certifications in Accelerated Learning, Neurosensory Development and hypnotherapy, and he is a Certified NLP Master Practitioner.
Dr. Woody is also an Associate Professor and teaches graduate psychology courses at Pacific Oaks College and Ryokan College. He has provided clinical staff services in hospitals and community clinics as well. He has a passion for helping others to achieve their goals and get the results in trading and life that they desire.
Dr. Woody has been using mind/body healing techniques both professionally and personally with much success for many years. He is the author of “From Pain to Profit: Secrets of the Peak Performance Trader.
Originally published at www.fxtechstrategy.com on November 28, 2015.