Avoid the Five Fatal Trading Mistakes and Start Winning in the Market Place

Avoid the Five Fatal Trading Mistakes and Start Winning in the Market Place

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Avoid the Five Fatal Trading Mistakes and Start Winning in the Market Place

Free course

Trading Psychology

July 18, 2017 August 22, 2017

Want to be a better trader? Trading Psychology explained in full 3D

Congratulations! For most people, the mention of trading psychology and the prospect of reading an article on the subject is enough for them to get shivers down their spine and click away, afterall, doesn’t psychology have something to do with analysing myself…. No thanks!!

Actually no, it’s not about analysing yourself, but it will certainly help you understand how and why you make your decisions, to make them better and more consistently and to do so with much less stress.

Perhaps you have invested or traded previously and didn’t get the result you expected. Alternatively, maybe you have purchased a trading education course or courses, and were underwhelmed with your outcome.

Or lets just say you have wanted to get started in the stock market, but haven’t yet, because you don’t know where to start, you know someone that had a bad stock market experience in the past, or you aren’t sure if it’s really for you.

This article will lift the lid from an “industry insider’s” perspective and give you great clarity on what are doing, and why it may or may not be working for you.

In this article, we are going to look at Trading Psychology in a very different way, from the perspective of having emotional control over your decision making and trading process.In fact, the way I have approached this article is unique and actually from 3 different angles, as a result of the unique position I have:

  1. As a professional trader and hedge fund manager with 25 years of real life trading experience around the World
  2. As the owner of a broking business, that has had the opportunity to witness hundreds of millions of dollars in trades from tens of thousands of clients, providing a unique viewpoint on who makes money and why
  3. As a trader coach and educator of tens of thousands of people educated, over the past 17 years.

Here’s the bottom line, this article is all about trading psychology in 3D so enjoy!

What is Trading Psychology?

Trading Psychology is a broad subject but in reality can be distilled down into one core skill. Having emotional control at each stage of the trade lifecycle – the Analysis, Decision, Risk Management, Execution and Position Management. By having emotional control, each of these stages are free to run their course, successfully in their own right, enabling you, the trader to have the outcome you are seeking.

However, without emotional control, you are probably enduring a rollercoaster ride that is stressful, inconsistent, loss making and well, just not fun, so let’s explore through this article how things can be improved.

  • Fear and Greed
  • Understanding our Human needs
  • The biggest dilemma faced by investors
  • Record Keeping
  • The Problem is the Symptom not the Cause
  • Why Do You Trade
  • Giving your Decision making a Natural Boost
  • An example of a Professional Trader’s Daily Rituals
  • Creating Lasting Change

Fear and Greed

Fear and Greed are often touted as the two primary emotions to deal with when mastering trading psychology and emotional control.

Greed is a natural emotion, especially when it comes to money. “Greed is an excessive desire and in the case of investing, to make as much money as possible, as quickly as possible”.

When markets are running hard (think about the Dotcom Boom or post GFC rally) the “get rich quick” mentality can override any investment and money management plan, as the focus shifts to “quick, get it, and then get more”.

In other words the trader or investor is out of control.

“Fear is an awareness or anticipation of danger” and can be just as damaging, from a trading psychology perspective, as greed. Taking no action, sitting on the sidelines and watching due to fear can be just as risky as chasing the wind of greed.

Take the post GFC equity market rally, where many retail investors sat it out, fearful of what happened in the GFC. Instead, they got to watch the Dow Jones Index plonk on 250% plus of gains, and not a single cent was added to their trading account.

This kind of “evacuation to cash”is totally irrational and a departure from many investor’s plan, yet they did it anyway, safe in the knowledge that at least by sitting in cash, they had a level of certainty back in their lives.

Wrong decision, wrong time and wrong outcome, leaving the investor with the belief that investing is bad, as they lost money through the correction and then missed out on the profits from the recovery by not trusting it and sitting on the sidelines.

This has proven to be an incredibly expensive lesson for those investors that sheltered in cash, post GFC. So much so, that many are still in denial and would find it hard to admit sitting in cash was the wrong decision, despite the results speaking for themselves.

So while most articles on trading psychology focus on fear and greed, these are actually symptoms of the real emotional undercurrent, when it comes to trading and investing. Specifically, that emotional undercurrent is understanding our actual human needs.

Understanding our Human Needs

Abraham Maslow pioneered what later became know as Maslow’s Hierarchy of needs – a list of human needs which we all seek out and need to varying degrees. However, while all six are great to know, this can be distilled down further into just two very straightforward categories, and that is what we will focus on in this article.

One of the many people I have had the opportunity to speak alongside, on multiple occasions, is Tony Robbins. Tony puts this very simply – we have two primary needs as human beings – Certainty and Uncertainty, and it really is that simple.

As people we crave both of these. We need to know our basic needs (food, shelter etc are being met) to give us Certainty, but we very quickly get bored with this and also need Uncertainty to keep us interested and engaged.

Thinking about this in a different way, we all love surprises, but not when they are the wrong kind! This juxtaposition, in my opinion, is where the real battle of emotional control and trading psychology is either won or lost.

The Single Biggest Dilemma All Investors Face

There is one huge dilemma that is faced by all investors and will either make or break you, when it comes to your trading psychology. Throughout my career, this is a response that I have heard thousands of times, and may well be similar to words that you have uttered in your time!

“You actually expect me to expose my hard earned money to risk?”

Now this is a single sentence but speaks volumes, especially when you consider our words reflect our beliefs and our beliefs and shape our actions.

Most people have a strong emotional attachment to money – and why not, they have worked hard for it. They require Certainty in order to be comfortable. Yet the stock market, for many, represents massive Uncertainty – hence the “freak out” at the mere mention of risk!

A two pronged attack is required to address and fix this, the first is breaking that emotional attachment to money and the next is creating some certainty in process.

How to create Certainty

When it comes to trading and investing, we use a trading plan to help provide that level of certainty in the uncertain market. This is a crucial and non-negotiable part of the process for winning in the marketplace.

Afterall, your job as a trader is actually surprisingly simple. All you need to do is execute your trading plan perfectly each and every time. Couldn’t be any easier, right?

And with a Trading Plan

Well, lets consider for a moment that you have a trading plan that you’ve taken some time to develop. What comes next?

Over the years, I have seen a lot of traders, even those who have great plans, continue to struggle as they grapple with markets. In a way, it is like somebody who has a great map but can’t actually get to their destination. One reason why, is that they don’t actually know where they are on the map, to begin with. Quite a problem!

Record Keeping

Eliminating the feeling of being lost is fundamentally important, and represents a huge aspect that is quite often neglected when discussing Trading Psychology. We refer to this as Record Keeping, and it is a major component of building certainty in your approach to investing.

Record Keeping can be split up into two halves – how well your plan is working and how well you are doing at executing your plan. These are very different things and provide all the feedback needed to maintain a great trading system, with the end result, a happy trader.

Aside from keeping accurate records and statistics, analysing the performance of the plan will enable you to model more of what is working well, while eliminating things that aren’t working. This continual improvement will enable your plan to last the test of time, helping you evolve as market conditions change.

To monitor and manage trader performance, Journaling is an incredibly powerful tool. The prospect of Journaling comes as a challenge to many, purely because of a misunderstanding of what you are Journaling and why. This is not “woo-woo” stuff like “Dear Diary I feel fat today!” it simply highlights the hard facts of what is actually going on in those key clutch moments when you are making your trading decisions.

By regularly maintaining a trading journal, you gain an incredible insight and depth of understanding over your decision making process. For the select group of private clients I work with personally, journaling is a pre-requisite for our working together-just to give you an indication of how important journalingreally is.

  • Some examples of how journaling can bring to the surface, many of the underlying issues faced by traders of all sizes and experience levels include:

    The departure from risk management, resulting in the trader managing their emotions rather than their money – otherwise known as ignoring your stops

  • Pulling the shot and entering later than what the confirmation signal showed – ignoring your entry criteria and waiting for more evidence
  • The trader’s values and perceptions toward money
  • Projection of past trades and their results onto this new trading decision
  • The causes or trigger for procrastination
  • The reason for impulsiveness on entry and exit
  • And much more

Lets look in more detail at another common one. Which metric a trader is using to measure performance?

Doesn’t sound much to do with trading psychology right now, but let’s explore.

Say the Win/Loss Ratio is what the trader has elected to be their critical performance benchmark (and this is never a good idea). In fact, this is a great example, as I had a coaching call yesterday with a new and very hungry trader looking to make a name for himself. He actually needs to refocus on the right things, not just his Win/Loss ratio!

What is a Win/Loss Ratio?

This is the ratio of winning trades to losing trades, which would seem an appropriate measure, especially to the newbie. Pretty much all investors want to see this ratio as positive, and the more positive the better. After all, for many people it is more important to be right, than rich!

And herein is the issue. Judging your trading on the Win/Loss ratio is not a good idea – sure its important to know you have a winning system, but is winning about being right, or is it about how much money you actually made?

Lets look at an example. You could have a system that was right 80% of the time but in fact you end upactually losing money,because your risk management on the 20% of losing trades wasn’t up to standard. Hence in this case, looking at just the Win/Loss ratio alone, you are focused on the wrong benchmark.

Alternatively, measures like the Edge Ratio – take things to a more meaningful level.

The Edge Ratio looks a lot deeper. So as well as looking at how often you are winning vs losing, it also looks at when you win, on average what do you make, vs when you lose how much do you give away.This is far more robust as it gives an additional depth to the winning and losing trades, vs Win Loss which simply looks at winning vs losing percentages.

The problem is usually the symptom, not the cause!

Most of us have stories, those softeners and justifiers we like to tell that explain why we do something. “I’ve always been the same when it comes to making decisions…”And guess what, you always will be the same, if you don’t make a change.

Of course if the past 5 years have been exactly what you want, then don’t change a thing! But if you are getting frustrated and not getting the outcome you want, then just maybe its time for a change?

Take a procrastinator, someone who finds it hard to make a decision.

Procrastination is notthe issue it is actually the symptom. Trading Psychology with AIE, is not simply recognising the symptom but providing real world, battle hardened, tried and tested fixes to it.

For example, typically a procrastinator can be someone that seeks perfection too. Perfection doesn’t readily exist and is an example of a bad goal.

The net effect for the procrastinator is rather than fail at attaining the perfection goal and carry the emotional baggage of failing, it would be better to do nothing (procrastinate for a bit) and avoid any risk of doing anything wrong – or actually doing anything, for that matter! Avoiding the pain of the missed goal is less painful for them than not actually achieving the goal!

This is a virtuous circle, where over time, the behaviour reinforces this belief and makes the bad habit – procrastination – harder and harder to break.

In fact, it’s a classic example of the “croc” part of the brain, which we explore in great depth within our Trading Psychology program.

What is your motivation for trading?

Well of course, the obvious answer is to make money, but while that may be the obvious answer, from a trading psychology perspective, trading may also be fulfilling other needs.

These range from recognition and achievement, which may come from developing a new or lucrative strategy, or alternatively, as something to fill in time, create a new hobby etc.

Understanding your motivation will give a great insight into some of the roadblocks that you may come to face as a trader. Trading and investing fulfils many needs, and as you understand more about your own needs, you can take remedial action to prevent some of the potential problems from appearing down the track, saving time, money, stress and your hairline!

To help you, here is a great opportunity to discover more about your trading and investing personality with this quick quiz. At the end of it, you will receive a full report detailing your own trading and investing strengths and weaknesses and this will only take a couple of minutes to complete


How to make consistently great trading decisions

The only way to make great decisions, consistently, is to arrive at the decision point in what we refer to as Peak State, from a trading psychology perspective. Imagine, or maybe you don’t need to imagine, trying to make a decision on whether or not to exit a trade when you are tired, frustrated, hungry, stressed and distracted by something else going on in the background.

Reality is, your decision making is unlikely to be at its best, irrespective of who you are.

Yet this is a very frequent problem scenario for many investors. Because trading and investing is something that they do on the side or part time, they approach their decision making from a “hobby or pastime” mindset, yet expect a professional outcome.

Their Trading Psychology is all wrong. Unsurprisingly, there tends to be a big disparity between what they want and what they get. And over time, they give up trading and investing, because “it doesn’t work”. Really?

Instead, we strongly encourage and school our clients to arrive at any decision or analysis point in Peak State – focused, fresh and with a clarity of purpose.

Giving you decision making a natural boost

Physiologically, we recommend making sure you haven’t been sat at your desk for a prolonged period – get up, move around, even do some push ups – do something to get the blood pumping and to really be energised, rather than flat, before you go making decisions.

This can be really beneficial, as the release of endorphins by moving about or creating energy with a short sharp burst of exercise, will have a marked impact on your brain functionality. Long story short, on a release of endorphins, your perception will be stronger, pupils dilated, arteries open, allowing more blood flow and your brain will kick into a higher gear, all of which will help you with your decision making.

And look, I appreciate this may sound a little out there, but try it for a week, before you bin the idea, and then see how you feel about a strong and certain physiological state when making decisions.Better or worse?

My morning ritua

For me, my day starts at 5am. I love mornings, with two small children, it provides a peaceful window in our home, and from a trading perspective, it allows me to trade the last hour of the US market. Not only that, mornings are the freshest and untainted part of any day!

That means I have an hour to get done what I need to do in the market, as the closing time is fixed and if I don’t get it done in an hour, it will have to wait for the next trading session, and that can mean missing a trade, very different fill levels and a whole new paradigm of data, news and information to absorb into the decision making mix.

By now, you should be getting the idea that there is a very real time constraint, so best get started and dive straight in, right? WRONG!

Over time, I have found that my enthusiasm for markets rarely wanes. In fact, managing that enthusiasm is critical. Jumping straight out of bed and ripping into the market is not a good idea – it is too big a jump from a sedentary sleep into live fire!

So now, and remember, there is a very real time constraint, this is how the process goes.

Up, dressed and a full glass of water to re-hydrate – having been asleep for 7 hours, the body needs fluid!

Next, I go to my Study and there I meditate for a full ten minutes. While for many, this may seem sedentary and put you to sleep (which I too used to believe) it actually has quite the opposite effect. 10 minutes of focussed breathing I find totally fires my brain up, and I am ready to hit the screen.

Much different from jumping up and diving into the screen, looking for decisions to make while the clock is ticking away in the background – can you feel the stress of that already?

I then fire my screen up, and begin my trading process. I check the analysts’headlines, evaluate my open positions and any trades which have gone through overnight, before then looking for new opportunities. The fact that I “only have” around 45 minutes to do all this is plenty of time, because I am focused, have a process and most importantly, approach this with consistency. This is the level of emotional control that is Trading Psychology 101.

After the market close at 6am, I can then exercise, walk the dogs, and spend time with our kids, knowing the vast majority of my core work has been done in that precious but not rushed 45 minutes.

Creating Lasting Change

While getting to the root cause is only one element of trading psychology, fixing the problem can be another matter. This may take some time and specific exercises, and is almost certainly something we can help you with. CTA INTO WEBINAR

It really is quite surprising that the core stumbling blocks for traders rarely get fixed by more analysis or more training, they are generally resolved by improving the ability to squeeze the trigger, at the right time, in the right way, every time.

That is the rock solid platform that will last you a lifetime in the markets, irrespective of market conditions, which comes from mastering emotional control through trading psychology.

Some of the areas touched on in this article can be ingrained in your trading DNA, enabling that long term success pattern. One of the tools we developed in our Trading Psychology program is the Trading Gymnasium, to give you regular, specific drills to keep your skills razor sharp, focused and working for you, rather than against you.

3D Trading Psychology in Summary

This is a huge topic and not one to be glossed over. Check out this complimentary training session and see in more detail, how getting a bullet proof trader mindset will help set you up for a long term successful career in markets, where stress was a thing of the past, and that you finally have control – not of the market – you’ll never have that, but of you and your own emotions and trading psychology.