FX Trading Mind-Set 101

Hello to all and welcome to this week’s offering. As many of my regular readers will already be aware of, I am especially passionate about the Psychological aspects of trading and the inner mental game which active traders and to some degree longer-term investors, have to deal with on a regular basis. Students and traders alike have asked me time and time again, as to why we all tend to find trading so challenging. After all, as any consistent market speculator will tell you, an effective and profitable trading system or strategy does not need to be highly complex to work. Some of the greatest and most profitable trading and investing strategies tend to be the most simple you could find. In the world of market speculation, complex very rarely equates to more profitable.

The simple answer to the question above is nothing more than the fact that humans tend to make decisions based upon their emotions and belief systems, as opposed to pure logic and common sense. I could get very deep with this discussion (just ask my students) but for the purposes of this article I would like to keep this relatively simple, so as to provoke some thoughts and suggestions to you as an assessment of how much your own trading is impacting your trading results. Ultimately, we all need to accept that money typically makes people emotional because of the associations that we make towards having more of it or less of it.

In its most basic concept, and let me be clear that I am making a generalized statement here, the average person would probably say that if they had more money it would increase the quality of their life, while on the flipside of this, less money would potentially equate to a lower standard of life. Again, let me make it clear that this is a general assumption for the purpose of this article. To summarize, we could therefore assume that the more money we have, the happier we are and the less we have, the less happy we are. Therefore, money tends to stimulate an emotional response in most individuals, thus creating the destabilization in their psychology. The question therefore is how to maintain a solid grounding throughout our trading “mental game.” Below I have put together a list of the three main hurdles that we need to overcome, therefore allowing us to build a solid mental grounding for the future:

1 – The Fear of Loss

To start things off we begin with probably the biggest challenge a trader faces in their quest for consistency in the markets, namely the fear of losing money. I speak of this harsh reality in classes regularly and I think that it is some thing that is often overlooked to be honest. Every trader starts out with the very best intentions to stick to a plan, take small losses and allow those all-important winners to run. However, after a few losses in a row it can become increasingly difficult to maintain this level of clarity in our trading. Losses are little dents to the ego and while they may sting a little at first, they soon turn into a greater pain after a few in a row. It is at this point where it become easy to slip off the wagon and fall into the trap of doubting yourself.

The challenge to stick to a trade plan consistently gets harder and harder, typically forcing the trader to tinker with their setups, move stop loss orders to break-even quickly and start to focus more on not losing than actually allowing a trade to win. The worse thing that can happen to you is when you start to pass on trades because they may lose, rather than taking trades with pre-defined risk because they may actually win. If you have ever heard of the saying, “scared money never wins,” then now you know exactly what is meant by it.

2 – Lack of Control

This concept I believe is possibly one of the most over-looked and under-recognized issues traders have to deal with. Again, human nature tends to encourage us to take as much control of a situation as we can. The more in control we feel of a situation, the more we feel we can dictate the outcome eventually. Well when it comes to the world of market speculation, we must acknowledge the fact that we have very little control whatsoever. One of the best pieces of advice I ever received from a former trading mentor was when he told me that when I realised that I really knew nothing about what the market was going to do, I would start to really make progress. At the time, this was really not what I wanted to hear at all and it gave me little comfort. I wanted to know what would happen next and wasted much of my time always trying to figure this out. Where did it get me? Frustrated, inconsistent and eventually very obsessive! I was trying to make up for my lack of control over what the market would do by attempting to figure out the missing ingredient, which would give me the ultimate answer.

Looking back on it now I laugh to myself. If there were really a secret to this business someone would have figured it out long ago. I was just trying to make up for my lack of control by attempting to control the outcomes of my trades to an impossible degree. Nowadays I take great comfort in knowing that I really know nothing about what the market will or could do. I just play the odds in favour as best I can, get out when I am wrong and stick with it when I am right. The market will always do what the market wants to do anyway.

3 – Less is More

This final point is really all about the beauty of simplicity. I live by the saying “Less is More.” When I teach at Online Trading Academy classrooms worldwide, it has become something of a catchphrase I am known for! What I am really getting at here is that there is danger amongst traders to overcomplicate their market analysis and trading strategies because they think that the more information they use to make a decision, the more likely it will be that the decision turns out to be a good one. We like to make things complicated because if something seems to be too easy, then we tend to question why is it so. When it comes to trading and the potential returns which can be generated from the markets, the common belief is that it requires a great deal of complex analysis and planning to work. In reality, the markets can only go up, down or stay in a range, so this alone should suggest to us that it really is not that detailed. The Online Trading Academy Core Strategy is a simple rules-based system based on price and price alone, with no use of technical indicators in the mix because they overcomplicate things. Complexity in trading usually equates to nothing more than a psychological crutch to lean on when we think we don’t know enough. In my experience, all you really need to know is what the market is telling you and for that you need to be prepared to listen. More to come on that subject in my next article. I hope this was useful to you.

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