We strongly believe that Trading Psychology is with Risk Management the most important things in trading.
On the other hand, it is also the least popular topic to talk about.
Many people can spend countless hours looking for that perfect strategy, but if they cannot set up their minds the right way, they will never become profitable traders.
In this Trading Psychology course, we are going through handful of different topics that were covered by our Trading Psychologist.
Why is trading so difficult?
Most trading sites will tell you that all you need is to purchase a trading system or take part in a weekend-long training and you will be well-off for the rest of your life. If a trading guru offers a quality system, it should, in theory, be no problem to profit by just replicating the system correctly. However, most traders are in fact not driving Maserati’s. So, where is the problem?
The more experienced traders mostly agree that the greatest problem is not their trading approach but their psychology and discipline. In short, they are not disciplined enough to do what they have set out to do. In this part, we will be discussing why trading is so difficult for us as human beings.
Our mind is programmed to operate based on causality
From an early age, we are used to the fact that a particular action will produce a particular reaction to which we usually do not have to wait for too long.
For example, if we studied for a test, we expect a good grade, or if we bought a bus ticket, we expect to be able to ride the bus.
How does it work in trading? In trading, there is no direct proportion between the number of hours spent studying, trading itself and the money earned.
Unconsciously, we expect that spending often even many hours a day studying and trading, that the profits must be realized almost automatically. When profits are not made, we needlessly start to feel frustrated.
Resistance to the unknown
In everyday life, there are things where we do not think about twice.
For example, we know that 2+2 = 4, which is a truth that does not change over time.
On the contrary, every moment is unique in the markets.
Yet, most trading systems rely on models that have occurred in the past. The traders who created these trading models with their decisions will never be trading in the same composition or making the same decisions.
The markets, therefore, form an incredibly varied environment where we under no circumstances can ever be sure where the market is going to turn.
Despite that, we incessantly try to apply to the markets price patterns obtained in the past.
In essence, there is nothing wrong with that but it is always necessary to keep in mind the fact that historical behaviour of the market has absolutely no connection to current market action.
Our minds are made up of the conscious and the subconscious, of which approximately 10% are conscious and 90% of our personality is formed by the subconscious.
Consciousness provides for tasks we perform consciously.
For the male population, this is a maximum of one operation per a given moment.
On the other hand, the subconscious provides for an enormous number of tasks we do not do consciously.
These may include very basic tasks or behaviors learned over time which we initially performed consciously.
Surely, everyone knows this: we are walking around town, and we have an important phone call which we have to consciously concentrate on.
Meanwhile, the subconscious mind ensures walking, avoiding other people, stopping at the crossing, orientation, and countless other things.
When the phone call is over, we may not even remember the route we took.
The primary task of the subconscious mind is the protection of our well-being.
The bad part is that the subconscious mind also protects us when trading. As soon as I give a couple of examples, it will all be immediately clear.
- Premature termination of a position– if trading causes us stress, the subconscious wants nothing other than to rid us of stress. That is why it pushes us to withdraw from a position.
- Freezing before entry – the subconscious wants to eliminate the stressful situation, therefore it makes us reluctant to enter.
- We accept low profits – any positive figure as the outcome of a trade causes joy. At the same time, the subconscious does not want positive numbers to change into negative ones – God forbid!
The power of the subconscious is enormous: we can spend a whole week promising ourselves that we will not move stop-loss prematurely but the minute it comes down to it, we make the same mistake again. The very act of shifting stop-loss is often done completely automatically.
When we think about it, both the subconscious and the trader want the same thing – the profits, but the path to profits leads through situations that the subconscious is trying to completely eliminate.
Why is Trading Psychology so important?
You probably heard that 90% of the traders fail.
A lot of people might think it is because they don’t know what to do.
This is not true, they just don’t do what they know they have to do.
Let’s start with a Quiz
You have two traders, Trader A, and Trader B.
Trader A has the best trading strategy out there, but very poor self-discipline and risk management.
Trader B is using very basic strategy, he has a basic understanding of trading, but he has bulletproof trading psychology and risk management.
Which one is going to be more successful?
If you have guessed Trader B, you were right.
With the best strategy in the world, but with poor trading psychology, you are going to be easily outperformed.
Trading Psychology – Battle of Emotions
Much has been written about the psychology of trading and, in particular, the theory of trading psychology.
In this article, we will focus on some of the issues that may arise and some specific exercises will be shown on how you can fight these issues and how they can be eliminated.
What is most important to acknowledge is that emotions associated with trading emerge from something.
Emotions don’t arise from the air, emotions arise from the thoughts we put in our mind and from biological reactions triggered by these thoughts.
What does it mean in practice: If we think about the fact that our trades do not come out as a success, we start to worry, so we put a negative thought and a negative emotion of fear appears.
But this is not the beginning of the problem. Negative thoughts also appear from something. In this case, negative thoughts result from poor previous experiences or low self-esteem.
If we had enough confidence, our thoughts wouldn’t turn to previous bad experiences thinking that we failed before. In a perfect scenario, we would take it as a lesson and transform the negative emotions into a productive thought that would help us improve in the future.
Likewise, if we feel demotivated, the cause may be a lack of inspiration that stems from poorly set goals.
Another problem may be a lack of discipline.
But if we compare it to my favourite resemblance with house building, the discipline is like the stairs from the basement to the first floor, while emotion management is building the floor so we have where to put the stairs.
For those of you who do not know what it means, imagine trading as a house building.
The first step is to select the land that in this case represents trading in general.
Then we choose the type of construction, which means we decide what we want to trade.
Then comes the design itself from the architect, a plan to start building and selection of a construction company that in this case is the strategy we choose based on our knowledge.
Then we can build the foundations, which is one of the most important, yet often neglected trading psychology or we could say how we manage ourselves, our emotions, how we follow our chosen strategy and discipline needed in order to execute our strategy.
Only then on these strong foundations based on clearly chosen strategy and mastering of the psychology we can build another floor that represents profits. Those can increase unlimitedly with each floor.
Here I have the first task for you: Write down why you began with trading in the first place and what you enjoy about it. Every time you aren’t sure if your time is dedicated in the right direction, go back to this list and remind yourself why you do what you do. Write to me to email@example.com the reasons why you enjoy trading, I will be happy to read it and be inspired by it.
If we look at emotions and their coping, I’d like to introduce to you the method called DOT (doing – outcome – thinking) that was introduced by an American psychologist.
Its essence lies in considering all the available facts first and based on the rules we set, we then simply act.
Then something will happen, an outcome, in our case a profitable or an unprofitable trade and only after that there comes the moment where we can give space to emotions.
Here, I would like to mention that you need to think of trades as profitable or unprofitable, not as successful or unsuccessful.
Even a losing trade can be successful. If you have managed to follow your strategy and your rules, you have not been dominated by emotions and have taken the trade as a lesson, then this loss-making trade is only a statistical item, a cost to trading just like any other activity.
Every time you decide which trade to take, evaluate all the facts you have available and then decide into which trade to enter.
Tell yourself what a computer would do in your place because a computer doesn’t have emotions and makes decisions based only on the data set in the program.
Enter the trade and follow the limits you set.
Only after that give space to your emotions, and in case of a loss, rationally evaluate why it happened, how to prevent it next time or praise yourself in case the trade turned out profitable.
Take your time to absorb the emotions, for example, set your phone for 2 minutes and let yourself be fully dominated by emotions.
Consciously imagine letting off emotions when the alarm goes away. Do not think about past trades and do not enter another trade unless you have a clear head.
Exercise: Test this methodology every day. Write down how you are doing and always review everything. Write yourself feedback as if you were writing it to someone else.
Think about the reasons why you didn’t succeed. I will be glad if you write to me (firstname.lastname@example.org) how successful you are, or the reasons why you are not.
Mental game of trading psychology
The following article was sent to us by one of our clients, Samira C. Samira shares her story of how she became a trader. It is a very inspiring journey as you see her talk about her ups and downs. We are very happy to share her wisdom with our traders.
For more stories of our successful clients, you can take a look at the testimonials page.
I got into trading almost by chance.
The first time I ever saw a chart it looked like astrophysics to me. I remember staring at the screen and back at him and wondering how he could understand anything in all those hieroglyphics while I would only see numbers.
I couldn’t define anything I was seeing, it was like a Picasso painting. Just numbers and lines and colours and symbols that – I believed – only some chosen people could translate into something useful.
It was overwhelming, for the first time I felt really stupid for not being able to put any of the things I was seeing together.
Short after my first interaction with the markets, I went on holiday and met such Swiss guy claiming to be employed by Goldman Sachs as a stock manager. I didn’t know much about Goldman back then apart from it being one of the biggest financial banks in the world, but then I didn’t have any knowledge about trading whatsoever.
So to me, the fact that an approximately 27 years old guy could already be stock manager didn’t raise any suspicion in me.
The guy turned up being a scammer, thing that I would learn later on wasn’t uncommon at all in the financial markets.
But what is really important about this piece of information is how coincidentally or not I came in contact with financial investment talk twice over the span of one month while before the whole subject seemed to me like an unreachable reality that only the top 1% could afford.
These two experiences fired up my curiosity, especially since both guys were claiming that investing is THE Sacred Grail of money making.
So as all new things that fascinate me, I started looking into it.
As probably most new traders, I landed up almost immediately on the BabyPips website where I got all my basic knowledge from.
Was months and months I would spend on charts and reading material. The whole enthusiasm brought me to even buy a relatively cheap course which helped me in the first couple of months of my trading journey.
I didn’t spend much time on a demo account
Enthusiasm was so big that after almost no practice I decided to open a live account with as little as £200. Probably the luck of the beginner or the lack of understanding in risk management made me somehow flip that account to £800 in the time frame of couple months. As you can imagine the risk I was taking was ridiculously big, but my trading was going so well that my mind didn’t even take into consideration the idea that the winning streak could eventually end.
But it did. I lost a couple of trades in a row and being my risk huge it had an enormous impact on my trading psychology.
Taking a step back to focus on Trading Psychology
I decided to take a break and re-assess what I was doing wrong.
Obviously, the beginner’s mentality “let’s make millions overnight” didn’t even clued me about the fact that maybe – just maybe – my mistake could be the risk I was taking.
Either way as everyone who is new in the business and unsure about what they’re doing I started wondering if it was my strategy that stopped working (newbie mistake, I know).
So, I started wandering around listening to what anyone had to say, hoping someone could give me the secret formula for the perfect trading.
I was lucky enough to meet a trader who would have later on shared with me his experience.
This knowledge was coming down to a basic series of rules of trading psychology:
- risk less than your reward
- cut your losses quick
- find a strategy that works and stick to it no matter what
- focus on trading psychology more than the technical analysis.
Now, that last part was what really overwhelmed me. He taught me everything he knew in terms of technical analysis. Tools that he said worked for him forever and seemed to me like the answer to my prayers.
But, what I wasn’t expecting was that after teaching me all the secrets he knew about trading he would turn to me and said:
“Now forget analysis, you need to work on your trading psychology.”
The statement was probably so far from my expectations on what trading meant that I didn’t really believe him, or didn’t want to.
He just handed me techniques top traders make you pay for or don’t even want you to know, completely for free, and he was telling me to forget about them?
I would find out later on what he meant with that statement.
I blew two accounts and I did it with the perfect set of skills: why?
Because I didn’t grab a fundamental concept back then: no amount of perfect analysis is going to make you a profitable trader.
On my way to success
Was a tough reality to accept, but here is what I found out.
“The analysis gives you the tools to trade, but what makes the difference between those few who make it in the long run and the rest who spend their life being bitter over their failure as traders is the trading psychology.”
What is think is the main ingredient that separates success from failure:
- Accepting failure, making sure that when you’re wrong you always lose less than you make when you’re right
- Being able to sit and wait for the right opportunity instead of chasing the market with no clue whatsoever.
Having the mental strength to make your own rules in an environment that doesn’t offer boundaries and having the discipline to stick to your rules no matter what.
I hope you found yourself in my story and it gave you the chance to reflect on your own trading and if possible helped you improve.
I wish everyone happy trading! – Samira C.
Do you want to join Samira and become the FTMO trader?
Trading Psychology Guidelines
We hope that after a great story from Samira, everything makes little more sense why trading psychology is so important.
Now we provide you with some great set of rules you should stick to while you trade.
- Always know the risk/reward ratio of every trade. If a trade doesn’t have a decent ratio, then that trade isn’t worth pursuing.
- Never make a trade where the loss (risk) is too big to stomach.
- Place your stop-loss as technical invalidation level (below the swing low/ above swing high), don’t use a predetermined number of pips for your stop.
- Never go all-in on a trade.
- Don’t enter into a position because you feel like you have to trade something. Trading is about patience and it is okay not to take a trade for a couple of days.
- Only trade with a planned strategy.
- Always stick to your stop-loss! When trade is going against you, never touch your stop-loss, it is okay to take a loss.
- Look at losing trades as a cost of doing business, study your losses and learn from them.
- Never marry your bias. When you are feeling overly bullish or bearish, take a step back and re-analyze the situation from the opposite perspective.
- Avoid over-trading.
- After closing an extremely profitable or unprofitable trade, take a break and clear your head before returning.
- After a loss, avoid going into the next trade expecting to make that loss back.
How to deal with Fear Of Missing Out (FOMO)
Controlling emotions in trading has always been difficult.
We all know what we SHOULD do, but as human beings, we always do what we WANT to do, or what is easier.
Remember the time when you waited for the price to come to your support level to go long?
Somehow, price always seems to reverse a few pips before your entry point. You’re nervous, scared, not thinking properly. In the heat of the moment, you go long at a price point 10 pips above your original entry level.
After you have entered, you tell yourself: ‘Instead of risking 10 pips on this trade I now risk 20…’.
Obviously, what does price do?
It comes to your desired level after all and now you’re sad that you lacked the discipline to wait.
You had the FEAR OF MISSING OUT (FOMO).
A trade, that originally may have a RRR of 2:1 was reduced to 1:2 that easily.
By waiting out, you’d only need at least 33% win rate to be a profitable trader, but your lack of discipline now forces you to be right 66% of the time.
For the reference take a look at our Risk To Reward ratio infographic.
Now the odds are against you, aren’t they?
The point is, that the problem simply comes from your own mind and trading psychology.
You want to be in the trade and make money. This means that you don’t want to miss any market opportunities.
Unfortunately, this type of thinking paradoxically caused your biggest demise.
You have to tell yourself:
‘There is no need to trade every setup. It is worth to wait for the best trading setups and opportunities. NEVER regret missing out on a trade or losing one. I must patiently wait and stick to my rules. Staying disciplined is the most important thing.’
The question what a trader could do and should do is a very debated subject.
- Enter early and ensure to be in the trade.
- Take your profits early to secure them.
- Drag your SL and miraculously price reverses thanks to your decision.
Should you have done that? Certainly NOT.
You should enter when you are supposed to enter and exit when you are supposed to exit. If you’re not doing that, then you are just a gambler. You trade based on emotions and intuition instead of proven mathematical or historical backtesting on which your strategy is built on.
At the end of the day, we are still human beings and emotions will always be in our way.
A good trader is aligned with his mindset and is in control of his actions.
He is aware of bad habits he has and as a result, the part of his brain responsible for rational thinking and discipline is in full control.
Equity Management and Emotional Intelligence
So how we can connect trading psychology with real life trading? Through Equity management and emotial intelligence!
Equity Management is divided into four categories:
1. Properly Planning a Trade.
2. A good formula for the Preservation of Capital.
3. Knowing where to place your Protective Stop to avoid getting stopped out early.
4. The Importance of Emotional Intelligence, the Psychology of Successful Trading and Learning the Discipline of not fiddling with the trade.
What is Emotional Intelligence?
• The capacity to be aware of, control, and express one’s emotions, and to handle interpersonal relationships judiciously and empathetically.
• The capacity to control your emotions in any stressful situation or perceived personal crisis, enabling your action to create a positive, productive outcome.
• Emotional Intelligence is the key to both personal and professional success.
Disciplines to follow for successful trading:
• Educate yourself on how the market works and thoroughly analyze and plan your trades.
• Create a trading plan and trade that plan. Do not deviate from your plan without developing another comprehensive trading plan.
• Quantify any potential loss. Don’t risk everything on one trade and do not overtrade your account.
• Remain focused and do not marry a trade. Be quick to change directions if that is what the chart is dictating.
• When in doubt… Stay Out!
A common problem that most traders face is trying to force the market to move in their personal direction. This is a very unsuccessful and devastating strategy. Never try to force the market to do what you want it to do. Recognize how the market is moving and trade in that direction. Create a trading plan and trade your plan!
It’s not about what you want. You must learn to want what the market wants, then trade in that direction. Want what the market wants, not what you want…
Great Traders win their trade first and then enter the market… Defeated traders enter the market and then seek to win.
When to pass on the trade:
You should pass on the trade if and when:
• You are tempted to get in for whatever reason.
• It requires a stop-loss order that does not meet your equity management.
• If you have not had the time to make a trading plan that includes:
- A clear entry point
- A stop-loss order and
- A limit to get out
• If for any reason you feel uncomfortable.
• If you are not clear in what you are doing
• If you feel you are being emotionally self-forced into making the trade or if someone else is forcing you.
• If you cannot afford the loss.
RISK VS REWARD – Example with a 50 pips risk per trade for 10 trades
1 for 1 – 60% of winning trades to make 100 pips
# of Wins – 6 for 50 pips gain per trade = 300 pips
# of Losses – 4 for 50 pips loss per trade = 200 pips
Net Profit = +100 pips
1 for 2 – 40% of winning trades to make 100 pips
# of Wins – 4 for 100 pips gain per trade = 400 pips
# of Losses – 6 for 50 pips loss per trade = 300 pips
Net Profit = +100 pips
1 for 3 – 30% of winning trades to make 100 pips
# of Wins – 3 for 150 pips gain per trade = 450 pips
# of Losses – 7 for 50 pips loss per trade = 350 pips
Net Profit = +100 pips
If you take your 10 trades x 50 pips risk/trade = 500 pips risk total
If you make 100 pips profit it’s a 20% gain on your 10 trades. 100/500=20%
The Higher the reward vs the risk is, easier it is to be profitable.
Are you motivated in trading?
Working on your motivation in trading is very imporant part of mastering trading psychology.
Setting up achiavable trading goals will help you stay motivated and bring much better results.
Reflect on and answer the following questions:
- What are the latest achievements I am proud of?
- What drives me most in my life?
- What is the missing part to achieve my goals?
- How am I going to feel if I don’t fulfil my expectations?
- When I go to bed in the evening, am I looking forward to the next day?
As you have probably guessed correctly, in this article we will focus on motivation and goal setting and will show how to set goals in practice on an example.
Let’s start with the definition of motivation.
Motivation is the driving force of a psychic character that sets human behaviour and activity in motion.
It’s the force that makes us get out of bed in the morning, what drives us in our daily life.
The force that helps us to chase our dreams. We are almost never motivated by a single motive but always by a complex of motives.
So when exactly is a motivated behaviour activated? When the motive is strong enough, when the probability of reaching the goal is high and when the value of the goal is satisfactory.
What happens when the motivation is low?
Some of the underlying causes include poor goal setting that doesn’t inspire us enough and low self-esteem that follows after several losing trades.
We will focus on self-confidence in the future, the main focus now will be on proper goal setting.
Exercise: Think about your goals, whether you have just one ultimate goal or several short-time goals. Do you have them written down somewhere or do you just keep them in your head?
So, what is the most important thing while setting your goals?
It is important to have challenging yet realistic goals. The best goals are those that are slightly higher than your current level – they inspire hard work and if you constantly pursue them, they are achievable.
Every goal needs to be written down. If we write something down, a thought changes into a specific wording and there is no danger that this thought will disappear in 2 seconds. Pin your written goals somewhere where you can see them, it will motivate you more to accomplish them. Continuous evaluation and feedback are also easier for written goals.
Goals should be daily, monthly and annual.
It is important to distinguish between progressive, performance and outcome goals. Progressive goals focus on improving technique, strategy, thus how much time we spend educating ourselves, how much in details we think about our chosen strategy. Performance goals focus as we can derive from its name on performance, how we act, how we think, how we can handle technical and psychological aspects while trading.
Outcome goals place emphasis on the final outcome, on what we want to achieve.
They focus on long-term profitability.
Outcome goals can increase short-term motivation when a person is not actively trading.
Focusing on the outcome goals before or during trading often leads to increased anxiety and insignificant distracting thoughts.
Progressive and performance goals are important as they can be set and adjusted more accurately than outcome goals.
The combination of all goals (progressive, performance, outcome, short-term, long-term) can bring better results than just setting one type of goal.
Every goal, whether progressive, performance or outcome should be determined according to SMARTER principle.
Many of you certainly know SMART goals, but in the last few years, two more principles have been added. So what exactly do these letters mean:
S – specific
M – measurable
A – achievable/acceptable
R – realistic
T – timely/trackable
E – evaluated
R – rewarded
Goals should be recorded in a systematic manner, kept in a visible place and continuously evaluated and adjusted. Never forget to reward yourself for the effort and energy you put into accomplishing your goals.
A lot of theory, but what does it mean in practice?
Let’s look at one example.
The goal for most traders is to be profitable in the long run and reach the freedom to do so.
But this is only an outcome goal, progressive and performance goals are missing.
Therefore, it is necessary to establish them.
In this case, the progressive goal could be courses completed within the time set aside for education, but the goal needs to be adjusted to follow the SMARTER principles.
Thus, we need to determine specifically which courses we attend, when we attend them, what we want to achieve, what specifically we want to learn, establish a time frame and then evaluate whether we fulfilled our expectations.
Always reward yourself for the effort dedicated to this goal.
You also need performance goals, one of them could be improving your focus while trading.
Again, this goal is too general, we need to make clear what method we will use to improve our focus, how much time we will spend on it, and when we will assess whether our focus got improved and what will be the criteria for determining that.
Trading with Leverage and its impact of trading psychology
I think leverage is quite possibly the most important factor in all of trading.
It controls everything about your trading career.
Let’s think about this.
When we overleverage, there is a little part inside of us that we feel and we know we are doing something wrong.
Like a natural survival instinct that we’ve made a mistake or are in danger.
That feeling is 100% happening for a reason.
That feeling is valid. It’s the first subconscious signal that something is wrong.
Something is wrong and we are in danger.
We have risked too much equity and it could become a very bad day.
Trading is a % based game.
Yes, you may have a percentage-based chance, hit a huge trade and make an incredible % return. But how long can that trading system last until it does more harm than good.
That one “perfect” trade, isn’t always so perfect.
I can personally say that I have done that exact thing and seen my account wiped.
That post account depletion moment is terrible, yet completely avoidable. The first step is that feeling, the second is the psychological attack.
We all know that feeling of not being able to leave the screen in fear of what may come.
At that point, we have totally lost. The money is now controlling us rather than we are controlling us.
That is not trading, it is high-class gambling.
Which is why it is so important to leverage properly.
We are not gamblers, we are strategic risk-takers in a percentage based game.
The next moments are when we truly see the power of leverage.
Psychology begins to make us question ourselves.
Now in the heat of the moment, we are vulnerable to ourselves.
In moments like these, when we become our worst enemies.
This order flow of decay all started with undisciplined desire to be greedy.
Basing your trade on hope rather than statistics. Your psyche and your leverage are married to each other.
We have lost all control of a situation we have complete control over. This is all so avoidable by simply risking the standard 2%.
We see it in every book, every video, every successful trader… They all say the same thing. ‘Risk Management”.
Like all traders, they did the same thing, EVERY trader has blown an account, and that is okay! It’s a step into becoming a profitable trader.
That moment is when we truly learn the power of psychology and what it can do to us.
The question now becomes, what will happen next time.
Do we learn our lesson? Or go back to what massive statistics is the cause of trader failure. It is absolutely okay, if not necessary to lose big on trade.
That’s the wake-up call and every trader must go through that to understand how much power we really have as traders.
YOU control the money, do not let the money control you.
Trading Discpline – 5 actionable tips that will boost your trading psychology game
Another popular topic is a discipline.
Do you ever feel just lazy and not motivated to trade during the day?
You just spend time on social media, watching youtube videos?
This is because you are lacking a trading discilipine!
Luckily, we are going to give you 5 tips how to improve your discipline right away.
Focus on trading, not money.
The vision of money is the main driver for most of the traders in trading, but it does not bring anything good. With money, emotions enter trading, thanks to which we often violate the trade plan and trade differently than we really want.
Fortunately, MetaTrader 4 offers the ability to display the trading results in a way other than cash.
Set up the display of profits and losses in points instead of in cash. Looking at pips instead of money might help your emotional attachment to money in case you are in a floating loss.
Focus only on the number of pips, not on the money.
You will appreciate this idea when increasing the traded volume. When you are monitoring the movement of pips on the account, only now one pip has a bigger value.
Motivation, sugar and whip method.
Set up a system of rewards and punishments.
It is common to be rewarded for a job well done.
Reward yourself for well-traded opportunities, and set penalties for unnecessary mistakes.
It is very important to set the right values for punishment and rewards so that it is a real motivation.
If you choose rewards and punishments too low, you will have no motivation to follow discipline.
Conversely, high rewards can be unattainable, which can be demotivating.
For example, try to put a certain amount of money into the money box for each mistake, eg 2€.
If you meet your goals for a certain period, Reward yourself from the penalty box.
Exercises to strengthen discipline.
Various exercises work perfectly to strengthen discipline.
For one week, try to set a certain goal instead of regular trading only for adherence to discipline.
For example, try trading with a clearly set profit target and a stop loss of 1: 1, say 20 pips.
Analyze your trading account on a weekly basis. Did all trades have a result of +20 or -20? Or do you still have to work on your discipline?
Incorporate discipline into your life.
Following trading discipline will be much better if you are disciplined in your life.
The human brain is not destined for disciplined and rational behaviour, so it is very difficult to follow discipline.
Try to set something new in your life that you are not used to and follow it.
Try to get up 30 minutes earlier every day, try to start exercising regularly, or eat healthy regularly.
These exercises can also have a positive effect on trading results.
Try our Challenge and Mentor app.
At FTMO, we pay great attention to discipline. That is why we have prepared clear trading rules that our traders must follow.
It is a systematic approach that we believe leads to long-term consistent trading results.
Try our 14-day Free Trial and see how the rules help you in your discipline. If the rules alone are not enough, we have a unique application for you – the Mentor application.
Simply set up your Mentor app to look after everything you have a problem with. Problems overtrading? The Mentor app monitors the number of your trades and warns you to take a break.
More information about the Mentor application can be found here.
90% of traders I coach come to me asking how they can defeat it.
Wrestling again and again with their trading, they come out of the fight with a bloody port and a lowered self-esteem.
Emotions in trading.
“How do I get rid of emotions?”
This is a tough question because nobody likes the answer.
The answer is you don’t.
Emotions are scientifically impossible to get rid of, but they can be regulated. (We’ll talk about that next time.)
What I really believe is the problem with a trader is not the emotions they feel, but another “E” word.
Expectations in their performance, expectations from the market, and expectations of how their life should pan out.
It is with this Expectation that another detrimental E word comes in.
With Ego and Expectations, a trader will defy what is clearly right before their very eyes to prove to protect their self-identity at the expense of their performance.
Emotions get a bad rap. Traders forget that emotions are what made them the strength of character they are. Emotions are what got them into trading.
It is emotions of hope that got them thinking about a better life. Emotions of courage that made them decide to take this path.
In fact, it is emotions too that nags them to keep their risk exposure in check for fear of overleveraging and getting a margin call.
Life, in general, has to have a healthy balance of each. Ego, Expectations, and Emotions.
In fact, a healthy ego will tell the trader that he can beat the odds and become one of the coveted profitable Trading Rockstars.
A healthy amount of expectation tells us the reward is worth it if we manage the risk. Or the kind of expectation that revolves around how we expect ourselves to do our best but anticipate bumps along the way.
A healthy amount of emotions give us data on what our intuition is telling us about trade and pulls us out of funk once again after a drawdown.
The expectation that traders MUST be emotionless set them up for failure because it’s an impossible objective to attain.
What we need is an acceptance of what can happen and to learn how to use the norm to our advantage.
After all, “Every battle is won before it is fought” and denying what can happen during the encounter is a surefire way to lose.
Instead of asking our traders to ignore their emotions, it is time that we teach them how to face it.
Play the trading game
Every now and then, a trader ping pongs between two spectrums. Since trading is mostly about problem-solving of the self, when we “fix” an issue, we often wonder if we created another issue in our trading system.
I would say that a huge number of traders have a problem with overtrading. Trigger happy with their portfolio, jumping in and out to feel the rush of the craft only to crash down with losses. The mistake is evident. Greed and impatience.
But another camp has the exact opposite problem. Their issue is a sneaky one that often disguises itself as good.
Those who are stuck in the analysis.
As much as it is easy to overtrade, the tendency to stay paralyzed can be a sweet slippery trap too. The abundance of information on YouTube, Twitter, sneaky PDF books, articles, and the rest assists in masking this paralysis as hard work.
Too much analysis functions as an overcompensation for the insecurity a trader gets from the uncertainties of the market. Instead of looking inward at what they can do to get them ready enough to sail their ship, paralyzed traders want to find a way to control the tides.
But just like any man who knows sports, sitting at the couch watching hundreds of hours of the ball game will not make them a better athlete. Trading is a performance field just like athletics, and just by the name itself, to be a part of the game, you need to perform.
“The only way to learn how to play the game is to play the game.”
There are many things that books, videos, or articles like this one cannot teach a trader. We know more than most that theoretical discussions at school did not translate to real-life skills.
It is no different in trading.
For our knowledge to become our skills, the gap is in experience and in practice. Fear of losses cannot be defeated by more time away from the action. It is only when we are faced with it and when we have dealt with it will we learn that it was not as world-breaking as we have imagined.
As long as our risk management is intact, there is nothing to lose, but everything to gain. A gain of either profits or a gain of a better experience.
Either way, the only way we can roll with the punches is if we get in the ring.
Here are a few tips:
- Have a limit. Before you begin backtesting, decide on how much you need before you can jump in and apply what you’ve learned.
- Visualize all scenarios. When you enter a trade, it helps to accept that a loss can happen. Visualizing and preparing for this will stop catching a trader off-guard and will instead transform the trader into someone who can adapt.
- Every time after a trading day, especially a losing one, be completely honest and ask yourself if the good and the bad happened out of your skills or because of the market. Everyone can win and lose, but which one is due to luck?
- Just do it. Regrets are more painful than what-ifs. Saving yourself from potential losses through analysis-paralysis can seem like a good choice until you realize you are stopping yourself from opportunities too.
There is no way around it.
If you want to be a trader… Trade.
So what differentiates a professional from an amateur trader?
Trading might have a low barrier for entry but it has one of the highest barriers to profitability.
I’ve had experience coaching both professionals and amateurs.
It’s safe to say that none of them came into trading with the goal to lose. Obviously, we want to make money, and this has made a professional and an amateur essentially the same.
The motivation remains true across all levels of traders.
The wide gap between the two, however, is just a minor shift of perspective.
Here are the top 5 differences between a professional trader and an amateur trader.
Professional traders respect the craft
Professionals understand that there are people who make a living through trading and give it the respect it entails. It may be a game of probabilities but with a systematic approach, consistency can be achieved.
Amateurs are hyperfocused with the easy money, forgetting that this is a professional field. They typically brush off as normal behaviour to spend money and time for a degree that will take years to establish but enter the market as traders expecting to make money with almost zero preparation.
Professionals treat trading as a business, not a hobby
The main difference between business and hobby is that in a business, you dissect your activity objectively and expect an ROI.
Hobbies are things we do just for fun and this is the case for amateurs who come in the stock market with greed. Professionals, on the other hand, record their transactions, research their ideas, study their results, and execute a system that is according to their trade plan.
Another aspect to consider is how deep their interest runs.
A business needs commitment, while a hobby is something someone does only when they feel like it and just for the emotional kicks it delivers.
This means showing up day in and day out even just for practice and accepting that any business takes the time it needs to grow (just like our portfolio).
Professionals are process-focused, not outcome-focused
Since this is a business, professionals use their outcome as a hint on how to improve their process.
The end goal is not the end-all-be-all factor of their trading, but an indicator of how their system is currently performing.
Professionals act like professionals every day, they show it through their actions with or without a trade. It is in their preparation, their execution, and post-trade analysis. Like a well-oiled machine, a professional trader does not stop being a trader when the market closes. Their work and their edge are in what they do when everyone else is away from the screen.
Professionals manage risk, amateurs gamble
Both professionals and amateurs lose, the difference lies in the amount and control.
Professionals have accepted how much they are willing to lose even before the trade begins and will ensure that it does not go beyond that.
Amateurs rely on luck. To them, the risk is an afterthought, a remote consequence, a factor to be avoided. Thinking they can beat the system by finding a Holy Grail of indicators, they are sent on a wild goose chase that never ends.
Professionals, on the other hand, focus on a system that works and then mitigate the inevitable losses that can occur.
Losing is not a problem. It’s letting the losses get out of hand that is.
And while the amateur is on his 10th brand new system, the professional is quietly and consistently mastering his.
Their horizons differ
Amateur traders are here for the quick money and it shows in their trades.
Every single loss hurts because they’re looking for that one trade that could put them in retirement. Their tactics are hurried and their goal is to get things done as fast as possible.
Professionals have a much longer time horizon. Understanding that this is something they are willing to develop for years puts them at a more objective state. No single trade means too much aside from the lessons it can give, and every loss is a chance to grow rather than a blow to their ego.
With the fresh batch of new traders coming in, the distinction between a professional and an amateur becomes much more apparent.
It’s important to note that new traders can act more professional compared to veteran traders who stubbornly refuse to improvise and adapt according to the new market environment.
Being a professional and being an amateur is not in the years of trading. It’s in the mindset and in their process that separates them from the rest of the crowd.
Without a doubt, having technical skills to understand charts is very important.
But you should never overlook the psychological aspect of trading.
Developing your trading plan, following important trading guidelines, keeping your trading journal are the things crucial for your trading success and mastering trading psychology.