3. Trading Improvement

What Are Your Motivations?

This is about knowing where do you get your motivation to trade. When faced with greed and fear, think that you are probably more motivated by greed than fear. The mere fact of being a trader means you are motivated by making money and have less fear that other people who are not involved in financial transactions.
 
If your motivation is pursuit of money just for money's sake you may reach a point where the fatigue of not getting all the money you want is stronger than your sense of desire. In turn, if your motivation is to become a better person, or a better trader for that effect, you can always find worthwhile goals and have a much larger playing field. The classic virtues of honesty, discipline, patience, humbleness, among others, all lead to be a better person, a better trader, and ultimately to larger profits. Ironically enough, many successful traders acknowledge that they started making larger profits as a result of an switching from a fear and greed focus (fear from lacking money and greed from never have enough) to a focus of enjoying the small successes of becoming a better trader (honest with one self, disciplined approach, diligent work, etc.).
 

It's OK to Speculate

Traders (speculators) play a vital role in the financial markets and in the whole economy, because they are willing to assume a risk that other participants (non-speculators) are not willing to take. By taking the risk in exchange for the possibility of profiting from a favorable price move, traders are also providing the necessary liquidity to the marketplace and help prices flow efficiently. Without speculators and financial markets in general, prices in the real economy would be much more erratic and uncertain.
 
The important thing is to not feel bad when traders are blamed for price distortions or price manipulation. This is a widely discussed topic which falls out of the scope of this chapter.
 

It's OK To Lose

Sam Seiden brings a valuable lesson from his involvement with sports in his youth. Concerning losses, he acknowledges:
 
After so much success in a sport growing up, you feel there is nothing in life that you cannot do. No matter the task, not succeeding is never an option or thought. You can imagine my shock when I entered the trading world and learned that you have to be a good loser in order to win. When I first heard it, I thought it had to be a joke...

There is no way I am going to lose. I hate losing – I hardly ever lose. It did not take long to realize that this lesson was 100% true. I had losses that did not sit well with me. I tried to eliminate them but as I did, I eliminated the winning trades, as well. I hated losing. Slowly, I figured out the secret to trading from experience and from the advice of a friend. It depends on your definition of “losing.” In my early trading days, I had the wrong definition of the word “loss.”

Expectations

Keep your expectations in line with the trackrecord of your system. If you don't have a system yet, keep them in line with common sense. Jeffrey Kennedy adds to this point:
 
It is possible to experience above-average returns trading your own account. However, it is difficult to do it without taking on above-average risk. What is a realistic return to shoot for in your first year as a trader – 50%, 100%, 200%?

Whoa! Let’s rein in those unrealistic expectations. In my opinion, the goal for every first year trader should be not to lose money. In other words, shoot for a return of 0% your first year. If you can manage that, then in year two, try to beat the Dow or the S&P. These goals may not be flashy but they are realistic, and if you can learn to live with them – and achieve them – you will fend off the ‘[Invisible]Hand.’

Manage Your Capital

Rob Booker expands the notion of money management (Chapter C03), understood as position sizing, to wealth management.
 
You have to learn to be an accumulator of money. This means that your goal is to amass a huge pile of money in your regular bank account, not just your trading account. It means that when you have a profitable trade, that you set some of that money aside. It means that every time your trading account grows, you raise the high watermark on your account and do not allow yourself to lose what you have gained...

Start becoming a saver of money. Get used to the feeling associated with accumulating wealth. Real, liquid wealth. Next, you have to start just getting 20-30 pips a week in your trading account, and then you need to withdraw your profits every few weeks, and get used to the feeling of drawing profits out of your trading account.

Make An Inventory

Part of this inventory are all the associations your have around the concept of money. Most of us learn to associate money with various types of tangible (property, luxury objects, etc.) and intangible rewards (security, prestige, etc.). Money becomes a symbol of deeply ingrained notions of prosperity and freedom. This is why a sharp currency price movement against an open position, for example, symbolizes a threat against our notions of well-being.
 
Apart from your system, a trading inventory also includes yourself- your potentials and limits. Enjoying sitting in front of the screen watching the price bars move up and down suggests you would like day trading. Being bored watching the charts minute by minute or having your mind drift to more enjoyable endeavors suggests swing or position trading might be a better fit to your personality.
 
You may discover that your whole approach to the market isn't right for your lifestyle, emotional nature or long-term goals. For example, you may think that the money is made by scalping the one minute charts, and suppress your inclination to be a long term trader. The sooner you match your style with your personality, the sooner you start seeing good results. Remember that all styles have their pros and cons, no one is better than the other.
 
Make a list of the ideas, beliefs, expectations, fears, etc. you have related to trading. This ever-changing list will help you understand your relationship with money.
 

Ignoring The Talking Heads

If you spend time preparing a trade or developing a system and in the current set-up it makes perfect sense to take an action in the form of an entry or exit, try blocking extraneous information and concentrating on executing your plan. There is nothing wrong in perceiving what the general market sentiment is by watching the media or consulting other traders and analysts. An informed decision is not one that follows the majority but one that is coherent with your ideas and your trading system. Knowing your system, or methodology, means knowing yourself.
 
Scale out positions and start the day with a little profit: some intra-day traders prefer to close part of a winning trade at the start of the day or week to set the tone for the journey or following days. This money management technique has a strong psychological advantage (see Chapter C03).
 

Take Losses More Often

This piece of advice should be not understood literally. In fact, if you experience too many losses, your brain will start to associate trading with pain, and that is detrimental for your overall success. But if your winning streaks are, for whatever reason, very large, you will start to feel as if you can't lose. This is equally detrimental because now the risk is that you lose sight, over-leverage yourself and over-trade. The balance of profitable and losing trades is more than just a statistical figure- it's an emotional ratio as well!
 
Losing trades are natural phenomena in the business of trading. Good traders acknowledge this and ensure that they exercise careful position sizing to mitigate the risk of loss. It's obvious that nobody likes to lose, especially if it means money, but in trading you can be a winner by liking to take losses. It's because you are assuming a risk that your profits can be outstanding. Take as an example the system we displayed in Chapter C1: it has shown a Win Rate of 46% over five years of trading results, accumulating 300% just in one pair!
 
The results of the system displayed in Chapter C01 can be found in the Practice Chapter C. There you can also find a spreadsheet with over 50 statistical figures to track your performance. We suggest you use it for your backtestings and daily trading.

Based on the above argument, why not use your imagination and change the name of the Win/Loss Ratio to call it the Pleasure/Pain Ratio? The idea is that statistics help you become more aware of what you are doing.

The Next Trade Will Be A Loser

The following piece of advice consists in adopting a new belief. Believing the next trade will represent a loss instead of a big home run will encourage you to control risk and manage your capital. This is not in agreement with the old-fashioned concept of positive thinking, but, especially if you are over confident, restrain yourself from too much positive thinking! In turn, if you suffer from fear, adopting this new belief is not advisable, it could only worsen your fearful thoughts.
There is nothing like self-knowledge and finding out what kind of thoughts you entertain the most, so you can also find the most appropriate solutions to your problems.
 

The Garbage Account

This is a truly creative piece of advice from Boris Schlossberg to deal with over-trading. He writes in an article published in the Trader's Journal:
 
...it is crucial to have a garbage account in which we unleash all of our gambling instincts without doing any serious harm to our net worth.
With so many brokers offering micro-sized trading accounts, the creation of a garbage/gambling account could not be easier. The key is to make sure the well-reasoned, disciplined trades go into your real account, and all your impulse trades go into the garbage account. If we cannot realistically follow the dictum of Trade Less, Win More, we should at least attempt to minimize the damage of our cravings.

Reasons To Not Trade

Some of our experts like Derek Frey, Andrei Knight, or Rob Booker do mention this interesting axiom many times: search for reasons not to trade. Rob writes in one of his ebooks:
 
Try to cultivate a habit of not doing. On a regular basis I am shocked to see how I fall into the same pattern of wanting to be busy with the act of planning trades, taking trades, closing trades, planning more trades, and so on.
While I’m happy to hear you’re just as much of a currency nerd as I am, I have to ask, does the endless planning and making trades make you a better trader?

[...] why not just consider that after 10 years of being obsessed with the market, and pouring over your charts endlessly, you are going to miss loads of time with your family, or with your friends, and with the rest of the whole damn world. Be free to take a break.

Conserve your energy. You’re not going to miss anything by not trading.
But you might miss something by trading too much.

Question Yourself

Question yourself systematically and persistently, this is the piece of advice you can read from our experts in many forms. Among dozens of questions you can ask yourself, we picked a few from Daniel M. Gramza:
 
The first step in eliminating self-sabotage is to recognize it. The trader must ask himself: Do I select trades that imply illusions of grandeur? Do I select trades with total disregard for my trading strategy? Do I feel that the trade is too much to handle and I just want to get it over with? A “yes” would indicate poor trade selection and lack of a risk management exit, both of which imply a total disregard for his trading strategy.
Mark Douglas, when writing about self-observation in one of his books, reasserts:
 
Observing yourself objectively implies doing it without judgment or any harsh criticism as a consequence for what you're noticing about yourself. This might be not so easy for some of you to do considering the harsh, judgmental treatment you may have received from other people throughout your life. As a result, one quickly learns to associate any mistake with emotional pain. No one likes to be in a state of emotional pain, so we typically avoid acknowledging what we have learned to define as a mistake for as long as possible.
Not confronting mistakes in our everyday lives usually doesn't have the same disastrous consequences it can have if we avoid confronting our mistakes as traders.
Source: “Trading In The Zone”, Mark Douglas, New York Institute Of Finance, 2000, p. 174-175

Acknowledging Your Profile

Trading styles are largely defined by your personality, at least those of successful traders. They establish a style and system of trading that fits their needs and capabilities. Knowing what traits can put you in a dangerous situation, for example, if you are a risk-taker, or if you are the type of person who acts first and thinks later, etc… helps you ban that aspect of your personality that interferes with your trading. Conversely, the more favorable traits should be deliberately cultivated in order to benefit your trading.
Some people are born confident, while others are able to transfer it from other aspects of life.
 
Dima Chernovolov concludes one of his articles on the Emotion Management System, saying:
 
To master your emotions you should remember that any currency trading system is, in essence, an organized method to profit from other traders' emotions - therefore, unless you learn to control your emotions you will not be able to profit from any system. The path to the complete mastery of ones emotions is very long one - requiring a lot of introspection and hard work.

Gaining The Edge

Rumors, tips, full moons and feelings are not an edge. An edge suggests there is an underlying logic and truth to what you are taking action upon.
A short-term trader's premise may be different from a long-term player's but they both need to have proven logic and tools.
 

A Hobby Or A Business?

Some traders consider trading as a hobby while professional traders have a business plan. As part of the Trading Plan (chapter D04), the following points reveal some keys:
 
Trading commitment is measured by how serious you are about trading well. Imagine you would be paid not by achieving profits, but by a impeccable execution of your plan. Things would be different, wouldn't they? You see, it is not about profit, it is about execution. If you execute each trade to the best of your ability, the profits will follow.
 
An important step in your education as a trader is to learn to experience emotions only in relation to your trading approach, that is, your emotions should not be related to money results but to the execution: to how well you are following your system, to the statistics it is generating, etc.
 
If you judge a method for the gains or losses it can have harmful consequences. When you close a transaction for a profit, ask yourself if the trade was well executed following your plan or not. Did you risked too much, did you enter to early, and so on. Similarly, losing trades are not always the result of failures in execution, they may be simply just a loss.
 

Accumulate Thousands Of Trades

The accumulative potential of experience is not different in Forex that in any other endeavor. Borish Schlossberg makes an interesting point:
 
So how can we learn to trust our set-ups? Practice – practice - practice. Trading is a contact sport and can only be mastered through endless repetition. [...] Once that is done, you need to trade with real money because you can never replicate the psychological pressures of trading unless you have skin in the game.
The benefit of many retail Forex trading platforms is that you can configure the size down to 10 cent pips, so you can trade with real money but not have to pay much ‘real money’ for your education. The more you trade your setup, the more you will learn its intricacies under real market conditions. The more patient you will become. The more you will start to trust your setup and the more you will start to trust yourself.

Trading Journal

Log every trade and review it periodically so you can spot bad habits developing. Make a list of your problems at trading. There is no better teacher than your own experience with your winners and losers. Review your journal daily, weekly, and monthly. It is very important to stand accountable for all your results. Larry Pesavento sustains that a trading diary is one of his rituals that work for him:
 
One of the best things a trader can do for himself is to keep a trading diary. It has all positive benefits and zero drawbacks. A diary will help you identify bad habits such as failure to prepare, over trading and a host of other faults. Trading is a lonely business! You are the “captain of your ship and the master of your soul.” Self-evaluation through a daily log can go a long way toward insuring continued success.

Aspects You Can Control

Despite unanticipated risks, the aspects of trading you do control far outnumber those you don’t. It is not necessary for the trader to be in control of the market to establish a profitable business. This is how Daniel M. Gramza puts this favorable imbalance:
 
These are elements of the trading process that you do not control:

1. You do not control the market’s reaction to fundamental information.
2. You do not control the market’s price movement.

These are elements of trading that you do control:

1. You control your acceptance of the risks involved in trading.
2. You control your choice to reduce risk by identifying techniques that have a high probability of success.
3. You control your level of risk by determining how much of your trading capital will be allocated to the trade.
4. You control your choice of when to enter a trade.
5. You control your choice of when to exit a trade with a profit or loss.
6. You control your choice of when to add to or reduce a position.
7. You control your choice to transfer risk by using hedging or spreading techniques.
8. You control your choice to eliminate trading risk by deciding when not to trade.
9.You control your choice of how you emotionally react to profitable trades and the inevitable unprofitable trade.

Besides Money, Education

Education is the base of knowledge on every discipline. As lawyers and doctors require several years of college until they get their degree, Forex traders also require long years of study. It is better to have someone experienced to guide you through your trading, since some information could take you in the wrong path.
We share the words of Raul Lopez- as a matter of fact, the Learning Center is based on the premise that a Forex trader should never stop learning.

Accountability

We suggest that you become accountable to someone else for your trading both live and demo. Have a review of your trades at least weekly, see what you did right or wrong, and see if there were any improvements. Having someone to report your results will help you stay honest and realistic. It can be a spouse, husband, a good friend. For that matter, you have our FXWizard at the My Forex Mentor section of the Forum who is helping lots of traders keep accountable.
 

Backtesting

Your backtesting will also show you that as long as you follow each signal from you trading system and every instruction from your money management system you will achieve your profit objective sooner or later (provided that your system has a positive expectation).
 
Practicing manual backtesting can be very useful for preparing yourself psychologically for the first stages of your trading education which are basically mechanical. Many people argue that you don't have the emotional component when trading in a backtesting or forwardtesting (demo) mode. Unfortunately, they fail to see that in doing so you lay a technical foundation which will be vital later on when trading in real time with real money.
 
In turn, those traders that use backtesting as part of their preparation, admit that it is one of the best confidence boosters you can have. By playing candles forward pip by pip you are not only applying technical knowledge, but also accumulating visual experience. Every pattern you trade will be “printed” in your subconscious mind, educating it to detect and handle future price patterns.
 
 
 
Understanding yourself is the hardest lesson of all to learn. Confronting your own human failings is no pleasant task and is something that most of us avoid at all costs.
This Chapter is an invitation to deal with the mental issues that are causing these behaviors. Make peace with the obstacles to commitment and put them behind you, rendering them impotent and unimportant. Personal transformation is something that takes time but you can emerge as a completely new person by assembling these ingredients: a willingness to change, a clear intent of what you want to be, and a strong desire to put it to action.
 
 

Fell free to comment your insights at the LC Forum. If you need some help with your results, ask FXWizard at the My Forex Mentor section.
 
 
What you have learned from this chapter:

  • Most of us have the ability to become a successful trader. But few have the right attitude.
  • It takes time to develop new thinking habits. The only way is through deliberate practice.
  • You can probably develop a trading program that fits your personality more easily than you can adapt your personality to a particular trading program.
  • Trading is one of the most difficult money making skills to master because the market mirrors people's character traits to such a high degree.

FXstreet.com contents:



External links:



Books:

  • “Trading In The Zone”, Mark Douglas, New York Institute Of Finance, 2000
  • “Trade Your Way To Financial Freedom”, Van K. Tharp, McGraw-Hill, 2nd ed., 2007
  • “Technical Analysis”, Charles D. Kirkpatrick and Julie R. Dahlquist, Pearson Education, 7th ed., 2009
  • “Technical Analysis Of Stock Trends”, Robert D. Edwards and John Magee, Taylor and Francis Group, 9th ed., 2007
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