Can you remember the very best trade that you ever made? How about the worst trade? What did you learn from those experiences? Why do you think you created those results?
One of the largest problems that traders have is they are whipsawed between feelings of fear and greed whenever they trade. This leads them to make poor decisions and eventually leads to poor outcomes. I ask these questions at the outset of this article to illustrate that thoughts and feelings create focus. One of the most important parts of a trader’s life is the mindset and attitude towards wins and losses. There is a very strong connection between Trading Psychology and consistent performance. Specifically, for many traders’ emotions dictate their trading behaviors. Great traders recognize that emotions are triggers which are separate and distinct from what is happening in the markets. Most traders have a plan for everything else except for how to manage their emotions. Because of this we witness the psychological and emotional cycles of trading creating less than optimal trading decisions.
Close your eyes and imagine that your account grows by 20% tomorrow. How does that make you feel?
Now do the exact opposite exercise. Close your eyes and imagine that your account loses 20% of its value tomorrow. How does that make you feel?
Trading psychology is not about focusing on one of these possibilities over the other. Instead, trading psychology is becoming aware of how your thoughts and feelings change your behavior and perspective. While this may appear to obvious, most traders bounce back and forth between anxiety and joy very quickly depending upon their performance or what is happening in the market at the moment. This instability leads to poor decision making.
Winning traders do things that losing traders do not. Primarily what winners are obsessed with is developing an understanding of why trades lost money. We all have winning and losing trades. But by studying and understanding the losers it becomes possible to reduce the number of trades that failed. This curiosity is a characteristic that allows traders to understand the principles of successful trading directly. The ability to transform setbacks and frustrations into opportunities for betterment is what allows winning traders to win consistently.
Why are you trading? Are you trading from Elation/Glee because you had a good run and now you think you can do no wrong?
Do you question your decision-making process because the last few trades did not turn out as good as you had hoped?
Let me elaborate. Over the years we have literally worked with tens of thousands of traders who have attended our live online trainings as well as our Power Trader seminars. In all these experiences what consistently stands out to us is the different ways that traders respond to losses.
My favorite question I always ask traders is tell me about your worst trade. What always occurs is an outpouring of painful drama. Tens of thousands of dollars lost as the markets worked against them.
Then I ask the important follow up question. What did you learn from that trade? Usually, the silence is deafening.
Everybody experiences losses in their trading accounts, and it is very fascinating to observe how different the reactions to this experience are.
One group of traders often doubles up after experiencing a large loss. This is referred to as revenge trading where a trader increases their risk and activity because they are driven to get their money back. They refuse to quit and are redouble their trading efforts as a response to the loss they just took.
A second type of trader is determined not to let losses pile up. This type of trader calms themselves down and sometimes will even stop trading for the day. Their goal is to not let anxiety and disappointment drive their decision making moving forward.
The third type of trader was equally if not more frustrated with their performance. But what separates them from the others is that they are innately curious as to why. They recognize that there is a cause and effect to trading and they analyze their decision-making process until they understand where they erred. Only then do they return to trading with a fresh perspective.
Several weeks back I reviewed the most recent “Market Wizards” book by Jack Schwager. You can read my review here. One of the interesting aspects of “Market Wizards” is that almost all of them destroyed their accounts before they discovered success. It was their innate curiosity about the cause and effect of trading that led them to become immensely successful. Sometimes it was changing only one thing in their trading which resulted in spectacular success. Many of them commented that they were “amazed” at how quickly they lost their money, and this led them to a lifelong study to make sure they never repeated those mistakes again. Stop and think about that. It is quite a unique personality characteristic to be “amazed” about a profound loss of wealth.
Several of these Wizards simply were able to assume the opposite perspective and recognize that “somebody” made all of the money they had just lost and they better “learn how to play the game.” Others saw in their trading massively self-destructive qualities which they recognized as impediments to success in life. Some Wizards equated their value as people to the value in their trading accounts.
Over time you can clearly anticipate what the long-term outcomes are going to be for these different groups of traders. The first group of traders, who revenge trade, will have the most volatile performance because they channel their frustration into very reactive decision making. These traders often see huge increases in their accounts followed by corresponding massive drawdowns. These traders double down and increase risk-taking when they are trading their worst. Their trading days are quite literally a volatile emotional journey between fear and exhilaration.
The second group of traders were intelligent enough to know that they should reduce or stop trading when they experience a large loss. They focused on not losing money. This allowed them to stay emotionally restrained but they did not learn much from their setbacks and disappointments. In other words, this group of traders succeeded in coping but not in developing as traders. For the most part they were mostly treading water, and their performance was a little above or a little below break-even.
The third group of traders are the ones who are innately curious about why something performed poorly. They do not see this as a reflection of themselves but look at the frustration or setback as something that they need to understand to better their performance. These individuals channel their energy towards betterment.
They operate with a growth mindset. They stay engaged in their work, but constructively. They see trading as a process and break down each phase of the process to turn setbacks into learning successes.
Let me provide an illustrative example of the power that can occur when you turn the mirror on yourself. One of the recurring themes that traders do battle with is they want to grow their account BIG as quickly as possible. This can be perfectly reasonable and plausible, but your performance will depend to a very large extent as to how to define the words BIG and QUICKLY. What I often encounter among Power Traders is the realization that what allows them to dramatically increase performance is to trade smaller position sizing. This is completely counter intuitive. Many traders do not realize how stressful trading is until they learn how to trade small. Betting your entire account on one trade after another will probably see you have huge upswings but also massive corresponding downswings. What good does it do you if you grow your account 3x in a month but then in month 2 lose 70% of it on recklessness? The only question that needs to be addressed in instances like this, is “what did you learn from that experience?”
Awareness of how emotions create behaviors is at the very heart of trading psychology. To succeed massively in the markets, you need to find your comfort zone and stay innately curious when things go mildly awry. Otherwise, the gravity of emotions like anxiety, fear, despair, depression, glee, euphoria can easily take hold of your consciousness and lead you to take unnecessary risks.
Successful trading is NEVER about how much money you make when you are right. It is always about how little you lose when you are wrong. Within that simple statement is among the most powerful education you could ever receive. If you fail to manage your risk in trading, they will carry you out.
Here are some helpful questions that help Power Traders on Winning the Trading Psychology journey. They are all rooted in questions that stem from the following trade assessment: “What if I’m right? What if I’m wrong?” By the way, this is the one question, Artificial Intelligence, machine learning, and neural networks ask 24 hours a day, 365 days a year to arrive at the best move forward. It is what has allowed a.i. to beat humans at Poker, Chess, Jeopardy and Go. Why should trading be any different?
- Why am I considering this trade?
- What are my expectations for this trade?
- What is the best case and worst-case scenario that I am willing to take?
- Am I just looking for action or is this a real opportunity?
- Where did this trend start?
- What are the strongest trends?
- What are the weakest trends?
- Is volatility increasing or decreasing?
- What percentage of my account should I risk on each trade?
- What am I using to select trades?
- At what point would I be 100% wrong on this trade?
- If I was 100% wrong on this trade how would that affect my account?
- Where should I place my stop loss?
- Where should I add to my winning position?
- Where is the support and resistance to help confirm my decisions?
- Is the market making higher highs? Or lower lows?
- Where are we in comparison to the last weeks trading range?
- Where are we in relation to the annual trading range?
- If I do not take this trade how it will it affect me?
As a trader one of the most important realizations, you will have is recognizing you need to be tuned in to the PRICE ACTION and REAL DRIVERS that are affecting the markets you are trading. That is rarely portrayed in the form of reporters’ stories about what they think is happening in the economy, the market you are trading and the world. Since we live in a global marketplace the critical factors that affect a trader’s portfolio lie in recognizing and understanding the key drivers of an assets price. All markets are statistically correlated in some manner. Artificial intelligence, machine learning, and neural networks focuses exclusively on these relationships to create very accurate forecasts.
Most traders constantly bewilder themselves by trying to relate the top news stories to their trading decisions.
Do you ever read the headlines in the media and wonder how it is going to affect your trading?
- Trade War with China
- New Government Regulations
- Unemployment Forecasts
- Currency Instability
- Debt Growth
- Recession Concerns
- Negative Interest Rates
How do you make sense of it all? How does it affect your portfolio?
The challenge facing every trader is trying to make sense of the tsunami of financial information to make better trading decisions.
Quite a challenge!
That is why successful traders use artificial intelligence to find the best markets and the best time to trade.
Artificial Intelligence is not a would be nice to have tool. It is essential for today’s quickly changing financial landscape.
Your assets… your savings… your retirement… everything you have worked so truly hard for… they do not have to be at risk any longer.
Artificial Intelligence is no longer just for the large Wall Street Mutual Funds and ultra-wealthy. Today small traders are getting big results because of a.i.
Discover why artificial intelligence is the solution professional traders go-to for less risk, more rewards, and guaranteed peace of mind.
Visit with us and check out the a.i. at our Next Live Training.
It’s not magic. It’s machine learning.
Make it count.
DISCLAIMER: STOCKS, FUTURES, OPTIONS, ETFs AND CURRENCY TRADING ALL HAVE LARGE POTENTIAL REWARDS, BUT THEY ALSO HAVE LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THESE MARKETS. DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS ARTICLE AND WEBSITE IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES, OPTIONS, STOCKS, OR CURRENCIES. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED ON THIS ARTICLE OR WEBSITE. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.