Trading Psychology

A day trader must be able to answer the following questions after every trade

QUESTION 1

Did you follow the Trading System?

Answer: Yes

Did you make a profit?

Answer: Yes

Good. You are learning to follow the Trade System with Discipline and Patience.. 

Rinse and repeat.

QUESTION 2

Did you follow the Trading System?

Answer: Yes

Did you make a profit?

Answer: No, I made a loss but 

it was quite small. 

That’s OK. You have learned to take the hit before losses run away. 

Keep going.

QUESTION 3

Did you follow the Trading System?

Answer: No

Did you make a profit?

Answer: Yes I did. A big profit. Ha-ha.

You probably over-traded 

your account equity.

You were lucky. Luck does not last. 

You know that, don’t you? 

QUESTION 4

Did you follow the Trading System?

Answer: No

Did you make a profit?

Answer: No. I made quite a large loss. You got what you deserved. Try to follow the Trading System with Discipline and Patience.

Or give up.

Why do 95% of day traders lose money?

• Are they dumb? No, they can’t all be dumb. Are they lazy? Didn’t they read up on the technicals? No, most day traders put in a great deal of effort in order to learn how to trade.

• Unfortunately there isn’t a lot of detailed research on day traders. Day traders all over the world are a cross-section of society – albeit that they are risk takers. All races and religions, men and women, rich or poor and in between, educated to high level or not at all, all occupations, etc. 

• Statistics are sparse but men day traders  outnumber women by quite a distance. But on average both sexes lose money. Women seem to lose slightly less than men.

• Senior executives seem to make poor traders. Perhaps here’s a clue. There’s something in human nature that makes us want to change things. The typical corporate CEO is a change maker with a clear vision and determination to make an impact. But the market doesn’t care if you are a high-flying executive. The market doesn’t respond to what a day trader wants. It will do what it wants to do.

• Is it possible that people who are expert video games players could become good day traders? After all, the world’s most challenging video game is surely the market.

• What about airline pilots and captains of cruise liners or luxury yachts? Part of their job involves navigating at night in total darkness relying only on instruments. Could this cool-headed faith in on-screen data be a basis for learning to day trade successfully?   

Discipline

• Profitable day traders have discipline. Losing day traders do not. If the Trading System works why not use it? But using the system consistently requires a great deal of discipline.

• It’s all too easy to simply react to a price move. Click! Oh, hmmm … the technicals don’t look so good. Too late. You’re in a position. Suck it up.  

• When in a losing position there’s a massive temptation to add to the position. Average down and make it easier to get the money back. Sounds sensible? With luck this works out OK. But succeeding in getting the money back only reinforces poor trading habits. Inevitably some of the time the luck runs out. A poor trade is made and the trader is unable to accept the loss. That’s defeat and nobody likes that. The luck has run out and the psychological pressure is such that the technicals are ignored or totally misread. Boom!

• Focus is vitally important. The Trading System only trades 10 markets. These markets are very liquid with narrow spreads offering all the scope needed to make profitable trades. Although the principles of the Trading System are applicable to other markets it is essential to remain focussed on the 10 target markets. This way at any moment the technical scenario of each target market is familiar and trading decisions are easier to make. Trawling the market from NVIDIA to Soya Beans to Copper to USD/Yen looking for “opportunities” is the opposite of focus. 

Patience

• Profitable day traders have the patience to let the Trading System do its job. Losing day traders do not.

• Many CFD markets are open 5 days/week 23 hours/ day. Bitcoin trades around the clock 7 days/week. But it’s not necessary to be in the market all day long. In fact it is bad to be glued to the screen for hours on end.

• Surfers in California’s Malibu know the value of patience. They don’t go for all the waves. They wait for the best wave that they know will come soon.

• There’s a big difference between the African lion and the north American cougar. The lion sits under a tree waiting for a herd of antelopes to pass by. The lion spots a weakling (young, old, sick) and springs into action. The target defends itself and, often with the help of other antelopes, makes life hard for the lion. The lion ends up running around the Masai Mara trying to grab the prey. Lot’s of energy expended sometimes with a “result”, sometimes not. The cougar on the other hand has a different approach. This dude often climbs a tree and waits for deer to show up. When a target is spotted the cougar drops down for the attack. If the deer manages to escape the cougar gives up easily, conserves energy and climbs back up the tree. As a day trader try to be a cougar – keep focus, relax, save energy.    

𝐓rading Rules – 𝐏sychological

These rules are in no particular order. They’re all important. Some will make you laugh … others will not as they will painfully remind you of your mistakes.

  • Be very happy with 1% profit/day. Doing this EVERY day means over 20% profit in a month. Be even happier if there’s not a loss for the day.
  • After a nasty loss do not revenge trade. It’s very likely to make matters worse.
  • Leave the screen at least once/hour and do a manual task (e.g. gardening, washing up).
  • Don’t “sweat the last 1/8th” (…. an old trader saying before decimalisation, but still valid today). It means do not try to exit a trade at the very best price.
  • Think twice (no, three) times before adding to a losing position.
  • No shame in exiting with a small profit or loss the welcome rebound from a bad losing position. The exit will help to restore mental equilibrium.
  • Don’t enter a new trade just before lunch. Enjoy lunch.
  • Don’t trade on a smart phone during mealtimes. It annoys the person who makes the meal!
  • Don’t trade after dinner. Relax. Watch TV but avoid CNBC and CNN.
  • After 12 hours watching the market it’s time to stop before making a tired, costly trade.
  • Don’t go to bed too late. Get fcuked; but not by the market.
  • Do not stay up to trade after the midnight open. With thin volume it’s like watching paint dry. Poor trading and bad for the sx life.
  • To sleep well avoid holding loss-making positions overnight.
  • Every trade starts with a loss due to buy/sell spread and commission. Get used to it.
  • The 60/40 rule means being wrong 40% of the time is to be expected. Get used to this as well.
  • Don’t forget to read the Trading Rules every morning before starting to trade.
  • The Trading Rules will have been forgotten by lunchtime so read them again in the afternoon.
  • Missed a trade? Don’t worry. It’s like catching a train at New York’s Grand Central Station or London’s Clapham Junction. Another trade will soon come along.
  • Remember, trading is easy. Just click the mouse. The difficult bit comes after the click.
  • Upon waking in the morning recall yesterday’s worst trade. Which 3 rules were broken?
  • After exiting a badly losing trade don’t get annoyed at the market or Goldman Sachs.
  • Apnea diving is holding the breath whilst underwater. It’s a sport. Apnea trading is similar – holding the breath whilst underwater. But it’s not a sport.
  • Don’t let a loss go to waste. It’s a learning opportunity. What Trading Rules were broken?
  • Unreasonable expectations of profit are an equity killer.
  • Following the Trading Rules requires only three things: discipline, discipline and discipline.
  • Discipline and greed are incompatible. In the movie Wall Street Michael Douglas famously said that greed is good. OK, remember it’s just a movie.
  • Trading is hard work. Not trading is even harder. If in doubt; stay out.
  • Don’t try too hard by trading all setups. Relax and trade the best that seem to have acceptable risk. Go for the ripe low-hanging fruits.
  • Never use the smart phone to trade whilst driving. It’s illegal and dangerous for life and equity.
  • Trading on a smart phone is not easy. You can’t see prices and technical indicators in multiple time frames on the small screen. Avoid.
  • Avoid entering a trade before scheduled announcements and data releases. Goldman Sachs knows; you don’t.
  • When pissed off about something…. for God’s sake do not trade. Restore equilibrium.