It’s an unavoidable reality that your forex
trading success or failure will largely depend on your mindset.
In
other words, if your
Forex trading psychology is not right, you aren’t
going to make any money!
Unfortunately, most traders ignore this
important fact or are unaware of how critical having the proper mindset
is to Forex trading success.
If you do not have the correct trading
mindset, it doesn’t matter how good your trading strategy is, because no
strategy will ever make money if it’s used by a trader with the wrong
psychology.
You
NEED to have a business trading plan, a trading journal, and you need
to plan out most of your actions in the market before you enter.
The
more you plan before you enter the higher-probability you will have of
making money long-term.
You are ALWAYS going to interpret the market
more accurately whilst you’re not in a trade…so pre-planning everything
increases your odds of making money since you will be working more on
logic than emotion.
In today’s lesson I am going to help you develop a profitable trading mindset.
Note: I would love to hear how you plan on using the points discussed here to improve your Forex trading mindset. Please leave me your comments and feedback below after reading today’s lesson!
A lot of people seem to be unaware of the fact that they are trading
with a mindset that is inhibiting them from making money in the markets.
Instead, they think that if they just find the right indicator or
system they will magically start printing money from their computer.
Trading success is the end result of developing the proper trading
habits, and habits are the end result of having the proper trading
psychology.
Today’s lesson is going to give you the insight you need to
develop a profitable trading mindset, so read this lesson carefully and
don’t dismiss any of it, because I promise you that the reason you are
struggling in the markets now is because your mindset is working against
you instead of for you.
Step 1: Have realistic expectations
The first thing you need to do to develop the proper Forex trading
mindset is have realistic expectations about trading.
What I mean is
this; don’t think you’re going to quit your job and start making a
million dollars a year after 2 months of trading live with your $5,000
account.
That’s not how it works, and the sooner you ground your
expectations in reality, the sooner you will begin to make money
consistently.
You need to accept that you cannot over-trade and
over-leverage your way to trading success, if you do those two things
you might make some quick money temporarily, but you will soon lose it
all and more.
Accept the reality of how much money you have in your
trading account and how much of that you are willing to lose per trade.
Here are some other points to consider:
• Only trade with disposable ‘risk’ capital –
Disposable capital is money you don’t need for any life expenses,
including retirement or other long-term things.
If you don’t have any
disposable or risk capital, then keep demo trading until you do, or
stop trading all together, but whatever you do, do not trade with money
you are going to become emotional about losing.
Always assume you could
lose whatever money you have in your account or in a trade…if you’re
truly OK with that, then your good to go, just make sure you don’t lie
to yourself…REALLY BE OK WITH IT.
Trading with ‘scared’ money (money
you can’t afford to lose) will lead to severe emotional pressure and
cause ongoing losses.
• Make sure you can still sleep at night !– This is
related to the above point about disposable capital.
But the difference
is that you need to ask yourself before EVERY trade you take if you are
100% neutral or OK with potentially losing the money you are about to
risk.
If you can’t sleep at night because you’re thinking about your trade, you’ve risked too much.
No one can tell you how much to risk per trade, it depends on what
you’re personally comfortable with.
If you trade 4 times a month you can
obviously risk a little more per trade than someone who trades 30 times
a month…it’s relative to your trade frequency, your skills as a trader,
and your personal risk tolerance.
• Understand each trade is independent of the previous one –
This point is important because I know that many traders are way too
influenced by their previous trade.
The fact of the matter is that your
last trade has absolutely ZERO to do with your next trade. You need to
avoid becoming euphoric or over-confident after a winning trade or
revengeful after a losing trade.
The fact of the matter is that every
time you trade it should just be seen as another execution of your
trading edge; if you just had 3 consecutive winners you need to avoid
risking more than usual on your next trade just because you are feeling
very confident, and you need to avoid jumping back into the market right
away after a losing trade just to try and “make back” what you lost.
When you do these things you are operating 100% on emotion rather than
logic and objectivity.
• Don’t get attached to your trades – If you follow
the 3 points we just discussed you should have little chance of becoming
too attached to your trades.
Don’t take any trade personally, just
because you lose on a few trades in a row doesn’t mean you suck at
trading, likewise if you win on 3 trades in a row it doesn’t mean you
are a trading “God” who is immune to losing.
If you don’t risk too much
per trade and you aren’t trading with money you need for other things in
your life, you probably won’t get too attached to your trades.
Step 2: Understand the power of patience
I think one of the biggest realizations that allowed me to turn the
corner in my own trading was that I didn’t have to trade a lot to make a
decent monthly return.
Think about it, most people consider a 6% annual
return very good for a savings account, and if you average 12% a year
on your retirement fund you are pretty happy.
So why is it that most
traders expect to make 100% a month or some other unrealistic return?
What’s wrong with making 5 or 10% a month? That’s still exceptional over
the course of one year.
Whilst I can’t imply you will make a certain
percentage per month, if you just understand that slower and more
consistent gains are the way to long-term success in the markets, you
will be far better off at the end of each trading year.
Here are some
other points to consider about patience:
• Learn to trade on the daily charts first – By learning to trade on the
daily chart time frames
first, you will naturally take a bigger-picture approach to the markets
and you’ll avoid most of the temptation to over-trade that the lower
time frames induce.
Beginning traders especially need to slow down and
learn to trade off the daily charts first. Daily charts provide the most
relevant and practical view of the market. YOU DO NOT HAVE TO TRADE
EVERYDAY to make a solid return each month.
• Quality over quantity – I consider myself a
“sniper” of the market; I wait and I wait and I wait, sometimes for days
or even 1 week without trading, then when I see a price action setup that triggers my “this one is a no-brainer” alarm…I pull the trigger
with ZERO emotion.
I am always fully prepared to lose the money I have
risked on any one trade because I do not trade unless I am 100%
confident that my
price action trading edge is present.
• User your ‘bullets’ wisely – To really hammer-home
the power of patience in developing the proper trading mindset, you
need to understand that being patient will work to instill positive
trading habits within you.
Patience reinforces positive trading habits,
whereas emotional trading reinforces negative ones.
Once you begin to
trade patiently you will see how using your “bullets” wisely works…you
only need a few good trades a month to make a respectable return in the
markets, after you achieve this via patience, you will learn to enjoy
NOT being in the markets…because it’s then that you are “hunting your
prey”.
This in contrast to the frazzled and frustrated trader who is
staying up all night staring at the charts like a trading zombie who
just will not accept that they need to trade less often.
Step 3: Be organized in your approach to the markets
• Have a trading plan – I know it can be boring, I know you might think you don’t “need” to make one, but if you don’t make a
trading plan
and actually use it and tweak it as you learn, you will start trading
on an unorganized and probably emotional path.
A trading plan doesn’t
have to be a very dry and boring document; you can get creative with it.
You’re trading plan could be that you write your own weekly commentary
before each week begins, plan out what you will do and look for in the
upcoming week…just make sure you have a “plan of attack” before you
enter any trade.
• Keep a professional trading journal – You need a track record, you need to record your trades, you need to do this in a
forex trading journal.
This is a critical component to forging the proper Forex trading
mindset because it gives you a tangible document that you can look at
and instantly get raw feedback on your trading performance.
Once you
start keeping a journal of your trades it will become a habit, and you
will not want to see emotional results staring back at you in your trade
journal.
Eventually, you will look at your trading journal as something
of a work of art that proves your ability to trade with discipline as
well as your ability to follow your trading plan.
This is something any
serious investor will want to see if you plan on trading other people’s
money.
• Think BEFORE you ‘shoot’, not after – All of the
planning and preemption that I just discussed is analogous to thinking
before you shoot.
A gun is a very powerful weapon, we all know that we
need to think before we shoot one, even if we are just hunting or
shooting at a gun range.
Likewise, the markets can be very powerful
“weapons” in regards to making or losing you money.
So, you want to do
as much thinking before you enter a trade as you can, because after you
enter you are going to naturally be more emotional and you don’t want to
put yourself in a position of constantly entering regrettable trades.
If you plan your actions before you enter, you should not regret your
trades, even when you have losing trades.
I never regret any trade I
take because I don’t trade unless my edge is present and I’m always
comfortable with the amount of money I have risked on any one trade.
Step 4: Have no doubt about what your trading edge is
Finally, don’t start trading with real money if you aren’t really
sure how to trade your edge.
You are obviously not going to develop the
proper trading mindset if you jump into trading a live account without
being 100% confident in what you’re looking for.
Whatever your edge is,
make sure you’ve found success trading it on a demo account for at least
3 months or more before you go live.
Don’t just “dive in head first”
without being totally comfortable in your approach…this is what most
traders do and most of them lose money too.
• Have 100% confidence in your edge – I have 100%
confidence in my price action trading strategies…that’s not to say that I
am foolish enough to believe EVERY trade will win, but I am totally
confident that every time I trade my edge is truly present.
I don’t
compromise my trading edge by taking setups that look they are “almost”
good enough…I simply don’t trade in that case.
I only take price action
setups that I feel in my gut are high-probability valid representations
of my edge.
Therefore, I am never fearful or worried about any trade I
enter, even if it ends up losing.
• Don’t gamble – There are skilled traders, and then
there are people who gamble in the markets.
If you take a calm and
calculated approach to your trading and wait patiently for your trading
edge to appear, like a sniper, then you are a skilled trader.
If you
just “run and gun” and veer off course from your trading plan, you are a
gambler. So,
are you a Forex trader or a gambler?
• Price action trading helps develop the proper trading mindset – My trading edge is
price action,
and I fully believe that the simplicity of price action trading helped
me develop and maintain the proper Forex trading mindset.
We don’t need
tons of messy indicators on our charts and we don’t need Forex trading
robots or other expensive software.
All we need is the raw price action
of the market and our magnificent human minds to interpret it; it’s up
to us to harness this power.
The price action of the market gives us a map to follow, and a pretty
obvious one at that, if we can ignore the emotional temptations that
arise in our minds we will have no problem profiting off of this price
action map.
I trust today’s lesson has provided you with some insight
into how you can develop the proper mindset and ignore the emotions and
break the habits that destroy your trading success.
If you want to learn
more please
check out my price action Forex trading course.
