How To Develop A Profitable Trading MindsetIt’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.
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!
First, you need to change how you think about trading
One of the things that gives traders a lot of trouble, is getting too attached to any one trade. In fact, you should have zero emotional or mental attachment to any one trade you take.
As I discussed in my article on randomly distributed winners and losers, whilst your trading edge might have a certain winning percentage, let’s say 60%, you need to understand what that means…
What a 60% winning percentage means: It means that over a large enough sample size or series of trades, you can expect to win about 60% of the time.
What a 60% winning percentage does NOT mean: It does not mean that any one trade has a 60% chance of being a winner.
Many traders get confused into thinking that ‘this’ trade will be a winner, or even that ‘this’ trade has a 60% chance of winning, when in fact this is simply not the case.
To think about this from a different perspective, imagine a large jar of marbles of two different colours, let’s say red and blue. Let’s say each marble represents a trade that you took, there are 100 marbles total, 40 red and 60 blue. The red marbles are losing trades and the blue marbles are winning trades. So, you have 60% winners and 40% losers, when translated to your trading method, this shows that you can expect to win 60% of your trades.
HOWEVER…here’s where the thinking part gets tricky. If you shake up that jar of marbles so they are randomly distributed within the jar, and you stick your hand in blindly and pull one out, you don’t know if it will be a red or blue marble. Thus, you would not be ‘expecting’ a blue marble, because you know there are red ones in there as well, randomly distributed.
This is how you need to think about your trades. You need to think about them being randomly distributed events, even if you expect to win 60% or even more, over time. Once you begin to realize that any given trade has an equal chance of being a winner or loser, you will stop giving too much emotional and financial importance to any one trade. Once you do this, it opens up the pathway to carefree trading and allows you to truly induce the proper trading mindset.
I get emails from traders telling me they are ‘excited’ about a trade setup. This makes me cringe because it implies they’re expecting something from that trade setup, they’re expecting it to work out for them. But, they shouldn’t. They should have no expectation of any ONE setup, because each setup has a random outcome. It’s the SERIES of trades while trading our edge (price action) that gives us a chance to make money.
When you remove all expectation and attachment to any one trade, you automatically begin to do other things properly, like managing your risk properly and not fiddling with trades after they’re live. Because you realize that each trade setup may or may not work out, you don’t want to over-commit to it and you don’t want to get in its way. You risk an amount you’re OK with losing and you let the market do ‘its thing’, because you’re just letting your edge play out over a series of trades.
Think in probabilities to avoid emotional trauma
Think about a slot machine for a minute. You put money into a slot machine knowing upfront that it’s a random event, so you have no real expectations of winning or losing on any pull of the arm. Thus, expectations of the outcome of a slot machine are in alignment with the reality of the event itself.
In trading however, you see a pattern form in the market and because maybe the same pattern worked for you last time you start to expect that it will work again this time. Once you commit to this way of thinking you are setting yourself up for potential disappointment and emotional trauma. You are forgetting that each trade has a random outcome that is unconnected to your recent trades. Just because this same exact pin bar was a winner before, does not mean the next one will be, even if it’s exactly the same.
Now, obviously if you have an effective trading edge like my price action strategies, you can greatly improve your chances of a winner over a slot machine, but still, the outcome of any one event (trade) is random. So, you cannot allow yourself to be affected by the result of any one trade.
This trade has no influence or connection to the next trade. If this trade was a loser, the next trade might be a winner (or loser) and if this one was a winner the next one might be a loser (or winner). If you have a 60% win rate on your edge, remember that it is realized over a SERIES of trades, and that might mean you have 5 or 10 losing trades in a row. It doesn’t mean you panic though. You stick with your plan and strategy and you keep taking the trades as they form, because you need to trade a large enough sample size to see your edge play out.
Your goal should be to eliminate the potential for the market to disappoint you by realizing that trading is not about being right or wrong. This is how you to need change. You need to eliminate any potential for disappointment from your trading by thinking in probabilities. Remember the jar of red and blue marbles the next time you enter a trade. You are simply blindly dipping your hand into the marble jar each time you take a trade, so don’t expect to pull out a blue marble, just know that it will be EITHER a red OR blue marble, and that once you pull them all out, you will have 60 blue (winners) and 40 red (losers). IF you can do this, you will be thinking in-line with how the market actually exists and you will be putting yourself in position to profit from the market, rather than getting battered by it like you probably are now.
How to eliminate trading mistakes and start making money
All blown out trading accounts are the result of a snowball effect of trading mistakes. You get too attached to a trade that you ‘just know’ looks ‘so perfect’ it ‘can’t possibly fail’, and so you double up your risk or triple it, hoping to hit a ‘home run’. When that trade then fails, you experience severe emotional trauma and frustration. This causes the snowball effect to begin. You start feeling mad that you lost, you get angry, so you jump back into the market and risk even more, hoping you make back your lost money. This can go on and on until you blow out your account, which doesn’t take very long.
The point is, all of this emotional strife and frustration and the snowball of trading mistakes it causes, can be AVOIDED by changing how you think. That is to say, by thinking about your trades in terms of probabilities, as discussed above, you will circumnavigate the main reason most traders lose money; expectation.
Think about when you were demo trading. You probably did awesome, as many forex traders do. Why did you do awesome? Because you had the right trading mindset… You had no real expectation about any trade because no money was on the line so you didn’t care if it that particular trade lost or won. That’s it right there; you have to not care if you lose or win on any one trade, and you do that by thinking in terms of probabilities. IF you can do that, you will be well on your way to finally making consistent money in the markets.
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
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.
• 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.
