Price is moved by traders. Traders are moved by feelings and emotions. Our job is to read these emotions on the chart. When traders are under stress their behavior becomes much more predictable, allowing us to profit from their mistakes.
Category: Psychology
Market Watch H4 – 28th of February
“I cannot find a good trading system”
I cannot find a good trading system. The signals my system is giving me are really poor.
How do you act, what do you feel when you believe this?
- Frustrated – “No matter how hard I try, I cannot be successful with such a poor trading system”
- Depressed – “I don’t even want to trade anymore, I have tried so many systems and all them don’t work! The Market must be purely random after all.”
- Apathetic – “It’s not worth it, there is no point to continue. I must be a complete failure!”
- Lost – “What do I do now? No matter how many systems I try, the signals are still poor!”
- Disorganized – “I might as well just take random trades”
- (after a couple random losses) Hesitant – “I am not sure I should take this next trade…”
While it is true that a trading method is still necessary in order to be successful on the market, it will be of no use while you have so many conflicting beliefs about trading. After all, how many trading methods have you tested properly? By that, I mean taking 30-50 trades, without hesitation, in real account (demo just doesn’t cut it – better open cent account and risk $0.50 per trade), precisely following one method, not adjust any rules whatsoever?
In my experience, we are often impatient to get the positive results and so we cannot even stand a couple losses in a row, thinking that something must be wrong with our trading method. Of course, this is interrelated with our refusal to believe in uncertainty – we want to know what the outcome will be before we place the trade.
So let’s try and turn this around and see what happens:
The trading system I have right now is good enough for all practical purposes. I will not judge it until I collect live track record of at least 50 trades following this method.
How do you feel now?
- Liberated – “I can concentrate on the Market instead of constantly reading forums in the search of the next Holy Grail”
- Calm – “All I have to do is take the next opportunity, as defined by my trading method”
- Confident – “I know that the next trading opportunity will be provided by the Market. I know that whatever its outcome might be, it will take me a step further on my path towards trading success”
- Interested – “I wonder what the next trading opportunity will be? What lesson will it teach me?”
As was already mentioned before, when you have a proper trading mindset you might not become profitable in an instant. But you will be open to progress in your endeavors freely, without any internal resistant. The Market will teach you how to trade, it will become your friend, not an enemy – but you must take the first step.
“I should only take 100% certain signals”
I should only take 100% certain signals – the ones that I know will not fail me
This one is tricky. It seems that it makes good sense. Shouldn’t we all analyze the market properly and find the best possible trading opportunities? Why should we even bother taking the trades that we are not certain about?
So how do you feel, think and act when you believe this?
- Reluctant – “This signal does not look quite certain yet…”
- Frustrated – “I’ve been analyzing the market for hours now, but no trades look certain enough yet!”
- Reckless – “Now that I found this 100% certain signal, I can scale up my position and I don’t really need Stop Loss either – this trade can’t fail!”
- Worried – “Well, this trade does not behave quite as I expected, but I am sure it is just a temporal correction.”
- Hopeful – “I should just double my bet while Market gives me better price…”
- Afraid – “This does not look good so far, I don’t have much margin left…”
- Numb – [just stares at the screen…]
- Horrified – “It’s all #u?king gone! My whole account!”
The above example might be over-dramatized but it shows what can result from your inability to accept uncertainty.
You certainly get a lot of excitement trading that way, and I guess for some traders gamblers excitement is a goal in itself.
Let’s consider the opposite belief:
I should take any signal my trading system offers, knowing that none of them is certain
How do you feel when you believe in the above statement?
- Calm – “I am just doing my job, taking each opportunity I find”
- Quiet – “Every trade feels completely the same inside”
- Composed – “I know exactly what I am doing”
- Safe – “My account is always protected when I trade like this”
- Optimistic – “I am looking forward to positive long term results of my trading regimen”
Not much excitement, nor fun. Reminds me of one of my favorite quotes from “Market Wizards” in interview with Larry Hite:
“Larry, how can you trade the way you do; isn’t it boring?” I told him, “I don’t trade for excitement; I trade to win.” It may be very dull, but it is also very lucrative.
If you are excited about your trades, you are doing it wrong. If excitement is what you want, just go to Las Vegas – at least you get free drinks as you lose your money.
Thinking ahead of the crowd
When reading Price Action, one of the important concepts is to trade according to your bias before it is already obvious to everyone. You need to look for such price setups where you can already see some hints that the price is likely to move in the direction of your bias. At the same time, there is still no obvious entry setup. At this point we ask ourselves how other traders are likely to interpret the current situation.
How do you know that these early signs of reversal are not obvious to everyone else? Simple – the Market is not reacting to that setup just yet – the price is not breaking through support or resistance levels with enough conviction to show that the majority of market participants are trading in this direction.
If these signs are not obvious to everyone else, how do you know that these are correct signs? You don’t. That’s the main trick in trading – to act under uncertain circumstances. You want other traders to push the price in your direction, BUT after you are already in the market. We are seeking such a situation where not only there are enough traders who will see similar opportunity and start trading with us, but also there are enough traders who are holding the opposite position at this moment and who are ready to take a loss if the price goes against them.
If expecting a bearish move, start trading on a correction, on a bullish failure, on double top, on a bounce, etc. If you wait for the price to break a significant level, you are already too late.
The problem with waiting for too many confirmations is that we really can never be sure enough. Looking for confirmations only strengthens your desire to be right, to find a perfect opportunity. There is no perfect opportunity on the market, there is no situation when you can take a trade with absolute confidence that it is going to be a winner. But, there can be confidence that the Market is already providing a great selling/buying price and refusing it is foolish.
You see, there is nothing we can do on the market without our fellow traders. On the one hand, you need them to create liquidity and take the other side of your bias. On the other, you need them to move the price to your target after the entry – you want enough volume that will agree with your analysis as well. Whether this volume is generated through new entries aiming for profit, or taking old losses, is irrelevant.
“I cannot accept uncertainty”
I cannot accept uncertainty
Imagine how difficult it must be trading with such belief. In our daily lives we constantly strive for certainty, we want the outcome to always be expected, and yet there is just too much we can’t account for.
How do you behave and feel when you try trading with this belief?
- Afraid – The Market can take my money at any given moment!
- Helpless – Anything can happen and I have no control!
- Restless – How can I be at peace when I have no control over my trading even a minute from now?
- Frustrated – All my work is for nothing, because no matter what I do, I am not certain of any single trade!
- Miserable – I try so hard, but all I get is more frustration each day!
- Lost – There are no trading opportunities I can see! Any trade I consider might lose!
- Panicking – I just placed a trade and the Market already behaves not the way I expected!
- Embarrassed – All I do is making a fool of myself, I always buy at tops and sell at bottoms!
- Withdrawn/Apathetic – I don’t even want to look at the Market, there is no doubt it will just go against me yet again…
- Tired – The more I analyze, the worse results I get, my efforts – all for nothing…
Well, I don’t want to go to “Suicidal”, but it is true that our beliefs can push us into dark corners of our minds indeed.
Why are we doing this to ourselves? Why do we need to be certain of the future, when we know for a fact that it’s impossible? If you need to be certain, be certain of this:
I have no idea how the Market will look a second, a minute, an hour, a day or a year from now!
So how do you trade, when nothing is certain? Just like Bruce Kovner said in “Market Wizards”:
…making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.
Let’s see if your thinking changes when you consider just the opposite of the belief we started with:
I completely accept uncertainty on the market. I have no idea where the price will go.
How do you feel now?
- Liberated – How great it is not having to know!
- Concentrated – Now that I know what I don’t know, I can concentrate on my analysis better, without having to be right.
- Confident – Actually, now I know exactly what the outcome of my trade will be – uncertain!
- Relaxed – My job is to explore the opportunities, Market’s job is to show me if they work or not. I simply concentrate on my business and let the Market do its own.
- Amused – Each single step the Market makes is always a pleasant surprise for me – it simply teaches me and shows me where it goes.
- Fascinated – It is amazing how balanced, harmonious the Market is, if I but let it go!
You can have the best trading system in the world, only to be ruined by your own thinking.
True, you might not become profitable even when your beliefs are in harmony with the nature of the Market, but you will become the greatest learner, watching and following the greatest teacher there is in trading.
“I cannot Accept the Losses”
I cannot accept the losses
One of the biggest problems of any trader is accepting this essential part of trading business.
So how do you feel and behave when you believe this about yourself?
- Scared – “I cannot pull the trigger because it could end up being a loss!”
- Powerless – “It seems there is nothing I can do to remove the possibility of losing”
- Hesitated – “Something must be wrong with this trade, let’s wait another day, the Market just does not feel right”
- Annoyed/Frustrated – “I am trying as hard as I can, and yet here is another loss!”
- Angry – “Damn this Market and its stupid rules!”
- Reckless – “I am sure this trade is right, I will not let the Market play against me and stop me out with another spike, I will just put this trade on without a stop loss…”
- Inconsistent – “My trading system is just not working, I must change the rules to avoid such stupid trade in the future”
- Depressed – “It is all hopeless – how can I ever win if I keep allowing these losses?”
- Disgusted – “I swear I’ll never trade as long as I live!”
- Foolish/Embarrased – “I was so sure about this trade, I kept telling everyone how much money I’ll make in this one!”
Notice when you allow your brain to enter into any of these patterns of thinking. Take a look through the list, see what applies to you personally.
It is a great thing if we are able to catch ourselves breaking predefined trading rules, such as our Risk Management or Entry rules. However, it is our thinking patterns that lead to breaking the rules or to any other problems in our trading. Consider for a moment, have you ever caught yourself thinking any of the above thoughts?
Being aware of our thinking is much harder than being aware of the fact that we did not put a stop loss in a trade. If you learn catching the moment when you talk yourself into not putting the stop loss you will start working with the cause of the problem, not the effect.
So let’s reverse the original statement:
I can easily accept the losses
Now, this may not be true for you at the moment, but try to imagine how you would feel, behave and trade if this thought would be your reality.
- I am confident – the losses do not frighten me.
- I am comfortable with my trading system – I accept all parts of it
- I am at peace with anything the Market will do – I allow it to behave in any way it needs to.
- I am grateful for every opportunity to place a trade – whatever the outcome of that trade might be.
- I find all the circumstances helpful – any outcome is completely acceptable to me and therefore I am making myself available to learn from it.
- I am looking forward to getting a loss – it is the greatest signal the Market could possible offer to me.
Consider the last point – isn’t it really the greatest feedback the Market could ever possibly offer to you? The Market is not against you, it is simply there to teach. It is clearly telling you, from its perspective, that your view of the circumstances was not correct at the moment when you placed the trade. What did you believe about the current market situation just before you pulled the trigger? Take that belief, reverse it and you have the corrected point of view, available to you with Market’s help.
I you are serious about working with your beliefs, consider trying this method – Katie Byron’s “The Work”.
“I do not understand the Market”
I do not understand the Market.
How do you feel when you believe this about yourself? Examine the following statements and see which ones cause the biggest emotional reaction – these are the ones you want to work on.
- Powerless
- Hopeless
- Stupid
- Like I am wasting time
- Frustrated
- Tired
- Angry
- Afraid of losing the money
- Afraid of looking stupid when I open a “wrong” trade
- Hesitated
Whatever you believe about yourself is what you are. So how do you think you would be feeling if this believe did not exist for you, if it would have completely disappeared?
- Free
- liberated
- Empowered
- Willing to pull the trigger on my trades
- Willing to explore the Market without resistance
Is it possible to understand the Market at all? Once again, the main question here is what do you believe “understanding” to be. Depending on how you define “understanding” it might be possible to understand the Market or it might be not.
What is understanding?
- Knowing where the Market will go
- Knowing why the price moves on the Market
OR - Knowing what the possible outcome of my trades could be
Consider which one is easier to understand about the Market. When you need to know where the Market will go, you are bound to be frustrated most of the time in your trading. If you simply need to know what could the outcome of your trades be, you will bring clarity to your trading.
If you really want to understand the Market in terms of knowing where it will go, why is that?
- Do you want to avoid losses?
- Do you want to prove that you are right?
- Do you want your trades to be ideal, absolutely perfect?
- Do you want to have confidence in your actions?
Remember, that each of the above questions must be broken down into aspects. Your belief system is extremely complicated and the answers are not likely to be found by scratching the surface.
Limiting Beliefs
Trading can often be very difficult to manage as a business, when you are doing it all by yourself. Every single day you have to get up in the morning and repeat the same tasks over and over again. It can quickly become frustrating, especially in the beginning, when you are not really seeing any outcome of your hard work.
If you have to motivate yourself every day to get started, there is a problem already present. You are not a trader just yet, because you have to overcome the resistance that is constantly present in the background. Think about some other areas of your life, your hobbies, what really interests you? Do you have to struggle to get started in these areas?
Unless we learn to do all the tasks related to trading with enjoyment, we are not traders. We are simple trying to force ourselves into becoming what we are not. The only way to solve this problem is to work with our beliefs.
Try asking yourself, what is it that generates resistance to trading work in your mind? What beliefs do you hold that constantly come up and often do not allow you to work for 8 hours straight with ease and joy?
Here is a sample list:
- Trading is boring
- It is not “right” to speculate (due to your religious, political or any other beliefs – examine those)
- Trading is too difficult
- I need someone to tell me what to do in order to do it right
- I don’t like working alone
- I can’t work from home
- I don’t want to spend so much time at the computer every day
- My family/friends do not believe in me succeeding and so I can’t take my trading seriously
- I am too disorganized
- I am lazy
- I am not smart enough to trade
- I cannot concentrate well enough
- I don’t like getting up so early
- I don’t like going to sleep so late
- I am not lucky (examine your beliefs related to trading being “just luck”)
I could easily continue the list on and on, but the whole point is for each of us to discover our own limiting beliefs.
Let’s examine the first belief, “Trading is boring” in more detail.
- I could care less where the Market will go (great, you already have one of the most important components of a successful trader!)
- I don’t understand the Market (do you have to?)
- I don’t enjoy analyzing the Market (the better you get at something, the more you enjoy it – I did not enjoy practicing guitar the first couple months too)
- It is too difficult to keep all the information in my head (make notes, take screenshots, write a blog!)
- I am too tired and I am falling asleep as I watch the Market (review your sleeping schedule and eating habits, make sure you drink water ALL THE TIME, review your alcohol/smoking/caffeine addiction)
Once again, this is just an example of how we must take each of our beliefs and break them down into aspects in order to discover what is really limiting our full potential.
Unless you are ready to become self aware and look inside yourself – trading is not for you. Stop wasting your time, your family’s money and go find something you can be truly good at.
Relax
The Market can do nothing to hurt you, nothing can cause any damage to your reality, so why is it that we find it hard to just relax? How much easier our job would be if we would follow the Market, instead of following our thoughts about the Market?
The reality of the Market can never do anything that would cause you stress. Only your interpretation of the Market – your thoughts about it – cause emotions and prevent you from being detached.
Yes, it is important to have a trading system – a framework inside of which you view the Market. A trading system will cause you to interpret Market’s actions, so it must be constructed in a way that avoids all inner conflict. However, if you are unaware of your thinking, even the best trading system will fail because you will not be able to follow it precisely. You will never notice when faulty thinking enters your mind and causes you to choose incorrect interpretation of the information Market puts in front of you.
Until we learn to just relax and listen to what’s going on inside, there is no point to try building a trading system. The conflict our unconscious mind tries to hide will be projected into our trading and ensure our failure.