Everyone says that psychology is the most important part of trading. So if trading is 80% psychology, what makes up psychology? I believe psychology can be broken down into two parts: patience and discipline. This article focuses on discipline, and why it is so essential to your trading success.
One of my mentors once told me: ‘If you can’t follow a set of rules, you’re going to find trading very difficult indeed.’
How right he was!
Trading profitably requires following a set of rules. Rules that over a sample of trades gives you high probability entries into the markets, in order to make a profit. It does not guarantee that you will win every trade, rather over a sample of trades, have an edge in the market, and expect to generate profitable results.
The First Step…
You need of course to ensure that your system or strategy is profitable. The best ways to do this is to back test the system. Prove that it has worked in the past, then to forward test your system on a demo account or very small risk on a live account.
Forward testing is absolutely essential for any system, as you can guarantee that when real emotions come into play, you need to know that you can execute your system. Only fools don’t forward test, and only fools trade a system live straight away on their hard earned money without ever having simulated it for a couple of months.
I know that the temptation to get into the market is strong, but is a lot easier to lose money in the markets than it is to make money. Therefore the discipline to apply your strategy on a demo account for a 1-2 month period is time well spent, and will arguably end up saving you money in the long run.
What is consistency?
You can learn to trade, but your edge needs to be applied correctly, consistently to get results. Consistency of results comes from consistency of your actions, and consistency of your actions comes from executing your strategy flawlessly, every time it sets up, on every market you trade.
In order to do this, you must have the discipline to take your trade setups when they occur, and manage your trades as per your rules. This way you are applying your edge in the markets, and only trading when you have your edge. Breaking your rules will typically lead to you losing money. Of course any one trade can always be a winner or a loser, but over a sample of trades, breaking your rules makes using your system completely pointless.
Consistency only comes from the belief in your system. Once you have the belief in your system and understand what profits it is capable of generating, you will develop the discipline to trade it.
You should create a Forex Trading Plan, like the one in our Learn Forex Course to help keep you on track while you learn to trade.
What is discipline?
As per Wikipedia ‘Discipline is the assertion of willpower over more base desires, and is usually understood to be synonymous with self-control. Self-discipline is to some extent a substitute for motivation, when one uses reason to determine the best course of action that opposes one’s desires.’
This means we have to use the more evolved parts of our brain to stay disciplined and follow our rules, as opposed to allowing our base desires to take control and wreak havoc.
So how do I improve my discipline?
It’s very easy to say this, but another thing all together to actually do it. Trading with your edge is essential to remain profitable, but it’s so easy to slip into bad habits and find an excuse to get into the market. We must remember that following our rules and staying disciplined involves using those higher brain functions.
Testing your systems past performance, then demo trading for a period of time will help you to develop the confidence in your system and the discipline to keep applying it correctly.
If you just decide to start live trading a new strategy without ever having tested it, or simulated trading it on a demo account, you will not have the confidence in the system. As a result, you will not have the discipline to trade it.
Testing, demo trading, live trading is a great way to build your confidence, and as a result improve your discipline. At Learn to Trade Online, we suggest trading live almost immediately with very small risk, as you will get to experience in the marketplace, and you get to test the systems. A demo account is very easy to be profitable on, as there is no money at risk…
In a previous tutorial, I talked about the importance of developing a solid trading strategy and sticking to it. These two skills, developing a strategy and following it, will determine how profitable you become in forex trading.
Unfortunately, very few forex traders in Kenya are able to practice this trading discipline.
The answer lies in emotions.
Human beings have emotions that are hardwired into them. These emotions, which include fear, greed and pride, are strong beasts. You will need to understand how they influence your forex trading decisions and what you can do about them.
How Do You Keep Emotions out of Your Trades?
The short answer to this question is that you can’t get rid of your emotions.
As long as you are breathing and your nerves are alive, you are going to experience emotions. They are hardwired into you.
In fact, your decision to learn how to trade forex is driven by emotions. There is nothing as uplifting as entering into a trade and exiting with a tidy sum of profits. It makes you feel like you are high on steroids. Just accept that as long as you alive, you will be experiencing some pretty intense emotions when you are trading.
Trade What You See, Not What You Think
‘The Euro has to go down, Greece, Spain and Portugal are all broke, Italy’s following them, it just has to go down…’
Trading fundamentals in Forex is a surefire way to go bankrupt. You need to think of Forex as a stupid, slow market place, it is not as reactive to fundamentals as Stock markets, or bond markets. It’s almost like you need to hit it with a 2 x 4 to the head, before it realises what’s going on. Remember that Forex is the biggest marketplace, so it takes the longest to change direction.
At the end of 2010, the Euro was supposed to be the big short going into 2011. Guess what…4 months straight up! Similarly, at the end of last year, 2011, going into 2012, every man and his dog was short euro right? Wrong, because it went straight up for 3 months.
The important lesson here, is that you must ‘trade what you see, and not what you think’. Price action doesn’t lie, the verdict is still out on the media. If the market is moving up, look to be a buyer. If the market is moving down, look to be a seller.
Trading what you think, means that you are trading an idea, guessing where the market is likely to move next. The last time I checked, guesswork was never the most profitable way to trade any market.
The first step is identifying the difference
Firstly we need to know, what is the difference between trading what we see, and trading what we think? Trading what you think, comes down to external distractions, such as current news events, which way your mates are trading, which country is going bust this week, or what you read in the newspaper last Friday.
Trading what we see, all comes down to looking at a chart, looking at the price action, and trading in the direction the market is moving. Price action will tell you more often that not, where that market is likely to move next. Trading with the trend, only enhances our probability of success.
Can we quantify a fundamental viewpoint? Very difficult. Can we quantify a price action setup – absolutely. As a result, we know that trading strong price action setups in the overall market direction will typically lead to us making money, so why on earth do we feel the need to let fundamentals get in the way?
The simple answer is because we are human. It takes a lot of guts and determination to trade against popular opinion, to take a contrary viewpoint. Sometimes however, that’s exactly what we need to do. Remember that patience is a virtue, and there will always be another trade
I’ll tell you something that I was told when I first started trading…
1. Understand the basics of technical analysis. You don’t need to be a quant-geek to be successful, but understanding the basics would be a great start.
2. Understand the basics of fundamental analysis. Pay attention to trends in interest rates, commodity prices, prevailing direction of investment flows, among others.
3. When the fundamental and technical outlooks for a currency differ, always side with the techs.
Point 3 hits the nail on the head…Having an understanding of the fundamentals is nice, but it can’t make you any money, and it will probably end up costing you. It also kind of makes point 2, well…pointless.
Understanding Price Action and Technical Analysis, can make you money, as a result that is where your focus needs to be, this brings us back to ‘Trading what you see’ can certainly make you money, but ‘Trading what you think
Perhaps one of the most important skills that a trader must develop is ‘patience’. The ability to let a trade pass them by, safe in the knowledge that there will always be another setup at a later date…
As you learn to trade, you must remember that we are trying to make as much money as possible, while losing as little as possible. We accept that there are going to be losses, but we seek to minimize these losses.
Every time we take a poor trade, through frustration, or anger, or trying to force the market, we take a step backwards – we lose. Every step back we take, moves us further away from our target. This means that sometimes we need to learn to pass on trades, to realize that ‘being a pilot on the ground, wishing he was in the air’ is far better than ‘a pilot in the air, wishing he was on the ground’.
Walking away from a trading opportunity is a very difficult thing to do, but sometimes it is necessary to preserve capital and live to fight another day.
Remember that the market is open 24 hours a day 5.5 days a week. The markets have been around for longer than any of us have lived, and they will likely continue long after we die. Therefore we need to recognize that there will always be another opportunity. There will always be another trade. We should focus on high probability opportunities, and nothing else.
Think of it this way…
Let’s you have a $10,000 account, and you are risking 1% per trade. You are looking to make 1% return per winning trade. If you have 7 losers, and 8 winners, are you at +1%? Yes, No , Maybe??? Well I can tell you now that you’re not at +1%, you’re slightly under that figure. 15 trades for just less than a 1% gain? Yes its positive, but is it not better to simply wait for the high probability trades and take a +1%?
Remember that less is more, and that patience is a virtue. Being prepared to walk away from lower probability opportunities and waiting for the obvious setups is a far more sensible option. It leads to less work for a higher return, which is what we’re all after.
As you learn to trade over time, you will realize that less is more, you want to trade as little as possible to make as much money as possible. At Learn to Trade Online, we encourage you to only trade high probability opportunities. Our Learn Forex Course has price action strategies with proven results. Bear in mind that if you trade Daily charts, you can trade from as little as 20 minutes a day…
So remember, it’s ok to walk away from a trade if you don’t like it, in fact I encourage you to do that. Ask yourself if you would put half of your account on the trade, suddenly you’ll find yourself a whole lot more selective…(don’t actually do it though!)
If you’re struggling to get to grips with Forex trading then check out our ‘Learn Forex’ Program that is suitable for beginners, intermediate and advanced traders who are looking to make trading a whole lot simpler, and generate an immediate income from Forex.
K.I.S.S. Keep It Stupidly Simple Approach
The KISS approach can be applied to many different aspects of life, and Forex Trading is no different. Keeping it Stupidly Simple applies to all aspects of your Trading. From Trading Strategy to Trade Execution to Trade Management.
With Forex Trading, everyone thinks it comes down to the next holy grail strategy, some new fancy indicator or the latest computer robot in order to be profitable. In fact the one approach that has stood the test of time, is keeping it simple and trading what you see.
Most Traders harbor similar beliefs, that if they keep searching, they will find the hidden gem that will be their lottery ticket and take them on their way to riches beyond their wildest dreams. This is what typically causes people to blow their accounts, by chopping and changing systems. Always searching for the next best thing, trying to be a Jack of all trades, rather than a master of one. They never learn to trade one system well, instead they constantly find themselves learning another new trading system in a half-arsed manner, losing 3-5 trades and then not understanding what they’ve done wrong.
This is a flawed approach from the beginning, as the next new system is not likely to be any better than the last. Instead traders should focus on trading what they see on the chart, learning technical analysis, create a trading plan and executing it flawlessly.
At Learn to Trade Online, we promote responsible trading, by getting you organized with a price action based trading plan from our Learn Forex Course. In our experience, trading 1 or 2 strategies well, is far better than trying to learn to trade 6 at the same time.
Trade what you see, not what you think.
Trading what you see through Price Action on the chart is a great way to trade profitably. Bear in mind that price action leads everything else. Nothing tells the future, but price action tells you what is happening right now. Price action doesn’t lie.
Nevertheless, newer, less experienced traders, typically get caught up in the fundamentals of trading, imagining that the Euro can’t possibly go up against the Pound, or the Aussie will always keep on going up, because it always does right? Marrying yourselves to these positions, before you’ve even looked at a chart is dangerous.
The Forex market is a very slow moving, stupid market when it comes to fundamentals, you have to hit it with a 2 x 4 to the head before it realizes whats going on, and takes notice of the economic conditions.
Trading with the Trend, the most profitable approach ever.
More money has been made trading with the trend than any other method of trading. After all if a market is going up, trading in the direction of the overall market bias makes sense, similarly if the market is moving down, trading that way and shorting that market is a sensible thing to do.
Therefore one of the most important parts of Keeping it Simple is Trading what you see and Trading with the Trend.
How do you keep your Forex Trading Simple?
- First, learn about price action, learn to trade the price patterns such as pin bars, inside bars, engulfing bars, and other basic price action patterns.
- Second, study cyclicity and what happens when the market trends, and what happens when the market moves sideways.
- Third, learn about price action formations such as symmetrical triangles, head and shoulder patterns, and double tops etc.
- Fourth, create some rules for your trade entry, trade management, trade exit and risk management.
- Fifth, limit yourself to no more than 15 currency pairs.
- Sixth, put it all in a plan, write it up, and stick to it like glue.
Use this 6 step checklist to get your trading on the straight and narrow.
I hope this helps you with keeping your trading as simple as possible, as effective as possible, and as consistent as possible.
How can trading psychology be improved?
You can’t block out emotions. The secret is to understand them, know where they are coming from, and device a plat to deal with them. Of course this is easier said than done, but I have a few tips that should help you:
- Put your eyes on pips, not dollars and pennies: Don’t let the exact amount of money you are making or losing on a trade distract you. The market does not know how much money you had put into a trade, but it knows where the current price lies.
- Swallow your pride: The forex market is not about who’s right when. It is all about making money. There is only one way to measure your success in forex trading. Are you making profits or losses? Nothing else matters.
- You are going to lose money in some trades: Take it to your head. No trader is immune to loses. Just like making profits, taking loses is part of the routine in the forex market. What you need is a solid risk-management strategy to ensure that you loses do not exceed your profits.