5 ingredients you need for excellent trading psychology a beginners guide
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Content (Clickable)
Disclaimer ....................................................................................................... 3
About Author .................................................................................................. 4
Preface............................................................................................................. 5
Introduction ..................................................................................................... 6
The 5 Ingredients ............................................................................................ 7
1 Positive Mentality & Attitude ................................................................. 9
1.1 Can Win ................................................................................. 9
1.2 Never Give Up..................................................................... 10
1.3 Commitment ........................................................................... 10
2 Emotional Awareness ........................................................................... 12
2.1 Prevention ............................................................................... 12
3 Belief ..................................................................................................... 14
3.1 Market ..................................................................................... 14
3.2 Trading System ....................................................................... 14
3.3 Self (Belief) ............................................................................. 15
4 Money Relationship .............................................................................. 16
4.1 Money Objective ..................................................................... 17
5 Routine .................................................................................................. 18
5.1 Trading Process ....................................................................... 18
5.2 Discipline ................................................................................ 19
5.3 Continuous Improvement........................................................ 19
The Need to Balance ..................................................................................... 20
Thank You .................................................................................................... 21
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Disclaimer
The information contained in this guide is for informational purposes only.
I have written the book based on my personal experience and research only.
It does not take into account your personal circumstances; please dont act solely on this information.
By Viewing any material or using the information here you agree that this is
general education material and you will not hold any person or entity
responsible for loss or damages resulting from the content or general advice
provided by the owner of this website.
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About Author
Hello, my name is Alwin Ng and I am the owner of
TradeYourEdge.com, a website to help Traders
improve their Trading Psychology.
Im not a Trading Guru nor have I made my millions from trading (yet!!). However, comparing myself to
many, I do consider myself pretty lucky to be where I
am now.
Trading is a journey and Ive got a long way to becoming a Market Wizard. Nonetheless, I love what
I do and I truly believe that anyone can trade
profitably provided they have the right Education, Support and Commitment.
If you like what I write, please share my website with your friend and family
(oh, and while youre there, please Like my page as well, Cheers!) and feel free to check out my work on my website.
NOTE: If you would like to share this guide, please direct people to the link
below, so they have a chance to join the newsletter as well. Thank you.
http://www.tradeyouredge.com/subscribe/
Cheers.
Alwin
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Preface
When I started trading a few years ago, I often asked, What do I need to be a successful trader? Clearly I was curious. Then, on the first day of trading class, the phrase that really struck me was this Trading Success is 80% Psychology and 20% Technical.
Sadly, throughout my training, there was limited support given in the area of
Trading Psychology. And that was what inspired me to start my website and
to share my experience.
Through my research, I truly believe the 5
ingredients here are crucial to building, not
just a good but, an Excellent Trading
Psychology.
Nonetheless, Trading Psychology is a
pretty mysterious and a fairly broad subject.
As much as I would like to cover all of it
here, that would be too ambitious.
Hence, this is only meant to be a beginners guide to this subject. The recommendations provided are meant only to be a suggestive and not a one-
size-fits-all solution. Hence, please use the information with discretion.
Lastly, I have to give credit where its due. Some of the ideas here were inspired and incorporated from materials by renowned traders/authors
including Van K Tharp and Ari Kiev. I learnt a great deal from them and I
hope to share these with you.
With that, I hope youll enjoy the read.
Trading Success is 80% Psychology
and 20% Technical
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Introduction
Stories of successful and
flamboyant Traders goes around
very often and this inevitably
attracts lots of people into the
Financial Market. Some succeed
while some fail, this routine is
exceptionally common.
Nonetheless, when questioned,
many successful traders cannot
explain why and how they become successful. Typically, they only talk
about the technical know-how or about the systems theyve developed. Dont get me wrong, I believe they have earned it and should be given credit for
that.
On the other hand, when asked about Trading Psychology, they all agree that
Psychology is crucial. However, no one really explains it in detail. They
would talk about what their personal experience and thats about it.
Struggling traders almost always blame the
market. They claim that they are losing
because the market is not in their favour.
Meanwhile, Traders who constantly
breakeven love to jump from one system to
another, they hope to find the Holy Grail
(which doesnt really exist).
What these traders dont realise is that the market is fair and it treats everyone the
same way. It is the traders decision when they take positions in the market and, hence, it is the responsibility of the Trader if they lose.
Instead, if you understand the Psychology of Trading, youll realise that Trading is fairly simple and theres no one to blame but yourself.
This may not be the ultimate guide for you but this is definitely the starting
guide.
Struggling traders almost always
blame the market.
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The 5 Ingredients
A Traders Psychology is heavily influenced by the persons upbringing, living environment and background. Those are the things that made us who
we are and, believe it or not, it has tremendous impact on how we trade the
market.
Hence, you will soon come to realise that mastering Trading Psychology is
not difficult (though not easy) and theres nothing more than making an effort to become better.
The real problem with improving our Trading Psychology is that its difficult to pin point a starting point.
On that note, Ive managed to narrow down what seems like an infinite list to what I
believe are important ingredients that
Traders should have when working on their
Trading Psychology. I hope that this guide
will provide a stepping stone to help you
start.
The Psychology Mind Map (see Diagram on next page) shows 5 Ingredients
that each trader should master to achieve great trading psychology. Along
with that, Ive also included some sub-categories of areas to help you focus.
Trading Psychology is not difficult (though not easy)
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Fig1: Trading Psychology Map
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1 Positive Mentality & Attitude A traders mentality or attitude (or what ever you may call it) is the back bone of his/her trading psychology. And this is because a traders attitude will determine the very first image that he/she holds in his/her sub-conscious
mind. This is very similar to how First Impression (when meeting new
people) works. That image is built within the first few minutes of meeting
the problem and that image will stay on for a period of time until a new
image replaces it.
If the image in the sub-conscious mind is a positive one, the trader will sub-
consciously work towards a positive outcome. And vice verse.
So how do we perceive mentality? My simple
analogy is to ask if a cup is Half-Full or Half-Empty?
Essentially both of these answers are the same
but its the persons perspective that really matters. The situation can be a problem, a
process or just an average opinion.
My interest is to see if he/she approaches it with
a positive attitude or has he/she already given up
right at the start of the approach?
The interesting part to this is that a persons true colour is usually only obvious when he/she is
under pressure. For example, it is difficult to tell if a traders attitude is positive or negative after he lost 3 trades. On the other hand, we can easily
access a persons attitude if he has had 3 losing months.
Hence, often, we cannot jump strong into the conclusion when analysing
ones mentality.
1.1 Can Win
This is not rocket science but this is a major problem that many Novice
Trader faces. They all want to make money (well, who doesnt?). Nonetheless, a Want attitude is actually very far off from a Can attitude. Traders will, without a doubt, go through many obstacles in their trading
career. The bigger the obstacle, the more Can one should have.
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However, as a trader, the challenge
becomes slightly more complicated and
somewhat different to other problems in
life. And this is very much due to the
lonely nature of trading. When the going
gets though, traders will really need to
fight to survive. And this fight is really
between You and Youself. Dont blame the market because it is YOUR decision when you enter the market.
As Will Smith says it in the video (Click here), Greatness Exists in All of Us. Likewise, building a Can Win attitude towards a Trading career is essential to trading success.
1.2 Never Give Up
It is estimated that Thomas Edison failed at making the light bulb 10,000
times before he succeeded.
As clich as this may sound, I want to emphasise that having a Can Win
attitude is slightly different from having a Never Give Up attitude.
A Can Win attitude gives you the fuel and drive to move forward. However,
during the days when Trading results are not going any where, its like hitting a major road block. Throughout days like these, you really need to
stand firm to your conviction and Never Give Up. You need to hang on and
be persistent in your beliefs and stand up from your fall to try again.
1.3 Commitment
Every successful trader, in the
past and present, would have in
one way or another, committed
themselves to achieving success.
Having a full commitment to
success is crucial to a traders psychology. Once traders are
committed, the commitment
comes not just in the form of
Time and Money, above and
beyond that, they also come in
Greatness Exists in All of Us
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the form of Energy, Emotions and Creativity. The commitment that they hold will give traders the strength to make things work and to find resources
that traders would not normally realise exist.
Commitment is indeed a powerful attitude to have. While it is not difficult to
obtain, it needs to come from within, from your desire and your dreams.
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2 Emotional Awareness
Source: Link
According to Wikipedia, there are 6 main types of Emotions. Within those,
there are sub-types as well. To be honest, the list is endless.
Like it or not, Human Emotions are part and parcel of life. Unfortunately,
emotions often distort a traders mind and prevent them from making rational decisions. Emotions can be a Traders worst Nightmare.
However, the idea here is not to ignore or avoid emotions. Instead, traders
should embrace it, be AWARE of it and manage it.
Institutional traders spend a significant of
money getting it right. They either invest
heavily in education or they invest in
sophisticated Risk Control strategies as part
of their Risk Management. However, these
are the precautions that are often overlooked
by self-employed or retail traders. The end
result will vary and some can be devastating.
In my view, traders should nip the problem in the butt before emotions
become devastating. Hence, I cannot emphasise enough that Emotional
Awareness is crucial for the development of trading psychology.
2.1 Prevention
The clear step after awareness is prevention. Preventing a crisis is a much
effective and efficient way of managing emotions.
Human Emotions are part and parcel of life.
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Here comes the next big task.
For traders to prevent emotional issues
from happening, they need to understand
themselves as individuals and emotions
that causes problems. Unfortunately,
there is no fix and hard rule to doing this.
The only recipe that has always worked is
Practise.
Practise getting emotional, practise feeling the emotional turmoil, practise
being aware of your heart beat, practice feeling the pain when a trade doesnt go your way. Seriously, the list goes on.
If you really want this to work, be innovative and creative and find ways to
learn about YOU. It can be a slow and painful learning process but the
reward of knowing your emotions is just too great to be ignored.
Preventing a crisis is a much effective and efficient way of managing emotions.
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3 Belief
A persons Belief is the core reason why one would be comfortable in taking action to achieve specific goals. For example, if you belief that a car works,
you accept it and youll drive it.
The bigger the Belief, the bigger the action will be.
Another important thing to note is that your
initial Belief comes from gaining knowledge
and, sometimes, experience. Hence, believing
in the car manufacturer is only one part of the
equation. The other part is where the driver
needs to learn to operate the car and drive it
in a safe manner. And theres no other way but Education.
Once youve established the initial Belief, you grow it through the Belief Cycle. This is discussed further in the Routine section.
3.1 Market
All financial market behaves differently and most of them have their own
Personality. Sure, some of them are co-related but, nonetheless, there will be
unique characteristics that make it what they are. For example, the S&P is
fairly related to FTSE 100 but both of these markets are driven by different
speculators and governed by different regulations.
Before you trade the market, you would have established a certain pattern in
the market and you would probably have taken a position based on that
pattern. That pattern, which you have established, is essentially your Market
Belief.
3.2 Trading System
Your Trading System is a methodological approach of taking and closing a
position in the market. This system will have specific risk profile, trade
criteria, exit criteria and requires specific market conditions.
Also, the result of the above is that the system will produce a set of trading
results within a specific scope as well, including trading frequency,
Reward:Risk Ratio, Expectancy, expected drawdown and so on.
In my view, your trading system should also incorporate your risk
management system and money management requirements. This is just a
The bigger the Belief, the bigger the action will be.
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practical approach because you should not enter the market without first
establishing your risk and potential financial rewards.
3.3 Self (Belief)
This is one of the most crucial parts of
trading psychology. This is because you,
the trader, are positioned between the
Market and the Trading System. It is
pointless to belief in the market and/or the
trading system when the trader fails to take
trades.
Above and beyond that, Self Belief is about you, your values and your ability
to eliminate the doubts within you and make a difference in trading (or in life
in general).
Remember that Nobody can make you feel inferior without your consent. The opposite is also true; having Positive Self Belief is a choice. It might not
be the easiest thing to achieve but its not impossible to change if youre currently in the negative zone.
Nobody can make you feel inferior without your consent.
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4 Money Relationship
Money is a unique asset but, more
importantly, this asset can make or break
you. As money is such a personal matter,
everyone views it differently some people love money, some need money
and some see it as a means to an end.
Essentially, what you really need to know
is this What is YOUR Relationship with Money?
The biggest problem with this is that many traders THINK they understand
money. Unfortunately, this is not a typical question and many traders have
not thought about it thoroughly.
The following is an example of how traders would get confused.
Case 1 Trader A is a successful trader. He took a personal loan to top up his trading account a few years ago and he has now repaid all
his debt. He believes that to make sufficient returns, you need more
capital.
Case 2 Trader B is also a successful trader. He believes that the quickest way of making money from taking is by trading leveraged
financial products only. For example: trading stocks and equities are
less attractive compared to trading stock options or futures.
Now, Im not here to debate which one is a better money manager, nor do I want to see whose money belief is better. In fact, in my view, both these
traders are doing exactly the same thing they are both trading on leveraged finances.
However, if Trader A did what Trader B
had done (and vice versa), the results of
both the cases might have been completely
different. Trader A might not be able
comfortable with the P&L fluctuations of a
leverage financial product. And Trader B
might have sleepless nights due to the
liability in his personal account.
I hope you get the picture, traders needs to dig deep to understand how
money affect them and how their money beliefs can be very different from
the conventional view.
What is YOUR Relationship with
Money?
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Once youve established that, you can then decide if Money is a Friend or a Foe of your Trading Psychology and move on by taking appropriate actions.
4.1 Money Objective
Once you understand your relationship with money, it is also useful to
identify the reasons for having money. Questions like these are critical:
What do you want from Money?
Is Money the Only solution? Or is it the best alternative?
And thats the point of this Ingredient. If you want a trading success, make sure to establish clearly the psychology and relationship you have (or would
like to have) with money.
Without establishing clear and valid purposes for achieving financial goals, a
trader may find it difficult to take relevant actions to achieve these goals.
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5 Routine
You may ask what Routine has to do with Trading Psychology. Well, in my view, your routine is where you build your Belief Cycle.
Belief-Action-Results-Review...
A simple Belief Cycle is based on the above chain. Trading the financial
market is fairly routine activity. In fact, the more you trade, the more
repetitive it becomes and, without even realising, youre continuously increasing your Belief.
A good routine is imperative because good routines would ensure that
Actions are managed and Results are monitored. This would then lead to a
reasonable Review process. With that, any Review outcomes become
constructive feedback that reinforces the
Belief, before new and improved
actions are taken.
On the other end of the spectrum, if
theres not routine, no Belief Cycles would ever be built.
5.1 Trading Process
As Van Tharp says it in his book Super Trader, the trading processes are the things that you need to do on a day-to-day basis in order to be a good
trader. In my view, the following items are vital and are the minimum
requirement to establishing a good trading process.
Trading Plan
A good routine is imperative.
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This is a written document to show what, how, when and why you intent
to achieve trading success.
Trade Review
This can be in the form of a trading journal. Which is a record to show
what you actually did? This will eventually be marked against your
trading plan to identify any variations.
5.2 Discipline
Just to be clear, discipline is NOT a sub-set of Routine. However, Ive deliberately put Discipline under this heading because, essentially, you need
to have some sort of discipline to be able to execute a fixed routine.
Its easy to follow the plan a few times but if you had to repeat the same routine in the long term, youll definitely fail without discipline.
This is especially true in the trading world because trading can be lonely and
there is less chance of relying on others to get you going.
5.3 Continuous Improvement
In the war time, soldiers are often told not
to let their guards down no matter how
victorious they were. And this is because
youll never know when your enemies will strike again.
This metaphor is applicable to Traders as
well. Traders should constantly find ways
to improve themselves and their trading
because once they become comfortable, they become sluggish and thats when mistakes start to crop up. If you dont make an effort to prevent one mistake, more will along and stay.
Also, having a routine which integrates continuous improvement will most
certainly enhance your trading belief and make you a greater trader in the
long term.
Traders should constantly find
ways to improve themselves and
their trading
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The Need to Balance
I strongly believe that Excellent Trading Psychology is built upon the
confluence of all the Ingredients mentioned above. Yes, Ill say it again, traders will need all the ingredients mentioned.
Above and beyond that, the trader needs to be good in all of them
individually. One ingredient cannot do without the other because they are all
interlinked.
Unfortunately, because each trader has a
different story, they only focus on areas
where they THINK needs most help and
often ignore anything else. Hence, they
often overlook the need to use these
ingredients in parallel.
Just like baking a cake. You cant bake a good butter cake without good butter but
you also cant bake it without the lack of sugar, flour or milk (ok, I dont know how to bake a cake, but I think you get the point).
If you cannot focus on everything at the same time, my advice is to find your
weakest link and work on that as your starting point. And then, you can
gradually move from one ingredient to another until they all work in parallel.
One ingredient cannot do without the other because
they are all interlinked.
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Thank You
I hope youve enjoyed the book as mush as Ive enjoyed writing it. I cant thank you enough for taking time to reading this and for your support in my
work.
Please leave a comment at http://www.tradeyouredge.com/subscribe/, or if
you rather contact me personally, please contact me on my Contact page.
Lastly, if you havent already, please follow me on TYEs Facebook page, on Twitter or LinkedIn.
Thanks again and I wish you nothing less than success!
Cheers,
Alwin Ng
DisclaimerAbout AuthorPrefaceIntroductionThe 5 Ingredients1 Positive Mentality & Attitude1.1 Can Win1.2 Never Give Up1.3 Commitment
2 Emotional Awareness2.1 Prevention
3 Belief3.1 Market3.2 Trading System3.3 Self (Belief)
4 Money Relationship4.1 Money Objective
5 Routine5.1 Trading Process5.2 Discipline5.3 Continuous Improvement
The Need to BalanceThank You
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