As many of my regular readers of these articles may already know, I am a big believer in recognizing the mental challenges which trading brings to us all in the ongoing quest to attain and then maintain consistency. Without a shadow of doubt, we all need to understand that if our head game is off track then our results will completely reflect this simple fact. Two weeks ago in my last article, I spoke of how human beings are hard-wired to seek just a couple of simple experiences in life. Number one protocol is to seek out pleasure and the second protocol is to avoid pain of any kind. Be it emotional or physical in nature, both pleasure and pain are felt and recognized in us all and if as traders we allow our experiences of pleasure and pain to influence our judgment and actions in trading, we will soon find the door of failure slamming firmly in our face.
Emotions and trading simply do not mix. Sure we are allowed to get a little frustrated from time to time or be happy when a particularly big win comes our way. After all, we are only human at the end of the day. However these emotions do need to be kept in check over the long haul, especially when faced with the decisions of when to take a trade, when to not take a trade and also throughout the entire trade management process as well. The biggest problem with the feelings of pleasure and pain, as I explained in the previous article, is they tend to deter traders from maintaining a steady course of action. Trading is a game of consistency after all and those with the ability to be consistent in their actions and planning tend to reap the greatest rewards. An extended string of losses can cause real pain for a trader, resulting in them changing a system which may be perfectly sound in the first place, or vice versa; a long run of wins can also generate such euphoria in us, that we unintentionally get cocky and start to bend the rules thinking we have that Midas Touch, until the market one day inevitably decides to humble us in the blink of an eye.
With such mental challenges facing us each and every day in the Forex markets, we have to be fully prepared at all times and do everything in our power to combat those ever present emotions at every step along the way and remain as objective as we possibly can. As a Lead Instructor with Online Trading Academy, I have the ability to reach out to my growing number of students worldwide on numerous occasions every single week in the ongoing Extended Learning Track online program. During these sessions we not only engage the live markets during trading analysis sessions but we hold numerous lesson days, where together we explore a number of techniques and methods to remove emotion from the market, thus greatly enhancing our odds for trading success. Now, I may be limited by the scope of this article and the nature of the written word itself but I would like to share a few ideas with you on how I suggest you can control those emotions in your trading.
1 – The Candlesticks
This is probably one of the very first things I suggest to any student I meet who is currently struggling with the action on the charts making them jump into and out of trades. It is amazing how easy it becomes for us all to react to the never-ending changes in the market as the trading day progresses. Prices move up and prices move down and to most, this alone generates an intense urgency to feel like you are “missing out” on a move and jump in without a second thought. Reacting to price moves is never going to be a winning play in the FX markets and can often cost the novice trader dearly. Bring in a series of big red or big green candlesticks and all but the most disciplined traders around are facing a real recipe for disaster if they are not fully prepared. It is so easy to watch those parabolic green candles move higher and higher on the live chart and find yourself almost “forced” to take the long trade, only to find yourself quickly on the wrong side of a market which is falling down now just as quickly as it rose in the first place. Sound familiar?
If this is a situation you find yourself relating to, then try setting up your price charts to look something like this:
As scary as a candlestick chart without colors may seem at first glance, step back a second and think about it: Why do we need to have green and red candles in the first place? What real purpose do they serve the analytical process at all? Here at Online Trading Academy, we understand that Institutions make money in the markets by buying low and selling high. When any trader empowers themselves in the market by adopting this simple understanding of how professionals do things, the color of their candlesticks suddenly becomes pretty much redundant. How many times does it feel like every time you click the buy button, the market instantly goes south? All rallies are eventually followed by drops and vice-versa. Stop reacting to the candles and plan around price.
2 – The Rule-Based Strategy
I mentioned above that Institutions make their money in the markets by doing little more than buying at cheap prices and selling when prices are expensive. As speculative traders ourselves we need to learn how to recognize when prices are out of balance to the greatest degree and take action at these areas of Supply and Demand. This can be done by knowing what you are looking for in advance on the price chart and identifying objectively when to enter the trade. I like to look for these Supply and Demand zones on my charts, much like the ones below:
You may be thinking why I have picked these particular levels at all? This is actually due to a number of factors and tools which we like to call “Odds Enhancers”, of which there are around 12 in our curriculum that are fully explained throughout our educational courses in both the classrooms and the ongoing XLT. I have included two such odds enhancers on the chart above. However, it should be noted that regardless of the components behind the strategy itself, there are rules which define the reasons for buying or selling, for taking profits and most importantly when to get out for a small loss if the trade is wrong. All of these various features and aspects come together to complete the Rule-Based Strategy. No matter which strategy you choose to employ in your trading and investing needs, there needs to be rules and discipline behind it, thus allowing you to remove the emotion behind pulling the trigger and managing the position itself. When the trader employs a rule-based approach to the market which allows them to buy and sell only when the right opportunity comes along, they will be acting in a truly objective manner and therefore putting themselves in the greatest position for potential success.
3 – The Filters
Fundamentals, news, economic releases, CNBC or just a friend’s opinion, all have one thing in common: they can easily sway even the most seasoned trader’s plan or thought process in the blink of an eye. With so many factors out there which can influence our reasons for taking a position in the markets, is it any wonder why so many people struggle with their consistency? I describe these potential influences as the minefield and recommend aspiring speculators do everything they can to avoid such infested waters as they can. As my own trading has progressed over the years, I have intentionally distanced myself from anything which could affect my judgment or reasons for taking action in the market. By following a simple plan which is in turn, based around the rule-based strategy, a trader effectively filters out the noise of the minefield and gives themselves a highly increased chance of being on the right side of the market more often than not.
Obviously you can never expect to win all the time and those losses will come (in fact they are a vital piece of the success puzzle), but this is not the issue at hand. The question we really face, is understanding how we can ever hope to be systematic in the execution of our strategy if we listen to all the opinion around us? What indeed is the point of having the rule-based strategy at all, if we can our trade plan each and every time we hear about or read another insight upon the market? I call it “putting on the blinders” or literally zoning out from the news and opinion around us. By following a disciplined trade plan which has been built around a powerful, yet simple rule-based strategy, the consistent trader or investor will always be making their decisions based upon the reality of price, as opposed to the perception of value. Don’t listen to anything but your plan.
I hope this small selection of tips helps in your trading. Remove those emotions and you will undoubtedly find yourself facing far fewer hurdles in the future.
Take care and be well.