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The Pleasure and Pain Game

I have been involved in trading the financial markets for quite some time now and it has continued to amaze me just how much I have learned about myself, my beliefs and the way things work, since first deciding that I wanted to be a trader. Like many new recruits to the market, I had my very own perception of the way things worked in the world of trading and thought that I knew what I should be looking at to be successful. I read pretty much any fundamental analysis I could get my hands on (although I hated doing it!), I sat with my finger at the ready to click buttons when the latest major news announcement was released, thinking I could capture easy pips and then tried almost every single form of technical analysis I read about, seeking out the most powerful way to make lots of money in the shortest possible time! Do any of these pursuits seem familiar to you?

I ask because having taught many hundreds of students across the world through Online Trading Academy, I have found that we all share or have previously shared, many of these or very similar experiences and the reason is simple: we are all just human beings wired to do things a certain way. At our rawest level, we are basically programmed to do 2 things on a day to day basis. These are nothing more than to seek out pleasure and avoid pain of any kind. Our existence as creatures of habit means that with this basic function in our minds, trading can quite easily become a hugely challenging task before we have even really begun, inherently due to the fact that our DNA is wired against us! Think about what I stated beforehand: We seek out pleasure and try to avoid pain. What does this mean in the context of trading? Initially, it means all  of us have a huge task ahead of us in FX or any other form or trading, if we hope to eventually be successful and consistent at it. This is not because we are stupid or incapable of being good at trading, it is because of the mental challenge we face from the outset.

If you have read my articles before this one, you will know that I constantly recommend the use of a detailed trading plan and a simple rule based strategy in your trading and investing endeavors. The reason why I place emphasis on the “simple” part of this is because we need to be able to take action in the market when the time is right and not hang around and ponder over our choices for too long, otherwise we are in big danger of over-complicating the opportunities right in front of us and then never making a decision, or over-complicating the situation and then making too many decisions! The easier it is for us to spot a trading opportunity in the market, the easier it is to be able to place that trade and take action. The more and more detail we apply to each and every trading opportunity creates in turn a greater number of questions for us to answer before we can actually pull the trigger.

By using a simple plan we are helping ourselves to take action when action is required. However there is more to this than just being able to pull the trigger with ease. For many traders, pulling the trigger for an entry is not the problem at all. In fact it is probably the opposite – they find themselves trigger-happy! Therefore to cure this ailment, the simple trading strategy again plays its vital role in that the more simple it is, the less there is to modify and change. On the flip side of this, we will always see that the more detailed or complicated the trading strategy is, the more there is to potentially change about it. Have you ever heard of the phase, “There are too many moving parts?”

As you get further along your path of education with the FX markets you will soon begin to realize just how important the simple trading strategy is and why we also need to understand our own mental pitfalls before we even begin to trade. Let’s assume that we now have a simple strategy in our trading toolkit which involves buying at Demand and selling at Supply. We are going to focus on applying this strategy without question, meaning that every time a trade setup appears to us, we aim to take it. The first trade comes up and we take it and it works. The result is we make money and we feel good. Trade number two comes up and we take it in alignment with our trading plan and again it works out and we make money. How are we now feeling? Probably even better! No doubt that we are finding pleasure in our action thus far.

A day later and we come across another setup. Again we take the trade and this time we are stopped out. Expecting this to happen from time to time we move on and await the next trade. It comes up, we take it and again we get a small loss. In fact the next trade we take again results in a loss. We now have a total of three losing trades in a row. How do you think you would be feeling if you were fairly new to this game? Probably upset and little unhinged? This would be perfectly normal, considering how we are wired. Remember we are built to seek pleasure and avoid pain. The first two winners gave us that pleasure but the last three trades resulted in pain, yet we can’t expect to win every time can we? This is a perfectly normal turn of events in trading, whether we like it or not.

The reality of the markets actually dictates that we could get even more losses than this in a row. The different permutations and outcomes are virtually endless. However, if a trading strategy has been proven to work over the long run, with a quality risk to reward profile, it needs to be adhered to, no matter the way things play out. Ask yourself a question: is it the trading strategy producing the results or the trader producing the results? The biggest danger in the quest for ongoing trading success is the challenge of moving the goal posts when things don’t work out the way we hoped. A trading plan or strategy could be perfectly sound but if a trader hits a losing streak then there is a danger of them attempting to avoid the pain by changing the plan – avoiding the pain allows pleasure after all! We need to ignore these needy aspects of our raw human psyche and focus on the task at hand: consistency in execution and lack of emotion. The big question is how to do it. Join me in two weeks for a further insight to how we can block out emotion and maintain our objectivity to the highest degree in our trading.

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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