Trading Psychology Management

Trading psychology management is not simply controlling your emotions, and the issues typically referred to as trading psychology; trading psychology management would be a process used to control the actions that you take while trading that cause these emotions to occur, which then cause you to make trading emotion decisions instead of trading method decisions.

What are you doing to include trading psychology management as part of your approach to learning to trade, as part of your approach to progressing as a trader?

If you are going to trade, you are going to be affected by psychology - this is the only guarantee from trading that anyone will ever get.

Traders spend so much time searching for that perfect trading system, but they do so little to actually prepare to become a trader - preparation that includes their learning approach, preparation that includes their mental approach to the emotions and stress inherent in trading.

WHY Is That The Case?

Are you aware of the need for trading psychology management?
Are you avoiding the need for trading psychology management?

Are You Actually The Cause Of Your Trading Psychology Issues?

This would be the situation if your approach to trading isn't one of a learning progression that includes a continuum of: study, performance, feedback, adjustment - with feedback being the most important component to this progression, as it's feedback that is necessary for the understanding of things that you are doing wrong, but cannot determine for yourself. Unfortunately, many people will not put themselves in a position where they will allow feedback. This is a primary example of trading psychology management avoidance. Since feedback is also stressful it's avoided, but the avoidance interrupts the learning progression, which in turn keeps the person from being able to 'go forward' as they also aren't able to effectively learn on their own - leading to more stress and emotion - etc etc etc.

This would be the situation if you are doing anything while paper trading, that you wouldn't plan to do if real money trading. Why would you spend your valuable time 'practicing' trades that are non-method, what do you think this accomplishes besides invariably creating bad habits? Isn't the reason for paper trading the learning of base method setups that you can trade with real money, before you have real money at risk, don't you want to be a real money trader?

This would be the situation if you are making a large percentage of non-method trading decisions AND then 'excusing' those decisions through rationalizations and justifications. What is your goal, being right or being profitable?

This would be the situation if you are taking a large percentage of non-method trades like those 'missed' trade chases, those breakouts at resistance or support, those multiple congestion trade 'flips'. Why are you trading non-method trades to this extent, have you not defined base method setups?

These situations are all actions interrupting learning and leading to losses that come from emotion and continue to escalate emotion to an extent where method does not exist. The outcome makes profitability impossible, yet you can't 'blame' method because your aren't trading method - you are the cause.

http://www.tradingpsychology1.com/trading-psychology-management.html

Floor Pivot Trade Setup

This sell was done both as a floor pivot reject trade setup BUT additionally as a core method setup because of the additional setup components in the combination that are selective for price breakout-price continuation.

you know the left yellow square because of it being the low between the 2 high points from the price momentum divergence - you know the right yellow square as a test of this price after the initial floor pivot reject.

the red dot sell is a break2 with mex flow AND entered into the triple bottom breakout of the 2 yellow squares - the trade then having diagonal breakout potential trading back through the previous left swing.

this trade was another example of a price specific triple breakout-diagonal breakout potential chart structure setup - further enhanced because of the additional setup selectivity components that were part of the setup combination.

Floor Number Trade Setup

http://tacticaltradingmethod.blogspot.com/2008/06/floor-pivot-number-trade-setup.html

Trading Price Action Setups

6-25 721.10 High: was there a base setup that occurred after the russell high to be short by the last bar on this chart --- IF yes what-where - IF no what was the first base setup to the right?

the price action area prices in this area were 719.70-720.40 - 721.20 --- the 721.10 made a 721.20 test pmd high AND then made the initial reverse-went into consolidation between the high AND the 719.20 low between the momentum high-price high.

720.30 double test-reject of the 720.40 paa price - i would have liked to have sold the 719.70 paa price break AND didn't react - then selling the reject into the inverted diagonal failure break of the 719.20 price = 719.4030 fill.

this was a very good previous price-price action trade setup combination BUT the setup was also 'masked' by using the fast chart which is a typical situation during consolidation periods where price overlaps and loses pattern-clarity.

use a faster chart for timing - for directional resumption OR during 2-way market periods where there is swing slope and you can continue to see setup clarity --- BUT don't use a faster chart simply because you think you will be able to enter earlier - what you might do instead is hide some of the best available trade setups.

http://www.tradingpriceaction.com/

Price Action Trading

Core Method Trade Setup For Price Continuation

tradesetupB: the green dot buy is a right side failure of a left side price - that price being additionally significant because it was part of a previous trade price action.

buy the yellow-blue line break2 with mex flow [blue-purple lines] through the 2 yellow squares triple top break - the left yellow square coming from the lower high into the red dot sell - with diagonal breakout potential through the previous left side swing.

this combination triple top break through a left swing diagonal is a core method setup for price continuation.

Paper Trading and the Transition to Real Money Trading

Paper trading is widely discussed regarding its merits, and whether it is of value to a trader as they try to make the transition to real money trader. One viewpoint is that since paper trading is not real, the profits are meaningless, and are no indication of real money profitability. An opposite viewpoint would state that paper trading is an important step in the trader’s learning progression, and regardless of whether it is real, if the trader cannot ‘properly’ paper trade, then they will not be able to real money trade.

I began trading in early 1995, with the intentions of becoming an options trader; my first trading education was through an oex options teaching service. Besides options training, the service included ‘tape’ reading, trade management AND sp500 index futures trading – also included in the service was the prevalent attitude that paper trading was for ‘sissies’.

So I was a new trader, trying to learn and understand completely new concepts and ideas - what was called a trading method AND I was ‘practicing’ with real money – because paper trading was for ‘sissies’. What did I accomplish, besides a big draw down in my account? I quickly introduced to trading psychology and the related implications – something else I also knew nothing about. Losing money and a trading psychology ‘wreck’, both from the losses and thoughts like I was too ‘stupid’ to ever learn how to trade, became a combination which took me out of futures trading, and then unfortunately carried over into my options trading which I had previously been doing well with. I just couldn’t take it any more – I had to somehow start all over, or just quit for good.

Paper Trading Viewpoints

Consider: simulator fill prices are not real and won’t be attainable with real money. Even if this is correct, is it really an issue unless the trader intends to be a scalper, trading for very small profits, and thus each tick is critical? Granted, but shouldn’t a beginning trader be very selective, focusing on learning their method and the ‘best’ setups that method provides? This would be my viewpoint, and in this capacity paper trading fill prices are not an issue.

Consider: the trades are being done with no risk. No, there isn’t any financial risk in paper trading, but I actually haven’t met nearly as many profitable paper traders as one might expect. Why would this be the case if being able to trade without risk was such an easy thing to do? As well, what about self-esteem risk, and an attitude like - how can I be so bad that I can’t even paper trade? The risk feelings like these are probably greater than that of financial risk, and if they are going to surface, you would want to encounter them before trading real money. As well, even if the issue was only one of financial risk – wouldn’t you want to begin with the confidence of knowing that you were paper trading profitable? It would be hard to imagine a losing paper trading being able to profitably trade real money.

Consider: there is no emotion involved with paper trading. I was in our chat room watching a paper trader post their trades in order for me to give them feedback, and I noticed that one of their specific plan setups wasn’t done. When I asked why, the trader told me that they were ahead for the day and didn’t want to risk those profits. But the profits aren’t real – how can you not take a ‘base’ method setup when paper trading – isn’t that the point? Would you be in agreement, that if paper trading profits could be viewed in this fashion, that it has the ability to become very real and thus emotional to the trader? I would suggest that this is related to paper trading really not being ‘so easy’, and as mentioned above, self-esteem risk can be very emotional.

Besides examples like this, emotions can be added to the paper trading process. Throw away your simulator, and then go into a chat room and post all of your trades – no ‘youknowwhating’ around where you wait to see if the trade was profitable before you post it, like a number of traders that I have seen. What’s the point, and when you consider the underlying implications of ‘needing’ to do this – the issue certainly isn’t about whether paper trading is of value or not, but certainly best to find out before trading real money. You must post immediately and without lag, giving your direction and entry price, along with subsequent posts of any partial profits, and of course your exit, which ultimately is the determinant of whether the trade was profitable. There is no need to make any comments, or answer any questions regarding your trades – simply post the particulars as fast and real time as possible AND see if you feel any emotions doing this in front of the rest of the room while you go through a series of losses. Do you want to add even more emotions? Go through the same posting process, but do so where the rest of the room actually knows the method that you are trading, and what the trades ‘should’ be. You will quickly find out just how emotional paper trading can be – actually a very valuable exercise for the paper trader to do.

Paper Trading And Making It Further Beneficial

I have two predominant problems with paper trading, but this is with the trader’s approach, and not with paper trading by definition: (1) the trader does ‘things’ paper trading that they would-could not do with real money (2) the trader views paper trading profitability, instead of paper trading proficiency, as the guideline of whether they are ready to begin trading real money.

I have seen too many paper traders, continuously and knowingly, over trade ‘non-plan’ trades, with trading size that is greater than they could afford the margin for in a real account – let alone accept the risk of loss, while also holding trades for risk amounts that they would not accept with real money. Viewing paper trading as a ‘step’ in the learning progression and transition to real money trading, it is critical that the paper trader only trades exactly what, and how they would trade with real money. Don’t allow yourself to turn paper trading into a game, supposedly because there is no risk – the risk of making bad habits that you can’t correct is tremendous, and will circumvent any attempt to trade real money. This is the time to learn YOUR basic trading setups, and make necessary adjustments to them and your entry-exit timing, in order to then make money trading them – this is NOT the time to turn your simulator into a pinball machine flipping at any ball that comes near you.

There is a problem with focusing on trading profitability -vs- trading proficiency. To begin with, profitability places the focus on money instead of on plan. And what is profitability – if you take 10 trades and make $75 are you profitable? Technically, if you are net ahead you are profitable, but what if those same 10 trades had a potential of $1,500, and you only made $75 – are you really profitable? This is what I am referring to when I think of trading proficiency. Instead of focusing on the common metrics, such as win:loss or win size:loss size ratios, I am most concerned with the win size:potential win size ratio, and want to maximize this percentage to the extent that is possible.

For instance, when a trader asks about adding trading size, taking the attitude that if they can make $100 trading 3 contracts, then they can make $1,000 by trading 30 contracts, the first thing I ask them is what is their proficiency ratio – why increase contract size and the corresponding trading risk, if you ‘should’ be able to make more money from smaller size? This is especially important for the paper trader, where they should not regard simple profitability as an indication of readiness to trade real money, but consider proficiency – for instance, begin trading real money when you are 60-70 percent proficient with your paper trades.

So What Is Your Viewpoint Regarding Paper Trading?

I never thought that I would ever make a dime trading, let alone be able to trade for a living or become involved with trying to teach others to trade – was this simply a function of starting over and paper trading? Granted that is too simplistic, however, I do know that it would have certainly changed the beginnings that I had, while very much shortening my learning curve, and reducing a lot of pain.

Clearly, I am on the ‘side’ that believes that paper trading is not only beneficial, but that paper trading is also necessary – however the value received will be dependant upon the trader’s approach and attitude. Needless to say, paper trading as described is something that I have always strongly recommended.

Trade Setup Selectivity

euro1: we had a method 'template chart' for euro trading this morning - what-where were the trade setup combinations that made the trades more than right side base?

why refer to these charts-any charts as template charts? because they are core method --- they combine real price-price action prices WITH base setup components WITH breakout potential that synchs with the price specifics involved-the failure breaks of these prices.

red dot: price momentum divergence swing reverse into the left side diagonal as a price break2 with mex flow entry - go back to 411ct AND see the area low and how it became a right side price specific --- continue to extend the price to the right.

green dot1: this is a clear initial base setup - the left-right price specific break2 with mex flow that also has the left swing as diagonal breakout potential.

green dot2: do you see a base setup here OR is there no trade because mex flow hasn't completed the fast chart roll back - you have 120t mex flow --- i would suggest that price traders have a selective base setup - the trade was done as an addon to green dot1.

• price specific shift-reject with 120t mex flow - with a higher low
• left price action from the blue square-the spike reject into the sell - as the right side entry price OR failure-break entry combination
• into the 2 yellow square right side triple top break
• which is a failure break of the left side pmd high
• which is a failure-break of the left side pmd high

Consecutive Loses AND The Trading Psychology Spiral

You go long and the market immediately goes down - you go short and the market immediately goes up. That's 2 consecutive losses AND you are getting a little 'anxious' so you don't take the 'next' trade and it of course works. BUT to make the situation worse you then 'chase' the entry and it immediately reverses - another loss AND this is 3 in a row. Ok 1 more try - this can't happen on every trade can it - pray mode?

This time though you will be real clever. You have at least noticed that the market is in a range AND it's the bounce from the low/retrace from the high that is causing all the problems. So this time the next trade you take will be a range extreme fade AND the hell with your trading method. The market is at the range low AND per your new ‘on the fly’ plan you go long AND the range immediately breaks out giving you consecutive loser #4 - trading against a method trade that is going far enough to pay for the previous 3 losers and make you net ahead.

Now what are you supposed to do – QUIT? AND to be sure that there is no more temptation – your throw your computer out the window and dive out right behind it. You are in a trading psychology spiral.

WHAT is a Trading Psychology Spiral?

I think of a trading psychology spiral as the transition from trading losses that you have accepted both as a part of your trading method AND as something that is inevitable in trading, into a surge of emotions that continually builds to a point where you can no longer accept anything. As this eventually ‘spirals’ out of control – trading method becomes completely ignored AND is replaced by emotional responses and decisions for everything that is done. Even if quitting was really the only viable thing to do at the time, the tpsych spiral can cause an emotional response where this isn’t considered until the situation becomes so desperate that the trader can’t take it any longer AND does have to quit.

This isn’t a discussion about emotions and trading, and the various fears and issues that keeps a trader from trading to begin with; as we know, emotions are an inherent part of trading – you learn to control them OR you can’t trade. This is a discussion about emotions that are typically controlled well enough so that you ‘can’ trade AND then something happens where the trader loses that control and their emotions spiral - a series of consecutive losing trades is a root cause for this happening.

This also isn’t about something that happens only to inexperienced and unprofitable traders. There are going to be those times where nothing a trader does will work, and that result is going to be a series of consecutive losers. So the situation is the same, it’s the reaction that will be different. For instance, traderA may go into a panic causing them to spiral out of control, losing all self-confidence and self-trust, and ultimately more money than was intended. On the other hand, traderB may go into a period of revenge trading, coupled with an increase of their trading size, as they are ‘sure’ that each next trade is going to bring them back to even. Also a spiral out of control AND as the losses continue, ultimately a loss of more money than was intended.

Controlling The Trading Psychology Spiral

consider: each time a trading psychology spiral occurs AND you go out of control - the quicker the next spiral is going to occur AND the faster you will go out of control when it happens. this is going to continue until trading becomes to painful AND you will not be willing to trade any longer.

consider: it is better to work through the emotions instead of quitting. quitting is too easy AND provides no solution or aid in preventing this from coming back and intensifying each time you have a rough period. as well - you have lost the ability to 'count' on yourself when you need to do so the most. to control a tpsych spiral before you go out of control is a tremendous win in and of itself - also do this and get your trading back on track AND you will have made gains the value of which you can't imagine as you will know that you may have losing periods BUT you can trust yourself to remain in control and not magnify the damage.

Trading Psychology - IF Lose Discussion

consecutive losers in short time - becomes thinking that you don't know how to trade
method trades BUT losing - the method doesn't work

Trading Method - IF Lose Discussion

were the trades really method trades? IF yes - retain confidence and stay with the method based on your experience and consistency of repetition over the larger number of trades. IF no - be sure that you are only 'base' method trading - it is fine if these trades lose AND there is no way to limit those times that they may be consecutive.

Self Awareness AND Realization

transition - normal trading emotion to anxious/start spiral to out of control
be aware - what do you most want to remember/think about to 'stop' the spiraling

Read More: http://www.tradingpsychology1.com/consecutive-losses-trading-psychology.html

Chart Structure - Horizontal-Diagonal

I liked trading this chart period because besides being able to make trading method setup decisions, I can also see additional price relevance to the trade setups.

yellow line - blue line: yellow line previous price action from the channel reject back into 'sell mode' - extend this price across the chart.

yellow dot: i do not have a trade setup here on the horizontal line breakout - if you look inside the yellow square below the chart - you can see that the trade would be against momentum flow.

red dot: price momentum divergence high AND back to the horizontal line - lower high reject of the purple square which was the left momentum high - with mex flow down on the retrace to this lower high. also there is a synch diagonal line - this horizontal-diagonal line breakout structure added to what is a method base setup gives additional potential for continuation after the trade entry.

blue dot: this is a base first continuation setup to the red dot - the blue horizontal line rejects as resistance STILL with mex flow down - the reject entry includes an entry into the 2 yellow square triple bottom break WITH room to the diagonal start point.

Floor Pivot Number Trade Setup

The red dot sell is both a base trading method setup AND a floor number base trade setup - the combination providing for a more selective trade.

yellow dot1: no this is not a break2 with mex flow right side base trade --- not right into the floor number - otherwise i would have done this buy.

yellow dot2: no this is not a pmd swing reverse --- it's a floor number breakout.

red dot: yes this is base AND with selective components --- the right side break2 with mex flow is also a reject-failure combination - floor number reject with mex flow AND failure break of the left right price - into the horizontal triple bottom breakout WITH diagonal breakout potential below that from the previous swing.

http://www.tactrading.com/floor-pivot-trading.htm

Trading Psychology Plan

You have a great trading method and trading plan. You have profitably paper traded, and you now start trading real money AND everything falls apart, your method and plan no longer work. Everything you do is wrong, and you continually lose money - you come to the point where you can't even trade any more.

I do not think any discussion about trading AND/OR consideration to trade can be done without a harsh realization - the VAST majority of all traders lose AND many of these people are extremely successful in other walks of life. WHY is this - WHY aren't otherwise successful people also successful as traders? The REASON that most traders lose is that they are NOT psychologically prepared to trade, that is they are NOT prepared to enter into something where they have no control over the outcome from the advantages that they may have developed in other successful endeavors.

I had read an interview done with a group of four trading psychologists AND after reading this article I thought about how many times I had heard and used the words trading plan, but NOT the words trading psychology plan.

Consider the following trader particulars from one of the interviews:

John Smith (not his real name) came to me after a year of watching the markets. He said he wanted to support himself by day trading the E-mini S & P. He had only taken three or four trades in the past year. His proven system offered him 15 to 20 trades a day and made money on paper. He had the idea that if he studied enough, he could pick out the winning trades and let the losers ago. In fact, those few trades he had taken had been losers. Time and money were slipping away. It costs money just to sit there day after day doing nothing.

John said he was learning by watching the market. I suggested that what he was learning was how not to trade. I suggested he start each day setting his intention to actually trade, and that he leave the screen as soon as he let the first trade go by. He agreed, but was unable to do that. He sat there watching, telling himself he was learning about the market. He had developed a comfortable spectator sport.

When fear is stronger than desire, fear dominates. John feared losing money, and he feared being wrong. Each time a signal came up, he imagined that if he took the trade, it would be a loser. Imagination is stronger than will power, and so he was unable – no matter how determined – to put the trade on.

Over the next three months, John began to trade. First, he mentally rehearsed taking all the trades. He shifted the belief that losing made him a loser and was wrong, to the belief that losing is a natural part of the game and that not taking all the trades is wrong. He shifted his imagination from losing to winning by asking himself whenever an entry signal came up, “What if this trade is a big winner?”

Most importantly, he learned to set a new intention when he began each day’s trading. He shifted his intention away from losing or making money to following his system. He understood that the long-term consequences of following a winning strategy consistently was indeed wealth creation.

He developed what I call emotional inoculation through actual trading. At first he only took one trade a day, then two, then three, and finally all of them. Each time he took a trade, it became less significant and easier to do. Today he makes a nice living with his trading.

Developing A Trading Psychology Plan

It has occurred to me that we continue to discuss the importance of trading AND planning; you can't trade without a plan that is both consistent with your personality and with a given trading methodology. The plan must then further define the components of the trading methodology in order to develop specific trading setups, as well as a way to manage the risk/reward of those setups.

The objective of the trading method plan is to develop a plan that includes your ‘core’ repetitive setups that you have established a positive expectancy, that you can recognize realtime AND that you have accepted the implications of in terms of related risk/reward. BUT this might not be enough - there still may be issues that are related to emotion AND fear that circumvent the implementation of the method plan.

Like a trading methodology plan being a key to making the transition from method to paper trading to realtime trading, making a trading psychology plan would be just as significant to making the transition from trader action/trader psychology to trading method/trader trading.
The objective of the trading psychology plan is to develop a plan to deal with the emotion/fear issues that either circumvent the method implementation OR keeps a trader from trading at all. Take the trader's actions and give a honest assessment/understanding of a given action, and then define a 'setup' for replacing the action. Consider the excerpt from the article AND then evaluate the actions as follows:

Trading Plan – Methodology

5 to 20 trades a day
makes money on paper

Trader Actions

didn’t trade
attempts to pick out the winning trades and let the losers go
learning by watching the market

Psychology

create excuse for not trading
anticipate negative outcome
fear/pain avoidance

Trading Plan – Psychology

accept losing as part of trading
accept possibility of winning
replace focus of winning/losing with objective of following plan
implement plan in steps instead of all at once

Trader Self Talk - Question/Answer

The plan itself will have to include a ‘look in the mirror’ AND an ‘honest’ assessment of what you see [don’t break the mirror first]. You will have to ask tough questions AND the quality of those questions will be instrumental in getting from step to step. I liken this to some of the trading questions I receive AND my ability to then give a general answer OR a specific answer. Someone may ask should I go long when momentum turns green BUT with no further information about market conditions regarding continuation/congestion, direction/counter, or other related indicators - the best answer available is sometimes which is really no answer at all.

Relate this to any kind of problem solving and the asking/answering of questions - both to yourself, or to someone whom you are working with; HOW is anyone supposed to answer such general questions with more then a general answer at best – let alone give an answer that will aid in developing a workable solution/plan - specific questions that will ALLOW an answer with pertinent content is extremely necessary. Regarding the 'look in the mirror' questions - equally important will be to ask questions that are of a neutral non-judgmental nature in order to allow a constructive usable answer. So consider a trader asking questions like: WHY can’t I trade – WHY am I such a failure - WHAT is wrong with me – etc. Not only do I view these as ‘unanswerable’ questions – I also see them as destructive type questions that will push you into [OR further into] an emotional snowball that further intensifies the problems that you are supposedly trying to construct a plan to solve as you give answers like: BECAUSE I am a loser - BECAUSE I am too stupid - etc.

I see no way that a trader could ever expect to make that transition from emotion to method when they are asking questions like this OR letting themselves think like this. Your questions will direct your further thinking AND thought processing as you answer AND certainly explains why emotional issues are so prevalent in trading – as the trader further creates AND worsens the emotions that are their primary problem[s] to begin with.

Negative self talk not only prevents us from solving problems BUT depending on how extensive this becomes – what is referred to as cognitive distortion – it may even prevent the person from even acknowledging that there is a possible solution. A continual series of self talk including I can’t do it instead of WHAT can I do - both disqualifies that any positive experiences have ever existed to draw from AND directs thinking away from constructive actions. Asking the neutral questions – the WHAT can I/HOW can I – can lead to actionable answers that acknowledges the potential for a positive solution.

Emotions Are Part Of Life

I do not think that emotions are good/bad OR should be viewed that way - they exist in everyone as a part of life. What becomes important is your understanding of YOUR emotions - what they are AND how they further effect the way you act - again without judgment AND with the objective of controlling the emotion instead of having it control you AND in this specific case of trading - keeping the emotion from circumventing your trading plan.

Trading Psychology Plan

Like any kind of planning/plan making - analogizing the process to things that you have done before AND can relate to from experience will be very useful. In this case it would be the development of your trading methodology plan AND making it personal to you. Emotion AND fear have some general types BUT which ones most impact you will be extremely individual AND the trader must have a plan for both identifying what is most impacting them AND then have a plan for dealing with the outcome the emotion brings - I don't think the objective is to eliminate the emotion. I would like to analogize to the trading method plan AND trading indicators - to a psychology indicator attempting to measure when you are going from a neutral trading psychology to over-emotional AND thus leave your trading method plan for the actions that the specific emotions lead to.

The steps to this kind of plan were outlined/discussed in the training session - I believe that the absolute key to this plan will be defining your actions brought on by emotion/fear accurately AND without further judgment. From here, you have enabled a base for controlling the emotion by replacing it with evaluation AND doing so as a conscious act where the objective becomes overcoming the impact emotional responses have on trading.

As mentioned, I don't think that eliminating emotions is the objective - NOR do I even think it's necessarily a good thing. For instance IF I am confused AND that causes me an emotional response of hesitation - I actually want to see/feel that emotion - it becomes a warning to me that I should wait AND try to find more clarity to the chart/market - asking myself what needs to happen for me to take the next trade.

Shift The Focus Of What The Emotion Represents

But WHAT IF the emotion is the norm instead of a warning of trading conditions.

make a list of your emotions/fears AND rank the extreme of the emotion
determine whether the emotion has reached an unwarranted extreme
shift the focus of what the emotion represents

Consider: what is loss - a basic characteristic/function of trading that must be accepted, or is loss equivalent to trader failure and a further comment on the trader’s intelligence and worth?

Consider: you find that being stopped out on the entry bar of a trade elicits an emotional extreme. As a result, you further feel that IF you can be stopped out that quickly on the entry bar of a trade THEN you are too stupid to trade AND might as well quit trading altogether; now try to enter the next trade setup.

Is this emotional reaction extreme, and the resulting self talk, warranted or a logical conclusion to being stopped out on the entry bar of a trade? You will not be able to answer this question, or keep it from reaching the extreme that it reaches, without shifting the focus of what the specific action represents - ask yourself:

was the trade a plan trade AND IF so - how often will that same setup/trade go on to a partial profit - isn't losing part of trading that is to be expected regardless that sometimes it may happen immediately - was there anything i can consistently see in my entry timing that could have made a difference.

was the trade a non-plan trade AND IF so - what did i miss in the setup identification.

did you just make a mistake AND IF so - shift the focus from the emotional extreme response to NOT being perfect - take your stop AND go on to the next setup.

Trading Anxiety

fear trading so avoid trade
force trade to overcome emotion
diminished perception/lack of clarity when anxious
immediately exit trades to reduce anxiety
worry about things that are not verifiable - distortions

Distortion

are you FINE – freaked out-insecure-neurotic-emotional
all or none -vs- incremental changes and adjustments
perfectionism -vs- 70% objective
trading vocabulary
mistakes are permanent conditions that will always continue -vs- temporary and natural

Consider: the perfectionist refuses to find the positive in what they do, they give themselves credit for nothing they do, they always should have done better – the corollary would then be the non-acceptance of loss which is one of the most important psychological components to being a trade. It’s impossible to be perfect.

Consider: change your vocabulary and change your attitude, this may be even be a physical body chemistry change. Regardless, you did not get ‘killed’ when you lose 6 er2 ticks – there was not a ‘huge’ retrace against your trade when the er2 retraces 6 ticks.

irrational ideas and beliefs lead to false assumptions – and this leads to avoidance
overestimating the potential for negative consequences, thus leading to increase anxiety and causing fear – then this anxiety leads to avoidance to eliminate fear the fear that the trading plan is ‘supposed’ to manage.

Consider: mistakes are not permanent by definition – they have a ‘norm’ and ‘odds’ to reoccurrence. Mistakes are external – they are not internal and a personal part of the trader.

Accurate Self Monitoring/Assessment

accurate assessment – refute distortions and remain neutral
accurate measurement of progress using small attainable/realistic goals
don’t overwhelm yourself or expect immediate large scale changes – like perfectionism this is unrealistic and not possible
have a way to recognize your distortions

Consider: make a check list of distortions or specific anxieties/negative things that want to avoid, and when they occur confront the problem. Don’t shut down, and ignore the issues or hide from them, as if they don’t exist or will go away by themselves.

Consider: what would you tell somebody else to do, who mentioned these same problems to you and asked for your help?

Consider: make a chart that lists the specific occurrence that ‘triggers’ a distortion – evaluate whether it’s indeed distorted – accurately assess the occurrence. This is very necessary so that you don’t continue to ‘anchor’ the occurrence to the distortion – so that the occurrence continues to lead to the distortion and the related response.

You have a great trading method and trading plan. You have profitably paper traded, and you now start trading real money AND everything falls apart, your method and plan no longer work. Everything you do is wrong, and you continually lose money - you come to the point where you can't even trade any more. HOWEVER - do you have a trading psychology plan?

Trading Method Viewpoint

It is said that trading is 90% psychological and 10% methodological. Does this then imply that regardless of trading method, a trader that has control over their emotional issues will thus be a profitable trader, or will it be impossible to ever control emotions without the proficient implementation of method? The trading method viewpoint will suggest that not only are these statistics not the case - trading psychology does not exist. Trading method will be the determinant of profitability, and this will be done through: (1) the ability to understand the method's inherent strengths and weaknesses (2) the ability to maximize these strengths and minimize the weaknesses.

Trading psychology has become so widely discussed and promoted through books and consultants that it has become a very convenient rationalization and excuse for losing. Why take the responsibility for a lack of work ethic and trading without any concept of plan, an honest assessment which would be a ‘hit’ on the trader’s self-esteem – when you can just blame it on trading psychology instead?

Trading psychology is ‘something’ that a trader creates from existing personality traits that are not initially related to trading, but surface from trading without method understanding. The outcome of course is fear, but wouldn’t this be the case when doing anything that was perceived as ‘dangerous’, and which was being done without the necessary understanding and skills? Trading, with its inherent characteristic of accepting financial risk while participating in unknown outcomes, is certainly ‘dangerous’, and thus the more preparation and understanding that is needed.

Trading Scenario

Consider the a trading plan which has the following three setup types: (1) initial which your intended trade entry (2) first continuation which is used to enter a trade in case you have either missed your initial entry, or you decided that you wanted more confirmation because it was a counter direction trade (3) second continuation which is intended as a trade addon setup, but is also one ‘last’ chance to enter a trade.

You get an initial sell setup that triggers, but you do not take the trade = trade1. The trade breaks cleanly and goes to what would have resulted in a partial profit, and then before price goes down further, it retraces back to the area where the sell was done. This price holds so the swing remains short, and from this hold of what is now resistance, you get the trigger of your first continuation setup BUT you don’t take this trade either = trade2. Why wasn’t the trade taken? You decide that after missing the initial entry that you have missed the trade; your emotions and biases tell you that the ‘move’ has gone too far. Again, this trade breaks cleanly, not only adding to the gains of trade1, but also giving a partial profit on trade2.

Price now consolidates between the lows and the price resistance that you would typically be using to stay short if you had taken either the initial trade, or the first continuation trade. Instead of the swing reversing after consolidating, it continues down again, and with this continuation your second continuation setup triggers = trade3. AND AGAIN - you don’t take the trade. After all, if you didn’t take either of the first two trades, how can you possibly take this trade; maybe you were wrong when you thought that the move had gone too far to take trade2, but certainly that’s the case for trader3.

Like trade1 and trade2, trade3 is a profitable trade. This swing has really turned into a great directional move, with each break holding on weak retests – a textbook example of the strengths of your trading method, but YOU have never entered a trade. You are going nuts! You are getting into this damn swing - you just can't take it any more. Another retrace holds as a lower high. You don’t have an entry setup, but that doesn’t matter, the other three trades were profitable after a lower high. Isn’t it interesting, the same emotions which wouldn’t let you enter your plan trades, are now ‘forcing’ you to take a non-plan trade.

Instead of YOUR trade going to a lower low and to a profit, it instead goes to a higher low and then reverses into an initial buy. Bad just got worse, you also don’t exit when the swing goes into buy. After what you went through to finally get into the trade, you have to try and make it work, and after all the trend is down – right? TraderA uses this initial buy to exit their profitable sell and sell addon; they decide that they want more confirmation of swing reverse before trading the counter direction. A first continuation setup triggers and they go long, the swing has reversed, and this trade reaches its first profit target.

TraderB finally ‘gives up’ and exits THEIR short, although with a two point loss instead of the intended one point, and without any consideration of taking their next plan trade, the first continuation buy. This trader is done for the day, but at least they were ‘right’ all along; the swing had gone too far to enter, and their fears had been warranted – this was a losing trade that they should not enter.

Is this a trading method or trading psychology issue? What ‘message’ is TraderB going to take from what has just happened. Will they take the attitude that they should not be blamed, they just can’t trade because of trading psychology? Or, will they acknowledge that the method did win, that the resulting loss was not a method trade, and even if it was, the loss would have been offset by the prior winners. Will they acknowledge that THEY made their worst fears come true and not only turned this into a losing trade, they also increased he size of that loss, and then avoiding another method winning trade.

Granted, psychology was involved with what has happened in the described trading scenario, but that is a function of the individual’s ‘core’ personality, and would most probably be an issue regardless of what was being done; if there is ‘risk’ involved, there will be an ‘emotional’ response. Thus, it is first necessary to separate personal psychology from trading psychology, and the use of this concept as an excuse for trading actions. Then, if trading psychology is going to be controlled, this will be done through the development and implementation of a tested plan that the trader is willing to follow. Do not trade with ‘built-in’ excuses for failing, you will have lost before you begin, and will continue to do so with a continued ‘snowballing’ of emotion to the extent where trading will no longer be possible.

Trading Psychology Viewpoint

No discussion about trading, or the consideration to begin trading, can be done without a harsh realization - the vast majority of all traders lose.

It is said that the reason that most traders lose is because they are not psychologically prepared to trade, that is they are not prepared to accept financial risk for something of which they have no control over the outcome. Trading is much more of a psychological problem then a methodological one, only the traders who have first accepted this have a chance of being consistently successful traders. Without an understanding of trading psychology and the various issues that circumvent method, there will be virtually no chance to overcome the fear, confusion, and despair that can be inherent in trading. Ultimately, after a series of consecutive losses, method becomes replaced with a feeling that it is impossible to do anything right; if for no other reason than this situation, trading psychology is more critical than trading method.

New Trader Scenario

Consider a scenario where a trader develops a method for day trading an index future. The method gives 15 trades per day, and the trader has gotten to the point where they are able to paper trade with the following results: 9 wining trades averaging $85 each, and 6 losing trades averaging -$65 each – thus giving $375 average daily gains. The trader has achieved these results for three consecutive months; their paper trading goals have been met and it is time to start trading real money.

Real money trading begins, but things quickly change. Instead of trading their method like they did when paper trading, the trader starts ‘skipping’ trades trying to pick the winners instead of accepting the 40% losers; of course, they invariably pick more losers than winners. Trying to then correct this problem, the trader decides that maybe they are entering their trades too late. So now instead of letting the setup complete and then doing the trade, the trigger is anticipated so the trade can be entered earlier - the losses get worse.

With the continued losses the emotions take over: “What is wrong, why am I such a pathetic loser? Maybe it’s not my fault, maybe the method just doesn’t really work.”

The problems get worse with each trade, more emotions and more loses - the trader quits trading. The trader now decides that their paper trading results weren’t really adequate to begin real money trading. They will go back to paper trading and studying again.

Thoughts that are going through the trader’s mind now: “Maybe I should try different trading methods until I can eliminate those losing trades – then I will be ready to trade real money again. Really, maybe I should just quit trading altogether – maybe I am just a loser, and that’s why I can’t trade.”

The Trading Psychology Plan

What should be very apparent from this scenario is that the trader never traded their paper trading method plan after transitioning to real money trading. Unfortunately, the trader is unable to realize what they have done, instead their emotions first place blame on the method thinking that it really doesn’t work, and then on themselves for being “such a pathetic loser”. The final result being that the trader quits trading, and if the real underlying reasons for what has happened aren’t accepted and changed, this trader will never be able to trade real money even if their paper trading results become 100% winners, which of course is not going to happen.

The trader had a trading method plan, but they did not have a trading psychology plan. They did not have a way to make the transition from fear and emotion directed trading to actually trading the method as designed. They did not have a plan to objectively access and understand their given non-method actions, and then define a 'setup' for replacing them.

The trading psychology plan must begin with an honest assessment and acceptance for what really happened: the trader never traded their method plan; there is no other blame to be placed, or excuses to be made. There is nothing wrong with the trading plan, and regardless, the trader has not traded it in order to be able to make that evaluation. As well, traders cannot internalize trade loses where they lead to their viewpoint of themselves – you are not a loser because your trade is a loser.

Trading Psychology Plan Components

• Accept that losing will be a normal part of trading. Not only is it impossible to be perfect, it is not an objective or necessary to be a profitable trader.
  
• Replace the focus of winning and losing with the objective of following your plan. This was not done while paper trading, as the trader had a specific profitability goal that they used to tell them when they were prepared to trade real money. They did not understand that the reason they achieved this goal was because of how they followed their plan.
  
• Remain neutral and non-judgmental towards yourself. If profitable trading is ever going to be possible, this is mandatory. There is no way that you are going to be able to trust yourself to manage risk while you are also telling yourself that you are ‘stupid’ or a ‘pathetic loser’ each time you lose or feel that you have done something wrong.
  
• Eliminating your emotions is not the objective; I actually do not think this is possible. Emotions are always going to enter into trading – learn to control the emotions, instead of having them control you.
  
• Accept that emotions are a part of life; they aren’t by definition good or bad, and actually if you can shift the focus of what the emotion represents, they can be very beneficial for the trader. For instance, if I am feeling confused and that causes an emotional response or hesitation, I want to feel that emotion. This emotion becomes a warning to me that I should wait and try to find more chart-market clarity before taking a trade, something that can be very typical when markets are in congestion.
  
• Start slowly – this may be the most important component of your plan. For instance, begin trading real money for an hour at a time, and then assess what you have done, always asking yourself the question: did I follow my plan, or did I take non-method trades.

Granted, you will not be able to approximate your paper trading results as the expectancy of that plan was achieved by averaging 15 trades per day. However, not only will this help further to shift the focus from how much money did I make to did I follow my plan, it will also allow you to acclimate to the logistics of real time-real money execution, and the related initial emotions, where all of a sudden the market feels like it is moving considerably faster. By doing this you will ‘build-up’ to trading your full plan at a pace that won’t cause you to become so overwhelmed by the process, and immediately cause you to avoid what you had intended to do as fear and emotion becomes too strong.

You have a great trading method and trading plan. You have profitably paper traded, and you ARE now ready to start trading real money – just be sure that you have a trading psychology plan that is as good as your trading method plan, and that you realize that neither will be of any use to you without the other.