Download Free Forex eBooks: August 2011

Discipline, Mental Skills and the Psychology of Trading

Discipline - Majority of traders are not disciplined in their approach, else they would not be failing. These failed traders simply hate to hear the word Discipline!

Discipline allows you to more effectively plan your work (trades) and work (trade) your plan. Discipline – “Habit of Obedience” – yes the keyword being habit, i.e. have a Trading Plan and make a habit of following it. The golden rule should be No Signal – No Trade.

To sum-up this Mental skill set PAIR (Discipline / Passion): You must be disciplined AND remain emotionally detached from the market.

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Money management technique is twice as important as Forex trading techniques. If you rush to earn a lot of money in a short period of time, you will take larger risks and are more prone to wipe out your trading account.

There are no shortcuts in building wealth, regardless of what industry you are in. Whether it be with manual Forex trading or Forex managed accounts, if someone claims to make consistent profit month after month, then it is likely to be a scam because there is no risk involved.

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Everyone has a different style of trading, one that makes him comfortable. But once you pick your spot in an educated way, do something about it.

Many times the markets are not trending in any one direction. What then? Perhaps you want to pick a few times during the course of a trading day where the markets are at an extreme level in the TICKS or shows divergence on 5-minute charts.

I learned when not to be in the market, when to scalp on a smaller scale, when to fully load up in a position, and when to get out when a trade wasn’t working by reading the tape.

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If a trader has a positive attitude, it allows him to believe that by focusing on the process – the results will take care of themselves. This involves an element of trust.

Sometimes it is like diving off a high dive and knowing that if we follow correct form, we will hit the water just right and have a beautifully executed dive. What some people fi nd hard to accept is that occasionally our form will be off, and it is going to hurt when hitting the water. If doubt or negative thoughts creep into my mind when I dive off that platform, I am doomed.

I have so many tricks for eliminating the negative self-talk that the positive thinking has become purely habit.

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In your head, you beat yourself up a little because you know that when you started your “live” trading, you made an agreement with yourself to take the first 10 trades “no matter what”… and here you wimped-out and missed a big winner that would have gotten you even.

What‟s happening is that you are out of control. Your emotions are ruling your trading.

The above scenario plays out in every trader from time to time... newbie and veteran alike.

The winning trader senses what is happening and nips it in the bud. The winning trader spend time EVERYDAY, working on “the discipline of trading”.

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George Soros is another great example of legend distorting fact. His role in Black Wednesday (September 16, 1992) is well publicized. Soros’ Quantum Fund sold short nearly $10 billion dollars worth of British Pound, and forced the Bank of England to float its currency or face collapse.

This bold move netted Soros and his associates over $1 billion dollars profit. Not bad for a day’s work, certainly, and enough for a few tanks of gas in the limo without question, yet the return on capital was around 10%. The returns were large; so was the investment.

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It is unlikely that your losses are attributable to a large number of small losses, far more likely that they came from a few large losing trades, i.e. trades that you did not cut.

If this is the case for you, then success in trading will not depend on you finding the right trading system or idea, it will depend on your ability to learn to ruthlessly cut your losses.

The question is why is it so difficult?

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When analyzing any aspect of market behavior or when puzzling as to why the market did not move as we expected, it behooves us to keep this very simple fact in mind. The market is a very focused mass mind; it is the product of the total opinions of its participants on one topic ‘price.

If the market is a reflection of the minds of its participants and it did not move as we had anticipated there are only two possibilities, our assumption about market behavior was wrong or our facts were wrong.

If our facts were wrong that is the easier case; it can be corrected with better information. Market participants do not, of course, possess ‘perfect information’.

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In trading, you can’t control what the market will do. No matter how much you want the market to go in a certain direction, there is nothing you can do to make it go in that direction.

There is no affect that you can cause on the market to make it do what you want it to do. We can’t push a button, we can’t turn a key, nothing we do will make the market do what we want it to. Nothing at all!

So, if we can’t control the market and what it will do, then the only thing that will make us successful is if we can control ourselves. And that’s easier said than done. But it is the reality of successful trading. Again, you can’t control what the market will do, so you must control what you will do.

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There is a fundamental characteristic of unsuccessful forex traders: they trade forex because it’s exciting, cool, or for its sex appeal.

The mystery behind the charts, the notion that profits (although elusive) do really exist, and that money can be made quickly (but not predictably) all add up to create a romantic fantasy that is too appealing to avoid.

When they start to lose money, they leave their positions open, close their eyes, and hope that the trap is miraculously opened so they can be free again.

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As a trader, can you admit that your trading system is just experiencing a drawdown period? Everyone, including myself, has had their trading entry system generate multiple consecutive losses – and then you start thinking...

It is the negative thoughts that influence your confidence, which eventually leads to greater losses. Likewise, many beginning traders will win. The winnings will erode the trader’s humility and at the same time, intensify their greed. It is a very serious issue that many traders in my experience have had trouble with.

Overcoming this psychological barrier is crucial to a trader’s success.

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Trading is a game of probabilities. Imagine we're flipping a coin. Heads I win one dollar - tails you win one dollar. Simple.

Heads and tails will each come up half the time, and we'll both neither win nor lose. However, unknown to me, you have a loaded coin. For every 100 throws, heads comes up 49 times, and tails comes up 51 times. You now have a license to print money. Let's call it the "Tails Trading System".

All you have to do is sit back and bet on tails forever. Eventually, you'd win all my money (and anyone else's who took you on). All any trading system gives you is an "edge". A favorable bias. Something that is more likely to happen than not. Whatever trading system you use..

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Trading looks deceptively simple, yet few succeed. If you read interviews with the great traders, you will perhaps be quite surprised to learn that very few are intellectuals, many have never been to college, and a considerable number even dropped out of school.

Additionally, most will claim they have simple trading systems that almost anyone can understand.

So what separates winners from losers? The answer is not just knowledge of the trading environment, but also an understanding of our personality make-up and how it needs to interact with the market in order for the trader to emerge with consistent profits.

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Many of the ideas covered in this book are already in practice by professional money managers. However, the ideas that are widespread among professional money managers are not usually readily available to
the investing public.

Because money is involved, everyone seems to be very secretive about portfolio techniques. Finding out information in this regard is like trying to find out information about atom bombs.

I am indebted to numerous librarians who helped me through many mazes of professional journals to fill in many of the gaps in putting this book together.

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Sitting and trading all day long, or trying to take every trade that comes along is also an almost guaranteed way to failure.

I have not met many traders who can sit all day in front of a screen and still remain focused. Those who have studied such things agree that the less you trade the more money you make.

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Pages

Discipline, Mental Skills and the Psychology of Trading

Forex is Psychology, Money Management and Technique

Got Your Trading Style Figured Out

Maintain Your Mindset

Mental Fitness for Traders

The 7 Deadly Sins of Forex

The Easy Way to Cut Losses

The Market as Mass Mind

The Secret To Emotion Forex Trading

The Woodchuck and The Possum

Timely Advice From a Pro Trader

Trading In Mind

Your Personality & Successful Trading

Risk Analysis Techniques For Traders

5 Most Dangerous Problems In Forex Trading