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Trader Psychology: Fortune Favors the Disciplined Mind

Thu, Jul 2, 10:09 AM ET, by Jason Stapleton

I am constantly amazed at the caliber of people who end up knocking on my door looking for answers to their trading woes.  They are engineers, doctors, small and mid-sized business owners.  They are by all accounts the best and brightest the world has to offer.   

 
Yet most of these same people are losing money hand over fist in the markets and can't seem to understand why.  They are smart, well educated and yet frustrated by their lack of success in this one area of their lives.  Since they obviously posses the intelligence to grasp the concepts necessary for success, their natural conclusion is that they must lack some "insider knowledge", some secret that will unlock the puzzle and drag them from the foggy mist of confusion into the bright light of trading clarity.
 
But alas, there is no secret.  No magic formula.  No concoction of indicators and oscillators that will open Pandora’s Box and magically transform you from unprofitable into profitable.  There is no magic system, SO STOP LOOKING FOR IT!  Get out of the trading forums and chat rooms.  Stop spending your free time buying books with titles like, "Learn how I turned 200 dollars into 20 million in just 3 Years."  If someone offers to provide you the "secret" to making millions for the low, low price of only $99.95 run for the hills.  These are scam artists praying on your emotions.  These are the same emotions that are causing you to lose money each day in the markets.  These men are a cancer to your success, and nowhere are they more prevalent than in the forex market.
 
I firmly believe the key to success is rooted in emotional self-control.  For years I struggled as a trader, constantly looking for the "holy grail" that would turn me into a winner.  I spent thousands of dollars on books, seminars and trading courses.  Then, to add insult to injury I lost tens of thousands in the markets before I finally came to the realization that the answers to my trading problems were not external.  It wasn't the fact that I didn't have the "secret system”.  I had to admit to myself that I could have had a multi-million dollar system and I would have lost money with it.  I had no self control.  I put trading plans together that I never followed; made promises to myself I never kept.  My trading days were spend hovering over a computer, hanging on every tick in the market praying it would move in my direction.  Does any of this sound familiar?  If it does, congratulations, you are no different than 90% of traders in the market today. 
 
Read this very closely.  This is very important.  90% of traders lose money in the market not because they don't know what to do.  They lose money because they don't have the emotional discipline to do what they know they should.  If you have a basic understanding of technical analysis you can devise a trading plan that is 80% as effective as the best trading programs ever devised.  The question becomes, will you have the discipline to follow it. 
 
So maybe you're thinking, "Ok, Jason.  I'm sold.  So tell me how to get control of my emotions."  First, the simple acknowledgement on your part that your problems are your own and not the result of some external force puts you light years ahead of most aspiring traders.
 
Second, breaking bad habits is a process.  That's why weekend seminars are rarely effective.  Psychologists will tell you it takes 15-30 days to break an old habit and 15-30 days to install a new habit.  If you have to do this for several bad habits you've been harboring it's easy to recognize the dilemma.  Our goal should be to remove as much emotion as possible from our trading, allowing us to focus on consistency.
 
We do this by eliminating as much subjectivity from our trading plan as possible.  I am still amazed at how many traders who cannot clearly define the method they use for entering and exiting the market.  As you design you’re trading plan, think of it as if you were trying to tell a computer how to do it.  You must be specific.  Words like "sometimes" are never a good thing.  I advise using an "IF", "THEN" syntax.  IF the market does X, THEN I do Y.  We do this every time, without question. It doesn't matter if our last 3 trades have been winners or losers.  The method for making decisions does not change.
 
By doing this we create a clear set of rules to test our ideas and determine how effective they might be.  We then conduct both back testing and forward testing to work out any kinks in our plan.  What we are left with is a clearly defined trading plan and enough historical testing to feel confident trading the system real-time in the markets.  I call it "doing the hard work on the front end".  Traders who follow this simple procedure are amazed at the confidence they gain in their trading plan, and how much easier it is to stay disciplined through the inevitable draw downs.
 
I almost feel bad cutting things off here.  Naturally we have not even begun to scratch the surface of trader psychology and the steps necessary to control our emotions.  But I hope I have given you some good ideas to help get you started off on the right foot. 
 
Until next time, good luck and good trading.    
 


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