Trading Psychology: The Foundation of Success

CONTENTS
WHO AM I..
4
THE TURNING POINT
5
INTRODUCTION
6
YOUR SUCCESS WILL BE IMPACTED BY
8
INSUFFICIENT FUNDS
8
INFLUENCING OTHER PARTIES
9
LACK OF A WELL-DEFINED STRATEGY
10
TAKING EARLY PROFITS
11
EXTERNAL INFLUENCES
12
MEDIA INFLUENCE
12
GIVING YOUR OPINION TO OTHERS ABOUT THE MARKET
12
CONFIDENCE IN YOUR ABILITY
13
TRADING OUTSIDE YOUR STRATEGY
14
FEAR OF WHAT THE MARKET MAY OR MAY NOT HOLD FOR YOU
14
INCONSISTENT APPLICATION OF YOUR TRADING STRATEGY.
15
UNWILLINGNESS TO TAKE A LOSS
16
THE TWO TRADE ACTIVATING STAGES THAT MUST TAKE PLACE
16
THE LEARNING CURVE IN THE TRADING ENVIRONMENT
18
FORM VS CONTENT
19
CONTENT IS KING.
20
HOW DO YOU FIT INTO THE MARKET?
22
THE THREE PHASES OF FINANCIAL MARKETS
23
ACCUMULATION PHASE
23
MANIPULATION PHASE
24
PROFIT RELEASE
24
THE MARKET AS YOUR TEACHER
25
THE LEARNED HABITS/ EMOTIONS OF THE AMATEUR TRADER
26
THE EMOTIONS OF FAILURE
26
LACK OF CONFIDENCE
27
FEAR OF THE UNKNOWN.
28
HOW A LOSING TRADER DEVELOPS AND MAINTAINS THE ABILITY TO LOSE
CONSISTENTLY
29
THE LOSING TRADERS STRATEGY EXAMINED:
30
HOW A SUCCESSFUL TRADER MAINTAINS SUCCESS
31
THE SOLUTION TO TRADING SUCCESSFULLY
33
A LOOK BELOW THE SURFACE OF CROSSING THE ROAD
34
WHAT HAS CROSSING THE ROAD GOT TO DO WITH TRADING SUCCESS? 35
THE REAL CHALLENGE IS NOT THE TRADING OF THE MARKETS.
37
Martin Cole Professional Trader Since 1990s
Who am I..
Two decades is a long time to work in any industry.
If I could go back in time, would I again choose to be a trader?
That’s a tricky question; you see, I wanted to achieve one thing in life. To live life
on my terms.
It didn’t take long to work out that the only way that would happen was if
I could achieve financial freedom.
Honestly, suppose something else had come along that would have
given me the same opportunity for freedom. In that case, I might have
considered it.
I did not ‘choose’ trading because I was fascinated by it. Sure, later on, it
became interesting, but I chose trading as a means to an end. That end
is the freedom to live life on my terms.
It took me five years and three lost trading accounts to understand what
was happening. Five years before I got to grips with everything. Clearly,
this was not a get-rich- quick instant success opportunity that I had been
sold on.
This book, though short is packed with personal aspects of trading that
you MUST address if you are to become hugely successful.
The Turning Point
The turning point came in three stages
1.
Trading was a business.
2.
This business was not my business.
3.
I had to work on me before I could work on the market
The moment I discovered and accepted that this was not my business
and everything was a facade designed to separate me from my money
was the moment I started making money.
It was like night and day. BUT!
There was still number three to work on. That took a while longer as I
had not figured out this last missing piece.
This book is that missing piece or better put, pieces that make up the
whole of working on yourself.
Throughout this book, I will explain these essential elements of trading
and what they mean to you as a trader, along with aspects of trading that
most continue to push aside or discount as not relative.
Some of the points I cover may seem mundane initially and not worth
consideration. I promise you they are. If you find yourself saying, “This
does not apply to me”, as you read, I would urge you to stop and take a
closer look because you may have just stumbled onto something that has
far more impact upon your trading than you realise.
Martin Cole
www.learningtotrade.com
Introduction
For you to trade successfully, you must be equipped with the tools of the
trade. Some of these tools are already in your possession and others you
can freely obtain.
We are not talking about physical
tools, like carpenter's tools. (But we will
reference these shortly)
These tools that you already possess
allow you to see beyond the market's
facade and into its inner workings. It is
this knowledge of the market that will
set you free.
Through the following pages, I will help you identify your personal tools.
I will then show you how to turn them loose onto any financial market to
enable you to achieve your own trading success. Your own freedom
No matter what markets/stocks you trade, the information contained
within these pages is priceless regarding skills learned and results
achieved.
But first, a little back story.
If I could turn the clock back, I would have started at precisely the
position I will lay out in this book for you. The reason I would choose this
as the starting point is simple;
I would know how to avoid substantial losses
I would have been on my way to success in weeks rather than years.
When I say substantial losses, I really mean that. For example, I am now
not ashamed to say that during my early trading years, I entered the
market thirty-two times in succession with losing positions.
One has to really question this seemingly 'unlucky' run.
Could I pick thirty-two losing trades in a row if I tried?
Could I pick thirty-two losing trades if I merely flipped a coin and chose
heads for buying and tails for selling?
The answer to this is, of course, no! The odds are just too great.
How, then, could I get it consistently wrong so many times?
I got it wrong because I had become a victim, a pawn in a giant game
where I had no idea of the rules.
I was caught in a losing loop (we will get to loops shortly) I was also on a
self-destruct path.
This cycle of losing trades was devastating on both a mental and financial
level.
However, the upside is that I am now truly grateful for the thirty-two
losing trades. The pain of these trades proved to be the turning point I
had desperately sought for so long to discover.
So today, I will start working with you from the point where my
understanding of the markets literally flipped the switch from failure to
success.
Just before we make that start a couple of points to note.
To reach professional trader status you will, at times, become frustrated.
At times you will feel like quitting. But stick with it, these early days are
the proving ground to set you apart from the 'also-rans.'
Stick with it and financial freedom will be yours.
If you are unsure about anything that follows, visit my website and drop
me an email. I will do my best to offer any assistance I can.
www.learningtotrade.com
Don't suffer in silence for fear of asking the question to which the answer
might set you free.
"The fool wonders, the wise man
asks." Benjamin Disraeli
Your success will be impacted by
■» INSUFFICIENT FUNDS WITH WHICH TO TRADE.
■» INFLUENCING PARTIES.
■» EXTERNAL INFLUENCES.
■» LACK OF A WELL-DEFINED STRATEGY.
■» INCONSISTENT APPLICATION OF A PROFITABLE TRADING STRATEGY.
■» UNWILLINGNESS TO TAKE A LOSS.
■» TAKING EARLY PROFITS.
■» MISUNDERSTANDING OF HOW MARKETS WORK.
■» FAILURE TO HOLD CONFIDENCE IN YOUR OWN ABILITIES.
■» FEAR OF WHAT THE MARKET MAY OR MAY NOT HOLD FOR YOU.
■» ANXIETIES ABOUT YOUR SUCCESS.
Insufficient Funds
We often hear that you should only trade with money you can afford to
lose; this is the wrong approach and immediately conjures up images of
loss.
Is trading your only source of income? If it is, do you need to trade to
produce a living income on a weekly/ monthly basis? If the answer to
both of these questions is yes, you are putting yourself under
tremendous pressure to perform from day one.
As a guideline, if you are starting out as a full-time trader and this is your
only source of income, you should set aside at least 6-12 months of
expenses in a separate account.
Side Note: You do not have to quit your current income. Today
technology allows access to markets that were not possible when I
started trading.
This 'living' account will maintain your current standard of living and
prevent you from having to draw on your trading account early; it will
also lift the burden of daily profitability.
Influencing other parties
The issues of influencing parties are often overlooked. They can be an
essential factor in a trader's success or failure. Many reading this will not
consider that another individual may have any detrimental effect on their
trading. However, please pay attention to what is often overlooked in the
successful trader's profile.
How you might be influenced
What does your spouse/partner think of your trading?
■» A QUALITY PROFESSION OR GAMBLING?
■» ARE YOU AFFECTED BY THOSE AROUND YOU?
If you are in a negative environment, steps should be taken to separate
your trading from any influencing party.
We may believe and even convince ourselves that such things do not
affect us, but more often than not they do and this needs to be resolved
quickly. Better to ensure things are clear in this area at an early stage.
I admit that I need to be in a comfortable environment that is friendly to
what I am doing.
I don't feel comfortable if I am in the presence of someone having a bad
day and either inwardly or outwardly sharing that with me.
Guidelines for dealing with influencing parties.
If you are forced to involve another person, explain what you are doing
without intricate detail. This lack of detail is required because the other
party is unlikely to be of the same understanding of what you are doing.
Draw a line, at which point you will not further discuss your trading.
Do not involve another person in your trading decisions.
Do not show anger, frustration, or even joy, in front of another person. It
is far better for you as a trader to confine it to "yes, it was a good day"
or, if negative ", It was a great day for learning. I am looking forward to
tomorrow."
If you attempt to involve another person to reinforce your trading, you
set yourself up for a fall. DON'T DO IT!
Lack of a well-defined strategy
If you don’t develop a defined strategy, this is like travelling through
hostile territory without a map.
If you are trading without a plan, you will lose over time.
More importantly, A defined strategy is one you have complete faith in.
So you will act by that faith flawlessly. The strategy I developed was, in
fact, different from a strategy in terms of looking for a pattern.
Side Notes
■» NINETY PER CENT OF PATTERN TRADERS LOSE MONEY TRADING PATTERNS.
■» NINETY PER CENT OF THIS BOOK COMES BEFORE YOUR STRATEGY.
■» THIS INFORMATION IS FOUNDATIONAL.
■» GET THE FOUNDATION RIGHT AND YOUR STRATEGY WILL BE SUCCESSFUL.
Taking early profits
Taking early profits is akin to a crime being committed against yourself.
Traders take early gains for a whole host of reasons, some of which are:
The unwillingness to take a loss.
Influencing other parties' issues.
Lack of a strategy. (Lack of understanding why a market is moving at all
and not having a defined level at which to take profits)
Misunderstanding of how markets
work
You need to understand
financial markets relative to
market makers and their
business.
A straightforward example
would be trading futures and
needing to know about
contract expiry.
Traders must have an
understanding of the markets
and a complete understanding
of the particular aspect of the
market they are involved with.
Suppose a trader should misunderstand any aspect of the particular
market he is involved with. In that case, they are placing themself at a
distinct disadvantage.
My most recent expertise is in the forex market, which is Foreign
Exchange. This market is the most liquid in the world as such a trader's
dream because of the trading opportunities present almost every day.
Side Note:|
I used to trade FTSE - DAX - S&P500 when I lived in Europe (Spain and
the UK)
What I can teach you can be applied to all financial markets
External influences
This area will be covered in
greater detail later on, but a
couple of things to consider at
this stage:
The media and how this may
influence your trading decisions.
Giving your opinion to others on
the state of the market you are
looking at.
Media influence
You have decided that you will not take any notice of the newspapers
and will trade based on the evidence you see before you.
As you sipped your morning coffee, you noticed that the XYZ finance
group is meeting today to announce new finance measures.
Some hours later, whilst at your screen, you see a market action you are
unsure of. This uncertainty will cause the brain to scan all available data
sources in an attempt to link this event to some past event.
In a flash, the article about XYZ pops into your mind, and now you are
stuck with it. You are now mentally influenced by this story; whether you
like it or not, you will find it difficult to trade.
Worse still, you may ignore all the evidence you have gathered up to that
point.
Giving your opinion to others about the market
Let me explain some of the power any opinion may hold over you.
A friend calls you and asks you what you think of the market and which
way you think it will go. In a flash of pride, you explain XYZ about the
market and why certain things will happen.
In that one instant, you have, unbeknown to yourself, planted firm
opinions about the market within your own mind.
Now if the market does indeed do what you said, you are a hero; if it
does not, you got it wrong. But this is not the real issue. There is danger
in this situation because the moment you give your opinion, you will be
practically tied to it and find it challenging to change your mind about
the market, even as it starts to move against you.
There is no better salesperson than the person selling to him or herself;
your words will be ringing in your ears and prevent you from acting on
the raw information in front of you.
I have a standard response whenever I am asked “What do you think the
market is going to do?”
I suggest that you use something similar.
You reply, “Anything it likes at any given moment” The reason for this is
not to be flippant but to not fix an opinion in your mind.
Confidence in your ability
This happens as a result of not fully understanding what you are doing.
If you fully understand what you are doing and feel comfortable doing it,
then your ability to hold confidence will be strong.
Let me explain this in greater depth.
You enter the market based on your pre-defined strategy. You are
confident that this is a good trade and all is well.
The trade then reacts adversely against your position. As the trade gets
closer and closer to your stop, you feel anxious and even nervous.
Now how can this be?
Why should you feel these symptoms?
If you are committed to your strategy, which you have tested and KNOW
that it performs correctly more times than it fails? The answer will lie in
one or two key areas.
You could be underfunded
As a result of underfunding, your confidence in your actions is being
attacked from a financial angle. (Fear of loss, even though you know long
term your strategy is a winner)
Strategy issues
You have used a strategy that you have yet to thoroughly test.
Side Note
You may have visually tested your strategy many times. Still, if your
subconscious has yet to accept the testing as valid, you will not be able
to maintain your confidence.
Trading outside your strategy
This might result from trading frustration, i.e. The market has not been
supplying you with the means to use your strategy, so off you go hunting
for something that looks good.
On this hunting trip, you find something you think is like your strategy,
which you decide to trade.
Stepping out of your strategy, and it is so destructive that you may find
yourself in trouble for weeks to come.
Please pay particular attention to the above; it is crucial to your success.
Fear of what the market may or may not hold for you
This is strongly linked to the lack of understanding.
You may have been a little nervous about what was under your bed at
night as a child. Of course, now, in the rational light of day and
adulthood, you are confident that there was nothing under your bed and
nothing to fear.
However, even if an adult had told you then that there was nothing to
fear, you would still have doubts about the crocodile under your bed.
This is why YOU, as an individual, must make the connection between
your strategy and a danger-free zone. Once you have completed this
connection and can maintain it, your trading will take on new meaning;
you will experience a sense of freedom, elevating the whole concept of
trading to a very pleasurable activity.
Anxieties about your success.
You should realise that all these elements we are looking at here are
taking us around in a circle. This is no coincidence, as trading is, in fact, a
feedback loop. If you are in this loop as a loser, you will remain so until
you discard this loop and create a new one.
Already in a loop?
If you are already trading and are in a losing loop, then be assured you
can escape it, and there is a lot of help available
Inconsistent application of your trading strategy.
If a trader has developed and tested a profitable trading strategy, but
then fails to act on that strategy he will lose over time. Many traders do
not understand how this works; there are several causes that instigate
this type of inconsistent behaviour.
The trader believes that he/she has a good strategy at a conscious level,
but on a subconscious level there is conflict. This maybe as a result of
poor testing of the strategy or disavowal of certain elements of the
strategy.
Cherry Picking
Trying to cherry pick trades, this type of action often relates to
inconsistent application.
Trying to cherry pick, against number one is because of the underlying
conflict in the strategy and the fear of loss.
Lack of trading capital
Side Note
The inconsistent application of any strategy is often the start of the slide
into the losing trader’s loop.
Unwillingness to take a loss
If a trader is unwilling to take a loss, the trader is heading for a serious
drawdown of their trading funds.
An example here would be the trader who has expressed an opinion to
another person as to when, how, and what, the market is going to do. As
a result of this self-reinforcing action, the trader takes his own advice and
trades. In the event of this trade going against the trader, he will be
severely disadvantaged in his ability to close and take the loss.
Some additional factors
Losses as a personal attack
Do you perceive the loss as a personal attack against yourself?
This is an important concept with several branches that lead off, into
danger areas. Remember the market does not know you, it has no
interest in you and has no feeling for or against you.
Under funded trading
This will cause traders to hold positions longer than they should, in the
hope that the market will turn and give them their money back; this of
course this is a double- edged sword.
The list goes on in many different formats and styles, which are as varied
as we are individuals.
These are all signs that you need to be aware of. If you detect that they
are creeping in, then STOP trading and work out why.
The two trade activating stages that must take place
The first stage is signal identification and acceptance of that signal as
valid. The second stage is the response to that signal. This response is a
learned one:
In a simple form, X=X, therefore, action.
Let's examine how the response is developed:
The learning curve in a non-trading environment.
1.
We are stimulated to respond to the event or setting.
2.
We receive a response to our response.
3.
The loop closes with the event's outcome, now known as a result.
4.
We have a new learned experience.
The next time we encounter this or a similar event, we understand what
the outcome is most likely to be. We can now act accordingly. We can
even adjust how we react to the event to influence the outcome to a
degree.
The learning curve in the trading environment
In the trading environment, once we commit to a trade, we cannot
influence the outcome in any way.
The trader finds themself in a situation that has never been experienced
before. This can result in feelings of helplessness and confusion. These
feeling can be closely related to the gambling environment.
On the other hand, the professional trader has turned the whole thing
around with a systematic, tested formula that they know delivers trading
profits. In addition the professional trading will understand and trade the
CONTENT of the market over the FORM (Pattern) of the chart.
The professional trader has taken control of his/her environment through
discipline of mind and strategy. Together these stack the odds in their
favour.
To wrap up these points so far, we can say that the successful trader's
strategy has moved beyond ‘Chart Patterns’ (The Form of the chart)
The professional trader has accepted:
The inability to influence the outcome of the situation and the content of
the chart can never repeat thereby accepting each trade as a unique
event.
The professional trader maintains the position of a detached observer of
events; from this independent stance, he/she can observe the market in
a controlled state with clarity of mind and action.
This controlled and natural state enables the execution of further actions
that may revolve around increasing contract size or even exiting from the
position.
Let us now examine form and content.
FORM Vs CONTENT
When we visually look at a trading screen, we see it represented by a
series of candle or bar shapes. (there are other chart types, of course)
These candles represent what happened regarding trades taken within
the given timeframe of the chart/candle interval.
For our example, let us assume the chart is based on a continuing stream
of fifteen-minute candles.
The visual construct of the chart is the FORM (shape) that the chart takes
on with its up, down and sideways movements.
Ninety per cent of traders base their trades on these shapes. The FORM
the chart takes on.
Now this part is not easy to explain, but essential to fully grasp...
Each individual candle shape is drawn as a result of trades taken.
Each trade a trader enters into MUST, by default, first originate as a
BELIEF.
A traders belief will favour either the market moving up or moving down.
If a trader believes that demand will rise, they will action a BUY order.
The opposite is true if the belief is the market will fall.
The bedrock, the base, the foundation of EVERY trade taken is
BELIEF.
Pause for a moment and take that in.
All markets are an ever-changing and conflicting ocean of beliefs about
future prices.
The moment this dawned on me that it’s beliefs that drive future price I
knew I had a fundamental truth about all financial markets.
The FORM of the chart is given shape based on traders' beliefs.
1.
Belief gives rise to action.
2.
Action gives rise to placing a trade.
3.
Placing a trade affects the price
4.
The price gives rise to the shape FORM of the chart.
Are you ahead of me with FORM and CONTENT?
The FORM of the chart is the shape. The CONTENT is points 1 - 4
Content is king.
Successful traders trade CONTENT. Successful traders look beyond the
shape of the chart, the price and the pattern and instead consider the
foundation of every market move, which is... BELIEFS
Please do challenge me on this.
The next time you believe the market you are about to trade will rise sell it!
You can't sell it because the act of making that trade, the commitment to
making that trade, is anchored in your BELIEF about the future.
A side story.
On Black Wednesday George Soros known as "The Man Who Broke the
Bank of England" was able to make a profit of around $1 billion, during
the 1992 UK currency crisis.
Mr Soros was able to make this money because a politician who stood on
the steps of the Bank of England and said some words that will likely
remain embedded in Mr Soros’s mind for all his time.
The politician - the chancellor of the exchequer Mr Norman Lamont
said… “We will support the GBP”
The instant, the words left his mouth, every trader who could sold the
GBP (Mr Soros already had).
Why did they sell with
CONFIDENCE?
Because as long as the Bank
of England supported the
GBP there was a BUYER FOR
ALL SHORT SELLING
POSITION.
Such was the naivety of a powerful financial politician who did not truly
understand how financial markets work.
The screens on the market turned red, and the cameras panned quickly
away but it was too late. The avalanche had begun.
Eventually, the government pleaded to stop selling the GBP. They did
and then Mr Soros BOUGHT the GBP and rode it all the way back up.
Thus profiting from the short selling and the subsequent buying.
How do you fit into the market?
■» WHAT DO YOU WANT TO TAKE OUT OF THE MARKET?
■» HOW DO YOU FEEL AS YOU QUESTION YOURSELF OVER THESE ISSUES?
■» DO THEY MAKE YOU PONDER A WHILE?
■» PERHAPS YOU NOTICE A SHIFT IN YOUR SEAT?
■» IS WHAT YOU WANT FROM THE MARKET IN SYNC WITH YOURSELF?
■» DO YOU WRITE OFF THE ABOVE AS NOT APPLYING TO YOU?
I dropped the above into the conversation here just in case there are
personal elements that you want to explore further regarding personal
worth and coping with wealth.
How you view the market will influence your success as a trader
For you to win means that another trader has lost, how does that make
you feel?
Your first reaction (which you believe to be true) is that this does not
matter to you. The other trader is faceless and therefore is of no
consequence.
We all have a conscience that is pricked from time to time. This is
sometimes highlighted in trading and whilst this rarely prevents a person
from trading it often places a ceiling on the degree of success that a
trader might enjoy.
The Three Phases of financial markets
Phases of markets are critical. Understanding where a market is in each
phase gives you the opportunity profit quickly and efficiently.
There are three market phases, however two of them often bleed
together to cause the intended misdirection.
Accumulation Phase
The first phase, the accumulation phase (also called the set-up), is where
the market makers engage in the process of accumulation.
It is important to keep in mind here that the market makers have a keen
sense of whether there is likely to be belief in the market rising or falling.
In other words is there demand or supply in the market.
Note* When I refer to then market I am referring to any particular trading
instrument or currency pair. USDJPY - S&P 500 FTSE 100 ..etc
For many traders looking at a chart that is trading in a close range they
use the term ‘congestion’ This description ‘fits’ the look of the chart. It
fits the FORM of the chart.
If this description were true then trading out of congestion would only
require the simple act of placing buy or sell orders either side of the
‘congestion’ and waiting for the market to break either up or down from
the congestion area.
If you have been trading for any length of time you will know that this
trading method only leads to losses over time.
Rule of thumb
If there is no clear indication of market intent where you feel confused
and uncertain about market direction you can safely bet that
accumulation / manipulation is going on and this is not a good time to
have an open trading position.
Important
Your confusion and uncertainty about market direction should be
considered a positive experience. You use your manipulated feelings to
indicate what the market makers are up to. What you actually have here
is an onboard personal indicator that will keep you out troublesome
trading areas.
Remember, the look of the price chart is designed to get you buying or
selling by manipulating your beliefs about future prices. To get you
crossing the road when you should not be doing so.
When the market is uncertain about future prices, it buys and sells
without favouring any discernible direction. Market intent is extremely
difficult to see in the accumulation phase, using price bars alone.
However, you can still learn to recognise when accumulation is going on
and set yourself up to profit after certain events have taken place.
Manipulation Phase
The second phase, the manipulation phase (also set up), is where the
market makers go into bursts of activity before they move into the profit
release phase. Sometimes this initial burst of action is straightforward in
so much as the prices are marked up or down suddenly so that the
market begins to buy or sell in the direction of the intended profit
release.
Often, the initial emergence out of the accumulation area involves taking
out stops in which a massive amount of buy orders or sell orders are
rapidly accumulated by the market makers just before the third phase
begins.
It is this taking of stops that offers the clearest insight as to which side of
the market has been accumulated and therefore the intended direction
of the profit release.
Profit Release
The third phase is the profit release phase and is characterised by more
and more of the market coming on board. By this, I mean that the market
begins to predominately favour either buying or selling.
Remember, for the market makers to make a profit, there has to be
sustained buying or selling in a particular direction which drives the price
across the necessary range to profit from the manipulation they created.
This profit release phase also contains retrace moves that can confuse
the trader regarding overall market direction.
In hindsight, these profit-release moves are obvious. While trading within
them, the market intent can become obscure.
Traders who do not fully understand how beliefs are being manipulated
will often either withdraw from the market before taking all the profit
they could, or they will not enter and miss out on easy gains.
As you can see, discerning market intent ("Is the market favouring buying
or is it favouring selling?") is crucial to successful trading.
Remember, the market makers are always gearing up to make a profit.
They can only do this by moving the market to predominately buy or sell
in a specific direction. The critical word here is predominate.
Their money-making activity involves strengthening the market's belief in
future prices in the direction they want it to go. They start doing this from
the accumulation phase.
The market makers' entire money-making activity consists of developing
the market intent predominately in one direction, either up or down.
Now whilst I have explained the three phases here with the written word,
you will need to understand more which is beyond the scope of a written
document. But take this explanation to your charts and see what you can
see.
The market as your teacher
The teacher moulds your trading behaviour.
Golfers tell me that the worst thing a person can do when they decide
that they want to play golf is to pick up a club and take a swing. This is
because they will instantly adopt the stance that is most comfortable for
them but most likely unsuitable for actually playing golf.
The market does exactly the same thing to traders; the main difference
here is that the stance in golf is annoying and will affect your game. The
same stance in trading will empty your account quickly and could prevent
you from ever trading again.
Human beings are rapid learners; we can observe, mimic and perform a
skill; with time, we become adept at this new skill and add it to our
repertoire.
However, when trying this same process on the market, we quickly notice
that no two actions are identical in outcome. This is a severe impediment
to our normal learning process.
Imagine that you are about to learn the art of carpentry. However, your
carpentry teacher changes how he holds his tools each time he picks
them up and never holds them the same way.
Would you ever learn the skill? In this example, it would be more efficient
to observe the carpenter and then develop your own technique.
When learning how to trade, the lack of genuine
teachable trading knowledge is often at fault and not the individual
learning.
Hundreds of courses will show you yesterday's charts and where you
"could have" or "would have" made profits. This is the blind leading the
blind. This is meaningless drivel that is repeatedly sold to the
unsuspecting.
The learned habits/ emotions of the amateur trader
Remember that the amateur is often the person who has recently
decided that he would like to trade the markets. He goes out and buys a
few books, gets a charting package and starts to draw a few trend lines
and the like.
The budding trader enters the market, has a few wins, and quickly
discovers that all that glitters is not gold.
The harsh reality is that the market often takes on the role of an
adversary. The emotions attached to the trader during this reality shock
are the key to the trader's ultimate success or failure.
The Emotions of Failure
Fear and how it develops.
There is nothing wrong with fear. Its role is to protect
and serve us in times of danger. The problem is that we are the direct
interpreters of what constitutes danger. It has to be this way, of course.
Let's go back in time.
You are in your teens and desperately fond of a
particular person. You dearly want to ask them out, but fear holds you
back. Clearly, the type of danger here is very different from running in
front of a speeding train. Still, the debilitating effects are very much the
same. Pounding heart, sweaty palms, hyperactivity, nervousness, etc.
You will, of course, overcome your fear of the opposite sex as you come
to understand more about them. (maybe :))
Learning to parachute will serve as one more example: As you jump from
the plane, you will, of course, feel the very same symptoms as described
above, albeit a little more profound maybe. As you do more and more
jumps, you will start to enjoy the experience and eventually look forward
to it without any fear. The fear you once felt has dissipated over time and
eventually turned into fun.
Fun was obtained as you gained more experience and knew what would
happen at each new jump.
Trading fear, however, has a twist that is very different indeed. Usually,
when you start out trading, you will feel a low level of fear or excitement.
If things go well, you will feel the excitement. If things don't go well, you
will feel anxious or nervous.
These feelings will be mild initially, but they will build gradually without
training to halt this process.
Eventually, if left unattended, these fears will build to the point where
you cannot easily distinguish between the two emotions.
As this fear develops and strengthens, you will become highly critical of
trading opportunities. Over time, this will increase, presenting you with
severe trading problems.
You will note that instigating fear in the trading environment is the exact
opposite of fear when parachuting.
In parachuting, one starts out with a high level of fear, which gradually
dissipates.
Trading fear starts at very low levels and builds to a debilitating
experience that prevents your trading success.
Lack of confidence
Generally there are four stages:
Low confidence level as unsure of trading protocol etc.
Increase in trading confidence as one gets comfortable with the trading
protocols and the environment.
s the dissipation of confidence, as losses are not accounted for in the
candle pattern trading strategy.
Culminating in a lack of confidence in one's ability to trade effectively.
(Stage two is often the most dangerous in terms of losses)
Fear of the Unknown.
This is developed as the trader becomes affected by:
■» LACK OF CONFIDENCE.
■» UNCERTAINTY OF PRICE, VOLUME
■» CURRENT MARKET ACTIVITY.
■» IMPENDING ANNOUNCEMENTS, ETC.
These all build into what can best be described as an entity that does not
exist. Still, it exerts a tremendous amount of control over the trader.
How a losing trader develops and maintains the
ability to lose consistently
This trader has developed a losing strategy.
The losing traders strategy examined:
The trader has, over time, grown into this losing strategy, which is
maintained in the hope of the next big trade.
The trader may have even gotten to the point where he is so engrossed
in his strategy that he will defend it in the face of hard opposing
evidence.
What has happened here is that the trader got into a destructive loop as
show in the image above.
This loop has created its own strategy; the real danger of this type of
strategy is that it operates subconsciously. If left unchecked, this will
eventually lead to emptying the trader’s account.
The way out of this loop type can be tricky without some help, as it
requires a lot of personal examination. Sometimes, there is a
subconscious desire or wish to stop trading altogether. If the
subconscious picks up on this desire, it will do all it can to “grant the
wish”.
A key point to note here is that this would all be operating
subconsciously, and the trader would have no direct awareness of this
self-destruct process taking place.
How a successful trader maintains success
The successful trader is caught within the success loop just as the trader
is caught in the failure loop. The successful trader may or may not be
consciously aware of this.
Many successful traders are so unaware of what they do that they find it
virtually impossible to explain when and why they take any particular
trade to another trader.
For them to stop and think about this may even have a detrimental effect
on their trading.
Many traders write books about their trading and how they are
successful; other traders read these books to try to emulate the
successful trader. This is often disastrous for the student because the
book contains only part of the story.
I might add here that this is not deliberate on the part of the author)
Suppose the trader author has traded for many years successfully. In that
case, his success loop will be deeply rooted in the subconscious, possibly
to the point where intuitive trading has taken over.
When a trader reaches this intuitive stage, he may have a complete
misconception of what he is “actually” doing with regard to his trading.
The trader has supreme confidence in their abilities and growing trading
account; this is all they know.
The solution to trading successfully
The problem and the solution to trading successfully lay in a single word.
The problem is understanding how important this word is and how this
affects/controls all markets.
This word is often mentioned in trading circles, but it's pointed inwards
to the trader, which is the wrong direction when trading financial markets.
What is this one word…?
Belief
We are told to believe in ourselves, in success, and that what we visualise
will be obtained. This is all excellent advice; however, this is different in
financial markets.
To understand BELIEF and how it controls financial markets is to
understand every market move. Understanding every market move can
give you more money than you can poke the proverbial stick at.
So….you as a trader need to fully understand how beliefs work and affect
all financial markets.
By understanding and then applying the concept of beliefs to the
market, you will have a successful trading strategy that will exist in
perfection until humans change how they create and deal with beliefs
(we can assume this will not be changing anytime soon)
So where do we start understanding how beliefs affect every single price
traded and every sustained market move?
Crossing the road
Let's leave the markets momentarily to take on a very mundane task that
we can all carry out without too much thinking. The mission of crossing a
road/highway
Imagine you are standing on the
edge of a busy road. You are
watching the speeding traffic
coming from both left and right.
How are you going to get across?
The surface answer will be: "Wait
until it's clear and then cross the
road."
This seems logical and reasonable. However, this is a surface thinking
mode; this is a facade that our mind presents to us, which ultimately
allows us to cross the road without being aware of everything going on in
our minds below the surface.
A look below the surface of crossing the road
As you stand on the road's edge, your mind rapidly brings up past data/
experiences about your previous road crossings. It is now evaluating
these current and past conditions to arrive at a solution allowing you to
cross the road.
If applicable, that solution will work out the distance to the other side of
the road, the speed and distance of oncoming traffic, and even weather
conditions.
Suddenly, right the moment you step off the curb and head into the
road, something is born within you. That something is a BELIEF that you
can safely get to the other side.
Until that BELIEF is born within you, you will be immobilised and unable
to step into the road.
Now just back up a little and cast your mind to another time when you
were waiting to cross, and just as you were thinking about it, another
person standing beside you, also waiting to cross the road, suddenly
stepped out. You started to follow them, only to discover this was a bad
idea. No doubt you can recall, this was a stomach- churning experience
as you either committed to the crossing or leapt back to where you had
been standing.
So why is this so important to you as a trader to understand?
The first belief on crossing the road was YOURS; you created it and acted
upon it.
The second belief was a MANIPULATED belief; it was forced upon you
by the actions of another.
If you can fully understand the difference between these two beliefs, you
are well on your way to successful trading.
Now, one more observation of the road crossing. Imagine you are an
observer sitting high above this road looking down and watching others
cross the road. Could you now tell the difference between people who
cross the road acting on their beliefs and those who cross with a
manipulated belief?
I am confident that you will be able to do this in a very short period.
What has crossing the road got to do with trading success?
Everything!
You see, market movement (price movement) has, contrary to popular
opinion, nothing to do with price itself. The price change is brought
about by someone buying and or selling. You now from earlier that a
trading will be forced to develop a belief that his order to buy or sell will
result in success and he will make money BEFORE he/she can place a
trade.
It is ONLY when the trader has developed this belief that they can place
a trade to either buy or sell the market, precisely the same process as
crossing the road.
You can cross the road once you believe you can make it to the other
side.
You can buy or sell the market (thus influencing the price) once you
believe you are making the right trade.
What we can draw from this is again that BELIEF is at the back of every
trading decision.
The markets are an ever-changing ocean of BELIEFS about future prices.
The future price, meaning will the price move higher or lower from its
present position.
Furthermore, these beliefs (your beliefs) are being manipulated to
encourage you to take trading positions at times that will almost always
place you in a weak trading position.
You are being encouraged to step out into the road based on a belief
that you have been GIVEN and not a belief you personally CREATED.
There is a MASSIVE difference between these two beliefs.
Understanding the difference is crucial to your trading success.
The defining characteristics that separate the successful trader from
the unsuccessful trader
■» THE SUCCESSFUL TRADER WILL HAVE, AMONGST OTHER THINGS:■» A WELL-DEFINED TRADING STRATEGY.
■» COMPLETE FAITH IN THAT STRATEGY.
■» AN AUTOMATIC RESPONSE MECHANISM.
■» A LONG-TERM OUTLOOK.
■» CONFIDENCE IN HIS ABILITY.
■» A STRONG SENSE OF PURPOSE.
■» A DEVELOPED SENSE OF FEELING THE MARKET.
■» THE UNSUCCESSFUL TRADER WILL HAVE.
■» A WELL-DEFINED TRADING STRATEGY OR A POOR TRADING STRATEGY.
■» POSSIBLE SURFACE FAITH IN HIS STRATEGY, WITH SUBCONSCIOUS CONFLICT.
■» A CHERRY-PICKING RESPONSE MECHANISM.
■» SHORT-TERM WIN MENTALITY.
■» LOW LEVEL OF CONFIDENCE.
■» A CASUAL ATTITUDE.
■» POOR OR NO ABILITY TO FEEL THE MARKET.
Note
The unsuccessful trader may possess an excellent strategy, but other
subconscious components may cause the failure of this individual.
The real challenge is not the trading of the markets.
The secret of successful trading is to consciously be aware of everything
behind that particular trade at the time of the trade. It is this awareness
that separates the successful from the unsuccessful.
The successful trader has traded following his strategy and KNOWS that
this trade took place without any emotive overlay.
The successful trader's mind is clear and conflict-free to enable the
processing of the continuing stream of market data that is arriving.
The challenge for the successful trader is maintaining this state to
function in a non-emotive environment.
The challenge for the unsuccessful trader is to achieve the non-emotive
state in the first instance and then maintain it.
The easiest way to explain this is to compare the paper trading results of
a trader who then goes live.
Paper trading can never be compared to live trading with real money on
the line. The reason for this is an emotive overlay. The live trader is
subject to this emotive
overlay, whereas the paper trader is not.
The paper trader is often capable of producing spectacular results over
sustained periods, but as soon as he enters the market with real money
on the line, it's as if the goalposts have suddenly been moved.
You can find out more here if you are interested in professional training in
the market makers method.
www.learningtotrade.com
This book took me about 4 weeks to write but nearly twenty years to
know WHAT to write. Some of what I have written here will only be given
a cursory glance by the reader as if somehow this particular part could be
more interesting. If this happens to you, I strongly urge you to force-read
that section because, almost certainly, your mind would rather you did
not read and face the truth if that truth throws up some challenges to
you.
Easy reading is easy - challenging reading is
challenging. You will receive a lot more from the latter.
I wish you every success and send kind regards from my family to yours.
Martin Cole
https://learningtotrade.com/
If you can help a fellow trader then share this document with them.
Glossary of terms used in this book
Stepping out of your strategy.
This is a hazardous action for a trader and not only because of the
impending possible loss. When you maintain your profitable strategy,
you will gain confidence as your profits grow. This confidence will be
reinforced whenever you trade within your strategy, win or lose.
The reinforcement occurs even in a loss situation because you and your
subconscious know your strategy is a winner over time.
Once you step outside your known strategy, you introduce an unknown
concept. Your subconscious detects this new variable and recomputes
your strategy.
Now you are in trouble because your subconscious no longer has faith in
the strategy because it does not have one.
DO NOT knowingly STEP OUTSIDE YOUR STRATEGY. If you do, you
could be throwing months of work away in a single reckless action.
Also, pay attention to how you might be subconsciously perceiving this.
Trade Hunting
Hunting for trades often occurs when a trader has a developed trading
strategy, but the market action has failed for several days to produce the
conditions where the strategy can be used.
With the delay and frustration, the trader will start hunting his charts to
see what they can find.
What is happening here is that the trader's mind is searching for
something that fits the bill. Should the trader now trade this selfgenerated opportunity, a powerful force that has just been released
against future success.
Read again: Stepping outside of your strategy.
Trading Harmony
This means your trading strategy should align with your personal trading
ambitions, resources, and understanding of the markets. An example of
trading out of harmony would be increasing your contract size without
sufficient margin; this could create a fear reaction should the market start
moving against your position. This fear (maybe subconscious) may then
trigger inconsistent trading as you search for the fail- safe entry point to
protect your margin.
The Subconscious.
Your subconscious is your most important asset when trading. Why?
Because once your subconscious fully accepts your strategy, your trading
will take on a new level of ability. No longer will you be thinking about
what has to be done. You will enter into a phase that I call autonomous
ability. This is a highly desirable state for the trader and comes from
supreme confidence in your personal success loop.
Emotive Overlay.
Imagine a scenario where you have decided to carry out some action.
Someone near you says something that is not directly related to the
activity you are about to carry out but causes an emotive reaction.
This reaction affects your ability to carry out the task you had previously
decided to do.
This applies to trading when considering price movement and how this
affects an observer.
Fear & Excitement
How far apart are fear and excitement? At first, you might be tempted to
believe that they are at opposite ends of the scale. They are not. They
are one and the same. As a simple exercise, jot down the type of feelings
that you might experience when you are fearful.
Heart racing - Sweating - Deep breathing - Heightened awareness.
Now do the same with excitement. Begin to get the picture?
The Gambling Environment
Trading is often associated with gambling, especially in the futures/
derivatives market. This is because the amateur trader blames the market
and tells his tales of woe.
However, there is a link to gambling here, which we need to be clear on.
As we have already discussed, the amateur trader does not have a
strategy; he is haphazard in his approach. The only consistent method of
trading he has is consistently inconsistent. Therefore, the inexperienced
trader is gambling, and the odds are stacked heavily against them.
Disavowal
The person in disavowal is refusing to own or acknowledge something.
An example may be when another person has pointed out a fundamental
flaw in what you are doing within your strategy. Ultimately, This results in
you shutting the door to further discussion. This is similar to going long
in a falling market and telling yourself that the market is strong and it will
later start to move up in the face of mounting evidence to the contrary.
Cherry Picking
This can be best described in the context of actually picking cherries. The
one just out of reach is always sweeter. Therefore I will not take this
trade; I will take another better one.
Inner Voice
This is the still, small voice that resides in all of us. This can be a positive
or negative attribute, depending on what the voice tells you.
Drawdown
This is another way of saying that you have lost money. The technically
minded, however, might argue the point here. Your trading strategy is
currently resulting in losses and you are suffering a withdrawal of funds
from your account.
Contract Expiry
Example: Futures are traded on a three-month basis. As the contract
ends its term, it is said to expire.
Pre-defined Strategy
A trading methodology/system that has been defined and evaluated.
The fact that it has been defined does not make it necessarily profitable.
Intuitive trading
Intuitive trading is a sense of knowing, understanding, and a profound
psychological awareness of the market's condition and what will
constitute a profitable trade. These traders are few and far between, but
it is a skill that can be obtained.
www.learningtotrade.com
END