Trading Psychology – Find an edge with these tips

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Forex trading psychology is a big thing. Often, it is the psychology, and not a lack of academic knowledge or skill in application, that is considered to be the primary originator of trading mistakes. Mistakes are constantly repeated by financial traders of various national, cultural, and social backgrounds, which suggests that it is the common traits shared among us as humans that lie in the base of those mistakes.

That common trait is fear, which creates the ‘fight or flight’ response in humans. Unfortunately, it is this fight or flight response which can cause the downfall of many traders. We cannot change what we have evolved to feel over millions of years, but we can change how we approach these feelings, by studying the psychology of successful Forex traders and then applying the findings. Today, we will look at how we should behave and respond to trading situations from the correct Forex trading psychology point of view.

Fear can have a significantly limiting effect on trading behaviour. Naturally, your mind will want to find the safest option to ensure survival. In terms of trading, this means that if a trade looks like it is going to lose profit, your natural instinct would be to pull out of the trade, so that you don’t incur further losses.

However, this can steer you away from a carefully planned trading strategy. Even worse, it could cause you to make rash decisions, with the hope of turning that losing trade around, causing you to lose much more money than you would have if you had just left it to play out. Instead of focusing on the long term plan, your mind wants to focus on making the best out of this short term losing position.

Understanding the role of psychology within Forex trading will help you to alleviate fear from your decision making process. Becoming aware of fear on the spot will empower you, both as a trader and as an individual. It will also allow you to re-establish the control of logic and reason, which is your ultimate goal.

Different Types Of Trading Bias

It’s easy for traders to feel confident in their ability to remain calm and collected during their trading sessions before the market opens. However, once the clock starts it’s a different story. When faced with real financial decisions, it’s very easy for emotions to come into play. We can’t avoid our emotions, but we can learn to work around them.

Traders cannot afford to give in to feelings of excitement, fear, or greed when trading, as it can cause costly and irreversible mistakes. Evaluate yourself psychologically by identifying if you are exposed to one of the following psychological biases of Forex trading:

  • Overconfidence bias – ‘The market will go here’
  • Anchoring bias – ‘This probably means that’
  • Confirmation bias – ‘This also proves that I am right’
  • Loss bias – ‘I hope the price will come back’

Notice how they overlap, because no matter how you look at it each of these biases, they all boil down to fear. Nonetheless, we shall discuss them in detail, because the first key step is to become aware of our emotions.

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Overconfidence Bias

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Lesson number one in Forex trading psychology is to watch out for trading euphoria. Humans are naturally self-focused. Our egos want to be validated by proving that we know what we are doing, and that we are better than the average person. Any hint that confirms these thoughts only reinforces our self-image by a distinct feeling of self-love.

The problem is that this is where traders are most likely to succumb to overconfidence bias. It’s not uncommon for traders to complete a winning streak and then believe that they can’t get anything wrong in the future. To believe this is of course unwise, and is only going to end in failure. Make sure you always analyse your trading sessions and look at your wins and losses in detail.

This is the only way you can really stay on top of your trading. Allow yourself to make mistakes – and don’t make the mistake of being scared to prove yourself wrong – you’ll be in a much better position for it in the long run. You have to be comfortable with accepting that mistakes are inevitable, especially in the early stages. It’s all part of the learning curve.

Anchoring Bias

This one is about mental comfort zones created by traders when performing market analysis, by ultimately thinking that the future will be the same as the present, purely based on the reason that the present appears to be like the past. Just as with other biases in Forex trading psychology, this one is directly borrowed from social studies.

Anchoring is a tendency to rely on what is already known to a trader for decision making in the future, instead of considering new situations and the changes that they can bring. At times, anchoring tends to cause traders to rely on obsolete and irrelevant information, which of course won’t help them to trade successfully.

In practical terms, this manifests itself in traders holding losing positions open for too long, simply because they fail to consider the options that are outside of their comfort zone. You must not be afraid of trying new things when trading Forex – be willing to try new strategies, and go against what you know. By anchoring yourself to outdated strategies and knowledge, you’re only increasing the probability of bigger losses.

Confirmation Bias

Confirmation bias is the one factor that is most common amongst professional traders. Looking for information that will support a decision you have made, even if it wasn’t the best decision, is simply a way of justifying your actions and strategies. The problem is that by doing this, you’re not actually improving your methods, and you’re just going to keep making the same trading mistakes. Unfortunately, this can create an infinite loop in Forex trading psychology that can be difficult to break.

The best case scenario in confirmation bias is that a trader will simply waste precious time researching what they already knew to be true. However, the worst case scenario is that not only will they lose time, but also money and the motivation to trade. A trader must learn to trust themself, and be happy to use their intelligence to develop profitable strategies, and then be able to follow them without fear or doubt.

Loss Aversion Bias

Loss aversion bias derives from the prospect theory. Humans have a funny way of evaluating their gains and losses, along with comparing their perceived meanings against each other. For example, when considering our options before making a choice, we are more willing to give preference to a lower possible loss over a higher possible reward. Fear is a much more powerful motivator than greed. In practice, a trader with a loss bias is more akin to cutting profits when they are still low, while allowing bigger drawdowns.

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There is only one piece of advice to solve the problems of traders that can be drawn from studying Forex trading psychology – and that is to develop a trading plan and stick to it. As a trader in doubt, you should absolutely feel free to research every other possible remedy available, but the chances are that you will still come back to a simple trading plan. It’s understandable for traders to feel fear when they are trading.

However, being able to push this fear aside and work through it is absolutely vital for any trader who wants to be successful. Practice trading, make notes, research new strategies and make mistakes. Trial and error is a massive part of the Forex learning curve, and generations of traders have proved that this is the most effective way to eliminate trading fears.

You might want to consider the following example as a point of reference if you start to doubt yourself: Dr. Alexander Elder, in one of his lectures spoke about a story of an old friend of his, a private trader who was inconsistent and experienced periods of wins and losses alike. In a couple of years this trader’s name ended up on the US list of top money managers. When Elder asked ”How, what changed?”, the trader said, ”I am using the same trading strategy that I always have”. ”What changed is that I stopped trading against myself and my strategy”.

That money manager pulled a mental trick on himself. When he was still a private trader and was inconsistently profitable, he pretended that he was employed by an investment firm and had a real boss, who gave him a trading strategy and left for a year, leaving the man in charge with one condition.

Upon the boss’s return, the performance of the trader will be not judged by how much money he made, but by how meticulously he followed the strategy. In other words, he split his trading into two separate roles – the planner, who had no exposure to the market, and the executor, who had no say in planning. What’s more, it worked!

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Everyone talks about having a trading edge, but how do I build/think of a system with an edge?

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This is the biggest (and most important, congrats) questions in systematic trading.

An edge is the one absolute necessity for consistent successful trading. All the money management and position sizing and psychology in the world cannot help you one whit if you lack an edge.

Part of me wants to launch into a lengthy and involved novel about how one can systematically and objectively measure probable edge, by creating a strategy development framework oriented towards exactly that at every step in the process. . but I’ll spare you all. This time.

It’s a word that is tossed around a bit too flipp.

Psychology of trading. Enhancing Trader Performance by Brett Steenbarger

When I thought about the article on the topic of psychology of trading, on the one hand, I understood the importance of the topic, but on the other hand, considering the number of searches in search engines, it doesn’t cause much concern. This is very sad, because sooner or later, any trader is facing psychological problems.

I believe that the book “Enhancing Trader Performance. Proven Strategies from the Cutting Edge of Trading Psychology” by Brett Steenbarger must be read in the first place, before studying any strategies and before the start of trade. At least the first three chapters. They give the right direction in the approaches to learning trading. The vast majority simply begins to learn wrong. Most learners find teachers by chance (on advertising, advice on the forum,from a bought book). Next, they immediately wait for the “grail”, they want to see the entry points. They hope that by simply copying the strategy, they will earn money and set themselves for the rest of their lives. Question about teacher’s statement is still actively debated: if he earns or doesn’t do i. In this approach to trading, everything is wrong at all. You will not start earning, no matter how profitable the strategy was and how much money the teacher earned. If this happens, it will be a great success.

The “Steenbarger’s book” is also worth reading to “teachers”, often I hear from such people very dangerous trading tips. For example, people are categorically beginning to assert that some kind of trading style does not work and one needs to learn their style. I have repeatedly heard, for example, that scalping has died, day trading doesn’t work and it is necessary to engage in medium-term trade. Or, for example, they do not advise to “trade” on the simulators, and immediately go to the real market, and on the cheapest tool to trade the minimum volume. All this is wrong from the point of view of organizing the learning process.

The first stage of learning is to know yourself. You need to analyze your cognitive and emotional style, your strengths, and then search for a trading strategy, a niche on the market, considering your psychology. Your psychology is the foundation on which your trade will be built. It is very difficult to change psychology, your psychology will win your trading strategy very quickly if they do not match. Most do not get to trade because they are not in their niche. Books, seminars, which I saw, just skip this most important stage of training. Why did you decide that this strategy is right for you? Finding the right type of trade for you is the most important stage.

Before choosing a trading style and the market Steenbarger recommends to determine the comfortable time for you to hold a position. What is closer to you? Frequent opening of positions for a short time or medium-term, long-term retention of positions? The time question is very important. The sense of time depends on your psychology. Your discipline will depend very much on how you are comfortable in your time. In general, finding the right niche for you and your discipline are directly related. Discipline “improve” is impossible. If you are in the right niche for your psychology, you will be disciplined. Discipline will be natural for you.

I’ll tell you my story with discipline and time. It’s not from Steenbarger’s book, but from my trading experience. Over time, gradually, I found my niche. I traded volatile stocks of three issuers: Google, Apple and Tesla. I came to the fact that it was clear to me to trade the same securities daily, only three. I knew them well, I felt the tape, the volumes, the levels and the time when you need to wait, and when to open positions. I was lucky that from the first days of trading I managed the time. In fact, I scalped, held positions for 5, a maximum of 20 minutes. I managed scalping on a limited number of instruments. There were periods of two months without a single loss-making day, with rare unprofitable transactions. I was frustrated by the fact that there were often situations when I did not make a lot of deals, but at the same time I quickly closed the unprofitable positions. As it turned out, quickly closing losses is much more important than incubating profits.

Then I did not understand that I was in my niche, and tried to improve my trade, began to hold positions much longer, an hour or two. Started problems with discipline, I began to hold much longer losing positions. If in the scalp I had very tough stops, now I gave shares to breathe, focused on hourly schedules. The ratio of the number of profitable and losing trades has significantly worsened, serious drawdowns appeared in the profitability chart, which didn’t exist before.

I felt the stocks well, and in the end, they got in my direction, but, for example, the next day. I thought that, perhaps, it is worthwhile to increase the holding time of the position, that it is worth starting to postpone the position the next day. The situation became even worse. I began to hold unprofitable positions longer, and close the lucrative earlier to take at least something. Feelings of waiting for the opening session on the NASDAQ, when you sit from the previous day in a loss-making position, were terrible. My exit from the niche completely destroyed my discipline.

The worst thing about this was that under the influence of stress, I had negative patterns of behavior. Although I wrote earlier that psychology does not change, in fact, under the influence of strong stress, it changes very quickly and for the worse. Bad habits are fastened very quickly. I realized that I began to hold a loss-making position, 2-3 days, I could not close it, I just could not admit that I was mistaken, because earlier I was so rarely mistaken. The matter was further aggravated by the fact that the account on which I traded wasn’t controlled by the external risk manager. Nobody could stop me. I stopped myself when I lost profit for 6 months. I did not lose the account, but the grief from the incident was so great that I could not look at the stock market for a year. These are the results obtained because of the exit from my “niche of time”.

First of all, you should decide on your “niche of time”. To do this, use “paper trading” on historical data. Find a simulator in which you can feel the time. There are free simulators, where you can test the strategy, on the bars “cursing” the schedule. They will not suit you. We need a simulator that will build a graph in real time. The task for you will be to understand your feelings from being in position. What will you feel in 5 minutes, 15, 30, hour, when you move the position the next day? What do you like best? Often open and close positions within a day or keep a few days? Try at different time periods to open one, two positions or several at once. Are you comfortable watching several issuers at the same time? Find your comfortable time and comfortable number of tools.

Further, Steenbarger says that you need to try yourself on different markets and in different styles. This can be an intraday stock trade based on technical analysis, long-term trading based on fundamental analysis, statistical arbitrage, short-term trading in futures or currency pairs, options. Try trading with crypto-currencies. All these are naturally very different markets.

In addition to different types of market it is important to try to go through changes in the nature of the market that occur over time. It is necessary to try up trend markets and down trend markets. Markets that are in trading ranges. Test the periods with high volatility and slow markets. The change in the nature of the market has a very strong effect on trade. Usually people randomly choose the market, start trading on it when it accidentally is in the same phase that they understand (for example, the trend is upward), and then the market changes. The volume increases, volatility increases or the market vice versa, stops and trades in some range, and people begin to lose money, without understanding of what has changed.

You cannot do without simulators, if, for example, you choose your niche medium or long-term trade. To make hundreds of transactions, you need to train on historical data, speeding up the time in the program. In addition, just in such way you can try different kinds of markets. Trends, ranges, different volatility.

All markets and styles should be tested on demo accounts, and preferably on simulators and historical data. At the first stage of choosing a niche, you need to understand what you like, that you have some sort of positive emotional connection with a certain type of trade. At this stage, you must treat trading as a game. You are not yet learning to trade, you are looking for your strengths, which will develop later. At this stage, you do not need to enter the real market. It will be approximately the same as a first-grader after a week of physical education to compel to compete against the Olympic champion, and financial markets – this is the Olympic Games, where the best competitors compete. You will lose money, interest in financial markets, and will get nothing but disappointment. Even worse, if you due to stress get bad habits, which then are very difficult to fix. Bad habits, unfortunately, are acquired very quickly.

You can say that this will be a very long process, which will last several months. Yes, you need to learn a lot. Steenbarger gives good examples. People, for example, do not learn to control a jet fighter, just sitting in it and flying. People do not learn surgery simply by taking a scalpel and starting to cut people in the hope that something will start to happen during the operation. Any profession cannot be learnt like this, and neither can trading.

First you acquire knowledge, then consistently work out different skills, then there is a simulation of trading situations on the simulator, and only at the very last stage you begin to trade the minimum volume on a real account. Many people skip skills’ training and modeling. Such attempts to accelerate learning lead to nothing good. It’s a big mistake to think that only real trading can teach you. Tasks should correspond to the level of preparation. And at the initial stage, your knowledge and skills do not match the complexity of any market. As Steenbarger writes, the newcomer boxer will not learn anything, fighting against the champion. He will only go into a knockout. You will lose money faster than you learn something.

After choosing a niche, gaining knowledge, you gradually begin to practice your skills. For example, a week you work out only searching for a certain graphic model. Separately work out the inputs / outputs and staging stops, separately control the position (for example, set the position in parts and exit the position in parts). For different strategies and markets, this can be different skills. The learning process should be gradual, so that not to lose motivation, and that the skills are firmly entrenched.

Once you have consolidated these skills separately, you can collect them together and make a deal on the demo. Only after everything will work perfectly on the demo, when all the actions will be worked out till you can do it blindfolded, only then you can try yourself on a real account. This foundation and the skills that have been worked out till you can do it blindfolded will not allow you to shake your psyche in real trading. This foundation will give you self-confidence, without which you cannot trade.

The book “Enhancing Trader Performance” describes the learning processes in prop-firms. An example is given that people were forced to make hundreds of transactions a day on simulators. So, people train in more difficult conditions than in real trading. This is what gives the necessary hardening and brings the trade to automaticity. Confidence and automatism are very important. The results are based on habit. If there is no automatism, then you will miss good deals. Steenbarger says that you need to get to the point where you will open and close deals just like you are washing and brushing your teeth in the morning.

The most important thing is to find your niche and create a strong emotional connection with it. If you do not like what you are doing, then you will not be able to develop and overcome the learning difficulties. People work hard because they have found their niche. In addition, do not forget that the markets are constantly changing and what worked yesterday may stop working, your niche may disappear.

Successful traders study constantly throughout their career. This is a cyclical process from gaining knowledge, working out skills, trading on demos and moving to real trading. For successful development find a mentor who has experience of trading in your niche. It will help you understand your technique, determine what you are doing well and what is not, what you need to refine. He will help determine where the problem lies in strategy, tactics or psychology.

The book consists of many useful tools for both novice traders (keeping a diary, collecting and analyzing trading statistics that will create feedback, maintenance and subsequent analysis of video transactions and one of the most important skills – risk management), and for experienced professionals, tells about useful psychological techniques. For example, about pronouncing out our thoughts about the deal, the market or your behavior aloud. This gives you objectivity, allows you to play the role of an outsider. Tips are given for reprogramming traumatic stimuli. You can try to get rid of acquired bad habits, causing similar situations in safe conditions (for example, trading on a demo or trading a minimum volume).

There is a lot of useless information in this book, of course. It is overloaded with examples from sports that could be reduced. Beginners in trading will not appreciate that much or will not pay any attention. Only after you go through all the rakes in your own trade and read the book again, you begin to understand what’s what, and you begin to appreciate these tips. So, I strongly recommend you to read the book, and then again to re-read. This book will save your money, time and health.

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