Without a stark realization, no discussion about trading or the possibility of trading can take place. The vast majority of traders lose.
The reason most traders lose is because they’re not psychologically prepared to trade. In other words, they’re not ready to take on financial risk and not have control over the outcome. Trading is more a psychological issue than a technical one. Only traders who can accept this will be able trade consistently well. Trading can be difficult without an understanding of trading psychology. After several consecutive losses, you will feel that it is impossible for you to succeed. This is why trading psychology is so important.
New Trader Scenario
Let’s say that a trader designs a system for day trading index futures. The method allows for 15 trades per daily and the trader has achieved the following results. 9 wins are $85 each with 6 losing trades at a mean of -$65 each. This results in $375 daily average gains. After achieving these results for three consecutive monthly, the trader is ready to move on to real trading.
But things quickly change once real money trading begins. Instead of trading the method they used when trading paper, the trader switches to’skipping’ trades, trying to pick winners rather than accept 40% losers. They invariably pick less losers than winners. The trader attempts to solve this problem by deciding that perhaps they are entering trades too late. Instead of waiting for setup to complete and then entering the trade, triggers are anticipated to allow trade entry earlier.
The constant losses lead to emotions such as “What is wrong? Why am I such apathetic loser?” Maybe it’s not me, or maybe the method doesn’t really work.
Every trade leads to more losses and emotions. With each trade, the problem becomes worse. The trader then decides that their paper trading results aren’t sufficient to enable them to trade for real money. They will return to paper-trading and start studying again.
The trader may be thinking: “Maybe I should test different trading methods until these losing trades can be eliminated. Only then will I be able to trade real money again.” Maybe I should quit trading.
The Trading Psychology Plan
This scenario shows that the trader never traded his paper trading plan plan after switching to real money. Unfortunately, the trader can’t see the error and blames the method instead of themselves. The trader ends up quitting trading. If they don’t accept and change the root causes of what happened, then this trader will never trade real money again, even if all their paper trading results are 100% winners.
The trader had an execution plan for trading, but not a trading psychology. They didn’t have the right tools to help them make the transition from fear and emotions-directed trading to actually trading their method. They didn’t have a plan to objectively assess and understand the non-methodic actions they took, and then devise a ‘setup’ for replacing them.
The trading psychology plan must begin by an honest assessment. It is not wrong to have a trading plan. The trader should not have traded it. Trading professionals cannot also internalize trade loss to the point where it leads to their own view of themselves. Trade losses are not your fault, but you aren’t a loser simply because your trade was a losing trade.
Trading Psychology Plan Components
Accept that trading will involve some losses. It is impossible for a trader to be perfect.
o Stop focusing on losing or winning. Instead, focus on your goal and follow your plan. This was not achieved while paper trading as the trader had an exact profitability goal that he or she shared with them when they were ready and able to trade real cash. They didn’t know that the reason they reached this goal was because they followed their plan.
o Stay neutral and non-judgmental toward yourself. If you are going to make profitable trading possible, it is imperative that you do this. You cannot trust yourself to manage risks if you tell yourself that you’re stupid, pathetic, or have done something wrong.
Eliminating your emotions does not serve the purpose. Emotions will always be involved in trading. Learn how to control them, rather than letting them dominate you.
Accept that emotions can be part of daily life. If I feel lost or confused, this can lead to an emotional response. This emotion serves as a warning sign to me that I should wait for more chart-market clarity to make a trade. This can happen when markets are in congestion.
o Be patient – This may be the most important element of your strategy. Begin trading real money, for example, and then take a look at what you did. Always ask yourself this question: Did I follow my strategy or did the trades I took not conform to my plan?
While you may not be able replicate the paper trading results, it is possible to approximate them. The expectancy of that plan was 15 trades per days. This will not only shift the focus from the amount of money I made to did my plan work, but it will also help you adjust to the realities of real time-real cash execution and the associated emotions. Doing this will help you ‘build-up” to trading the full plan at an appropriate pace. This will not cause you too overwhelmed and cause you immediately to avoid doing what you planned to do if fear or emotion becomes too strong.
You have a great trading strategy and plan. You have paper-traded profitably and are now ready for real trading.
