You’ve probably heard the advice: cut your losses and let your profits run.
But when the time comes, you do just the opposite! Why?
Because of your psychology.
When you have to cut your losses, you start to hope and wait for the market to reverse.
When you need to let profits run, you exit the trade, fearing that the price might reverse.
And this is just the tip of the iceberg.
Trading psychology will help you solve these problems.
In this article, you will read 6 practical tips to help you manage your mind and money.
Of course, all advice can be reduced to one statement – you must become a disciplined trader.
But how exactly can this be done?
1. Find a job
Yes, it sounds weird.
But having a steady job will automatically improve your trading.
Because a job will save you from making money from trading alone and help you become more profitable.
If trading is your only source of income, you are putting yourself at a psychological disadvantage due to the urgent need to make monthly money.
This leads to you making bad trading decisions like increasing your stop loss, averaging, or trading large lots.
Therefore, most professional traders do not rely on trading as their sole source of income.
Often they additionally run training courses, websites, or blogs.
They do this not because they do not earn money from the market but because they have an additional source of income and feel financially independent.
Therefore, at the very beginning of your trading career, until you have enough knowledge to teach others, and maintain your blog or YouTube channel on trading, do not leave your regular job or find a job if you do not have one.
This will allow you to focus on trading in your free time without worrying about whether you can pay your bills this month and buy food.
Also, an additional source of income will help you constantly invest money in trading.
The average return on financial markets is 20% per year.
So, if you have $1000 in your trading account, in a year, you will be able to earn $1200.
Therefore, it will be difficult to consistently earn on Forex without an excessive risk increase without replenishing your trading account.
By investing free money in trading, you can earn more.
2. Test your strategy
One of the most important components in the psychology of trading is confidence in your trading strategy.
If unsure about your strategy, how can you trade during drawdowns when not every trade will be profitable?
Then you will abandon your strategy and look for a new one.
And then the cycle will repeat itself?
This is not the way out.
You must find a trading strategy that suits you and constantly improve it.
Test your strategy to make sure it works.
If a trading strategy performs well in the past, it should perform well in the future.
For this purpose, you can use the manual method, where you rewind the charts and look for suitable trading situations in the market to check the performance of your strategy.
The advantage of this method is that you don’t need any special skills, and your practice understanding the price action market.
Of the minuses: the results may not be entirely accurate due to subjectivity, and it will also be difficult to calculate all possible risks.
However, if you like to test strategies against charts manually, here is the correct sequence to do so:
- Precisely represent the trade setup you are looking for.
- Rewind the chart as far as possible.
For example, you can rewind the chart for several years on a daily timeframe.
Try to gradually advance the chart one candle ahead and anticipate the further movement of the market.
Always keep a trading journal and record all your trades in it.
This will help you collect the necessary statistics for your strategy.
Automated testing uses a programming language or special programs.
Therefore, you can quickly test any strategy and determine its possible risks immediately.
However, for this, you will need special knowledge, and not always a strategy that performed well in the past will also perform well in the future.
3. Psychology in trading – evaluate yourself
How often have you been disappointed in your trading strategy after a string of bad trades? But you should never give in to emotions and despair.
Think, if you constantly change one strategy for another, how can you consistently earn money with such inconstancy?
Therefore, I came up with a special trading evaluation system so that later you can analyze the results of your trading in an unbiased way:
To get started, you need a trading plan that outlines your entry points, stops, profit levels, and risk management.
- If you did everything according to plan in your trade, give yourself a one-star rating.
- If you did not act according to plan, subtract two stars from your rating.
- Your goal will be to reach 100 stars.
This method will help you follow your trading plan, evaluate yourself adequately, and stay disciplined.
4. Be rich
The harsh truth is that few make money trading.
You are dealing with opportunities, but you have no guarantees.
You will have both unprofitable and profitable months.
Therefore, you should be prepared for periods of drawdown when you cannot always withdraw money from your trading account.
So don’t spend all the money you earn.
Strive for wealth, but don’t act like a rich person! Otherwise, psychology will trick you, and you will have to think about money, not trading itself.
And this is no longer acceptable.
Don’t forget about balance.
A comfortable psychological state is the most important thing.
5. Zulu method
Big economic news is coming out today! I hear this every day from at least one of my students.
And then they send me a losing trade for analysis with a comment:
A bullish Pin Bar appeared on the GBP/USD chart at a strong support level, but looking at the economic calendar, I noticed that important GBP news is coming out today.
Fundamental analysts say the news will be negative, so I made a deal to sell.
From the comment, you can understand that a person trades according to two types of market analysis that exclude each other, which means that the probability of making the right decision is 50%, you can just flip a coin, and you don’t even have to think.
I believe it makes no sense to explain the problem of such traders – and so everything is clear.
And there, I was taught to do this.
Here is another commentary on the trade:
A Bearish Pin Bar formed at a strong resistance level on the chart of the AUD/USD currency pair.
The entry was made after the price broke through the low of this Pin, the risk/reward ratio was set to 1:2, the target was not reached, and a loss was received.
It is worth noting that the trader was guided by two trading methods optimized for different situations.
What I mean is that when entering the breakout of the low, the Pin stop will be much larger, we will enter at a worse price, and the market will have to travel a greater distance.
In this situation, it would be more reasonable to set the ratio to 1:1.
I teach entering from the correction of Pin.
This reduces our risk, allows us to enter at the best price, and we can also establish a better ratio of profit and loss.
But when someone starts trading using two methods at once, the probability of a positive outcome is noticeably reduced.
I understand that you want to believe that the courses you paid $ 1,000 for carrying at least some useful information, but you should not mix the two approaches because of this.
Otherwise, you will lose even more.
I hope you have learned the first two points for yourself and will no longer combine the incompatible.
We move on.
What is the Zulu method?
The first picture that comes to mind after reading the title is a bunch of naked Indians jumping around a fire, but here we have a different meaning.
A very long time ago, about 6 years ago, I read a book by some trader (I understand there is too much uncertainty), who claimed that speculators lack concentration on the chosen TS and cited his wife as an example.
Here is a brief retelling.
One day, my wife read a book about the Zulu tribe, and after that, she came up to me and told me one interesting fact about them.
I was interested, but I thought about something completely different.
And what if she would read all the literature dedicated to this tribe and later went to them and began to understand their culture herself?
Then she would become a professional in this field and would be able to participate in various scientific programs since she would know more than anyone about this tribe.
So it is with trading.
If you start to spray your attention on extraneous vehicles, then you will not achieve anything.
At best, you will stand still and be glad you do not merge.
But if you can focus on a particular teaching, you can consistently move in the right direction.
This can be imagined as a small quest, where your enemy is information that is unreliable and incompatible with your method, be sure that it will try to get into your head in any way and ruin everything.
It is necessary to build a strong defense and go to the end.
6. How to properly implement new knowledge in your trading method?
Imagine this picture: you are building a house from a durable material that has been tested for centuries, has passed all laboratory tests, has been tempered like steel, etc.
But suddenly, you have little money left, and replacing your super-duper bricks with a cheap but high-quality counterpart becomes necessary.
You start your search and unexpectedly come across building materials from XZ Inc.
What will you do?
I doubt that buying such blocks will be your first action.
Most likely, you will start looking for reviews about it.
Then give them for quality control, and drag this block through all kinds of tests.
And maybe even shoot it from an SVD.
Because you don’t want to finish building your future home from low-quality materials.
Especially since you invested heavily in building 3/4 of the house from heavy-duty slabs, bricks, or something.
Your trading method is a house.
If you start building it out of everything, I doubt it will last long enough.
It is necessary to introduce new knowledge after you are convinced of its quality and reliability, check on the history of various currency pairs, and adjust them for yourself.
If this is not done, the consequences will upset you greatly, perhaps so much that you will no longer want to build a house for yourself and your family.
If you want stability, you need to pay enough attention to something specific and not spray it on everything.
And remember, “A chain is only as strong as its weakest link.”
7. Learn to think like professional traders
A professional trader has a simple opinion about the currency and stock markets, while novice traders like to complicate things and attribute incredible events to them.
Sometimes their opinion is so unusual that fantastic books can be written on it.
To start thinking like a professional trader, you must remove all the garbage from the charts.
All novice traders love filling their charts with various indicators or trading robots, but all this is useless rubbish that only blocks the view.
So many computerized methods will lead to a reanalysis of the market and, therefore, to misunderstanding.
Do not complicate trading.
It is easier than it seems.
Of course, making money in the market is not easy, but with enough diligence and patience, it is quickly mastered.
There is no need to monitor and analyze the news constantly, although these factors greatly influence price movement.
It is much easier to learn price action theory than to spend years studying the impact of certain news on the market.
Most successful traders trade very simple technical strategies.
They do not care about the release of any news, as they know that any global news will be reflected on the chart of the currency pair as its component.
If you want to think like a professional trader, pay more attention to what the price tells you through candlesticks and technical analysis rather than through economic reports.
The truth is that almost all novice traders make more psychological mistakes than those related to their strategy.
How emotions affect: entering with a large lot, attempts to recoup, misinterpretation of the current situation, indifference to the result.
As you can understand, this leads to the inevitable death of a trader’s career.
Emotions will drag you down until you learn to control them.
Try to get the better of them.
All the tips in this article will be useless if you don’t follow them.
And to start following them, you will need something like “glue,” which will hold each mechanism and item nearby.
This “glue” is created from a trading plan and a trading journal.
By using these two powerful tools, you can instantly improve your trading, and these are not just words.
Sometimes after the third hour of trading, the head and eyes of the trader become clouded, and he begins to conclude such transactions that in the morning would seem to him complete absurdity.
Therefore, by keeping a trading journal, you will be able to identify those moments when your trade becomes unreasonable and entries meaningless.
By removing these elements from your trading, you will be able to increase the amount of your deposit faster.
It turns out that a trader should have a trading routine plan that will help him avoid reanalyzing the market.
But what is a trading routine?
In simple words, this is what you will do every trading day.
For example, analyze your trading journal, learn new things about the market, make a certain number of transactions, and the like.
In simple words, start working as a certain algorithm that does not make mistakes but does everything according to the system.
As you understand, a trader must make everything as predictable and easy as possible.
Only then can he become successful.
How to stay calm?
Good trading involves adhering to a trading plan and competently managing risk on every trade.
You will occasionally have profits and losses, but if you have a statistical advantage in the market, you will make money over time.
When you don’t think about trading, don’t read about it, but do it in real-time and open new trades, you have to face your emotions.
With each tick of the price movement, emotions will intensify.
You will be afraid that the market will turn around and go against you, that your stop loss will be hit, and rush to take a small profit.
From the outside, it looks silly, doesn’t it?
So every time you trade live, ask yourself: are you following your trading plan, staying calm, and are you in control of yourself and your emotions? If the answer is no, stop trading immediately.
If the answer is yes, then stop constantly looking at the charts and let the price reach your stop loss or take profit.
It’s simple, but it works.
This method takes your mind off your emotions and allows you to stick to your trading plan.
8. How to overcome psychological stress?
If you need to provide for your family, don’t trade all day.
The psychological pressure will be too great and hurt your trading efficiency.
However, if you are serious about devoting yourself to trading, raise enough money to cover 12 months of your living expenses before you start trading in the financial markets.
It will also be ideal if you have an additional source of income, maybe a part-time job.
After all, you can train other traders at the same time and make money from it.