Psychology lesson: Understanding your 'inner peace'.

For what feels like an eternity, I've been working on a new book of sorts. The consistent profits Forex course.

Here is a draft of the psychology section. A lot of you will recognise the sentiment from my original book but I hope you take something from it. Any feedback (positive or negative) is very welcome:

Module 4: Psychology: I've mentioned that for a long time, I traded with inconsistent, sporadic periods of profits, ultimately over a long period of time, the account balance would be at break even at best. I also mentioned that I put my eventual consistency down to two factors: 1: A switch to focusing on ‘fundamental trading’ (understanding and trading in the direction of the underlying cause of a move). 2: psychology. The switch to understanding fundamentals was (for me) critical, particularly because I feel a lot more relaxed when I've placed a trade with an understanding of the underlying cause behind it. But, I will say I don't think ‘understanding fundamentals’ was the absolute cause of my eventual consistency. I have no doubt there are successful ‘technical only’ traders. But, I do think ‘mastering psychology’ was absolutely essential to my success. Specifically, there are two aspects of psychology, both are as important as each other. And unfortunately, both are extremely difficult to overcome. 1: Acceptance of losing trades. 2: Placing a trade through fear of missing out. It's embarrassing to admit how many times I've fallen foul to both scenarios. Scenario 1: Picture the scene, Everything has lined up according to your strategy, you are very confident in the trade you are about to place. You enter a EUR USD long trade, but the trade stops out. You can't believe it, there is no way the trade was going to stop out. Convinced you were right and chasing the money a winning trade provides, you place another trade, exactly the same. But that stopped too. Incredulous with rage at this point, you place another EUR USD long, which (of course) stops out. All of a sudden, you've gone from having a good idea, to a minus 3. which all along should have just been a minus 1. Scenario 2: A currency has momentum, your strategy tells you there is definitely a trade here. But all of the criteria has not quite been met, the currency has gone up a little too far. Deep down, you think it's best to wait for a pullback before entering a trade. But the chart does still have momentum and you get a pang of emotion, you can't stand the thought of a missed opportunity. So, you place the trade. Even though deep down you think it's best not to. Lo and behold, the chart does pullback and your trade stops out. A needless minus 1, from a trade you didn't even think you should take. Which only leads to the inevitable scenario of placing more trades in an attempt to make up the loss. The hardest part of trading: There is no glossing over the fact that we are trading in an attempt to make money, the allure of financial gain can be intoxicating. Reaching the point of accepting losing trades and having the strength not to place a trade, even though the thought of missing out is tempting you, (to my mind) is the most difficult aspect of trading. I put it down to our inbuilt human nature of needing to be correct, combined with the fact potential financial gain is involved. Remember, due to our higher risk reward ratio per trade, we only need to be correct 50% of the time. But clouded by the allure of money, that fact escapes us. And a mist of blurred emotion engulfs us with every losing trade, causing irrational decisions. Ultimately resulting in a blown account. Unrealistic expectations are a very big factor in the reason most traders fail. If you're expecting to make very large sums of money in a short space of time, it's only natural that every loss hurts. Many traders also risk far too much equity on any given trade (too big a lot size,). I've come across people who often risk 10% on a single trade, aiming for 15 / 20% profit. If your risk percent is too high, it's only natural to place far too much significance on a single trade. I'll refer you to the exercise I suggested in module 1: ‘come to terms with and accept, a 25% gain for one year of trading’. If you haven't yet accepted that fact deep down in your soul, you will find it even harder than it already is to accept losing trades, which will ultimately make it extremely difficult, if not impossible, to make consistent profits year after year. How do you do it? How do you accept losing trades?. Even when you've come to terms with the fact 25% is a very good yearly gain. Even when you're risking a very minimal financial amount of your account on each trade, it is still difficult to accept a losing trade. Ultimately, it's a loss, it's something you didn't want to happen and it means that your idea didn't come to fruition. We are human, even now, after 10 years of trading, I still get a feeling of disappointment when a trade hits its stop loss. The key is not reacting to that disappointment. We can do that by knowing that our original decision was a good one. Making good decisions In every facet of life we are constantly making decisions. Should I brush my teeth this morning? What clothes should I wear today? All day every day, we are answering questions we don't even know we are being asked. But we are naturally answering those questions based on probability. Should I brush my teeth? Yes, because if I don't it's likely I'll get tooth decay. What clothes should I wear? If it's cold, wear something warm, if it's hot, wear something cool. My point is, if the sun is shining and it's very hot outside, you look at the weather forecast and the nice weather is set to continue all day. So, you put on a t-shirt and leave the house for a walk. Two hours later, it started to rain. By the time you get home, you're soaked and wishing you wore your rain coat. My point is, with the available information at the time (hot weather, good forecast), wearing a t-shirt was a good decision (who wants to unnecessarily carry a coat in sweltering conditions?). Deciding what clothes to wear is a very trivial example, sometimes we get challenged with life changing decisions. But the principle remains the same: Make the best decision you can according to the information you have at that moment. Sometimes, in the future, the information changes. Making your original decision look like a bad one. But, I can't stress this enough… It wasn't a bad decision! It is the exact same principle when trading. Picture the scene, US NFP data has just reported a better than forecast headline number. The US dollar is strengthening across the board, US YIELDS are up and subsequently, the JPY is weakening according to its inverse correlation with US YIELDS. It is a no brainer USD JPY long, you have a stop loss and a profit target you are comfortable with. Now is the perfect time to enter the trade. But, a few hours later, a FED board member speaks and dampens the possibility of a US rate hike, the USD strength reverses and the trade stops out. It is very important to realise that the original decision to place the trade was a good decision. If you went back in time, with exactly the same information, you would still place the trade. And that's all we can do, make the best decision we can, with the information we have at the time. When you can truly hone in on simply making ‘good decisions’ and not be affected by the outcome of that decision, resting on the fact you know it was the best decision you could make at the time. Saying to yourself, you know what. If I was put back in that exact same situation, I would still make the same decision. That's when you start to find inner peace with your trading. And before you know it, you'll also start to notice that you've quietly built up consistent profits. Setting your objective: The whole point of trading is to make money, you make money by placing winning trades. But, bear with me here, your goal is not to place a winning trade. I realise that doesn't sound correct, but due to the higher risk reward ratio we use for each trade, we only need a 50% win rate to be successful. Setting out with the goal of placing a winning trade puts you at an automatic disadvantage. Ultimately leading to emotion, a high amount of stress and rash decisions. I truly believe that whilst you approach trading with the goal of placing a winning trade, you will find it extremely difficult, if not impossible, to be consistently profitable year after year. When you realise that a winning trade is just the by-product of making a good decision and the outcome of each individual decision is actually irrelevant, you'll be able to approach trading with a relaxed attitude, simply focusing on making a ‘good decision in the moment’. And if you can somehow manage to block out of your mind the fact financial gain is at stake and only focus on ‘making a good decision according to your strategy’, you'll be amazed. It all sounds very straightforward when written down. But in the heat of the moment, when the little monster on your shoulder takes over, tempting you into taking a trade you know deep down you shouldn't be placing. It is very, very difficult to have the presence of mind to step back and truly focus on what you deep down believe is the best decision in the moment, a decision you would still make even if things don't go to plan. Constantly checking on trades: Once upon a time, I was desperate for every trade I placed to hit profit. Consequently, once I’d placed the trade, I would constantly be checking on it, reading into every positive or negative pip, questioning whether I'd made the right decision or not. Access to information on mobile phones makes it extremely easy to quickly check on the progress of my trade. The desperation to be right, the desperation to have a winning trade, compounded by the fact mobile phones are literally designed to make you addicted to them. All in all, the end result is what can only be described as an addiction, call it a trading addiction, a gambling addiction, whatever it is, it's bad news. And unfortunately, I suspect there are hundreds of thousands…..probably multiple millions of people, stuck in the trading addiction hole, desperately trying to become successful traders. The irony is, once you become blasé about each trade you place, (not only each trade but every decision you make), that's when you slowly start to see consistent profits. These days, I place a trade and I don't think about it until my next allocated time to trade. Honestly, it was a long and difficult road. It takes every ounce of mental strength you have to override the ‘human need to be correct’. How do you do it? How do you hone in on ‘inner peace’? For me, I need a stop loss I feel very comfortable with to find the feeling of inner peace. It could be different for every trader, you may prefer the profit target, you may prefer to only trade fresh news or only trade pullbacks. Understanding your own inner peace, that moment you have no doubt it's a good trade, is down to each individual, it's a process of understanding how you feel every time you are attempting to trade. Do you feel rushed? Are you anxious? Are you chasing a loss? Are you over confident? Understanding your emotions helps you to hone in on that relaxed feeling when you know it's the correct time to enter a trade. Acting on your decision: It should go without saying that once you've made a decision, you have to act on it. But actually, it's not quite that easy. We know what we should do, but the allure of what we want to do takes over. And we end up placing a trade when deep down, we know it's best to wait a few hours. Otherwise known as ‘the fear of missing out’. When you're about to place a trade, you gain a feeling of peace by logically rationalising the reasons for the trade, safe in the knowledge it's a decision you would stand by even if it doesn't go to plan. The same logic can be applied for times when you decide it's best not to place a trade, even though you really want to. All you have to do is reverse the scenario: AUD JPY is going up, you know why, you think it will continue up. But the chat looks overbought and your decision is that the best thing to do is wait for a pullback. The pullback doesn't come and the chart continues up for another 80 pips. I find myself in that situation many, many times. It is very important to understand and accept that it was the correct decision not to place the trade. Regardless of the strategy you use (I will show you my strategy in the next module), every time you approach trading, I can't stress enough, it is important to be aware of how you are feeling. What thoughts are you having? Are you desperate to place a trade? Are you feeling excited about the possibility of a winning trade? Acknowledge the thoughts you are having and be aware that the only state of mind you should have is one of calmness, feeling at peace with the decision you are about to act on. If you can become self aware and break the mold of placing trades out of emotion. Slowly but surly, you'll eventually reach the point of ‘inner peace’ with every decision you make. The by-product of trading with ‘inner peace' is consistent profits. Exercise 1: For the next three weeks, notice (perhaps even write down) how you are feeling each time you are attempting to trade. A few hours later, without checking any charts, analyse whether or not you truly acted on what you believed to be the best decision at the time. Did you truly act on what you believed to be the best thing to do? If not, why not? The goal here is to act on your best decision 100% of the time. Exercise 2: According to your strategy and assuming you've acted on what you believe to be the best decision. Over the next three weeks, take note of how many times you felt your decision eventually turned out to be the wrong decision. Remember, a correct decision and a winning trade are two separate things. Correct decisions often stop out. But if your analysis is correct over half of the time, you know you're on the right track. If your analysis is wrong over half of the time, the strategy may need tweaking. Which brings us to module 5….

Thank you, like I say, feedback is very welcome. Interesting week so far, UK jobs data and the RBNZ 'not as hawkish' as the market expected, created GBP and NZD short opportunities as ' in the moment news trades' for anyone at the charts at the time. Whether the negative mood for the currencies continues will depend a lot on the market risk environment.

johnelfedforexblog@gmail.com