This article completes the mini-series of 5 articles on the “Pillars of Trading in Modern Markets” I have focused on this week.
So here follows a definition of Trader Psychology: it is the beliefs system that has to be in place for a trader to be successful in the markets. 95% of people lose money in the market not always because their trading method is flawed, but rather because they approach trading with a wrong set of beliefs. The common sense ideas and beliefs we bring from our everyday life do not work in the markets.
Note: This is the most important aspect for a trader to understand. If we as traders start with the right foot and question every impulse we have when we approach the markets, we put ourselves in a better spot to become successful in trading.
If, on the other hand, we just second our impulses and let ourselves react and take trades that are not in synch with the market psychology and current price structure, we create from the beginning a very negative energy associations with our trading experience. If you are a starting trader, avoid this at all cost!!
For instance, a lot of traders will initially fall in love with the concept of trading breakouts. This is basically entering the markets above recent highs (for longs) and below recent lows (for shorts). But although it can be successful this is not the best practice, for sure not for all instruments and for all time frames.
Note: The best way to trade the markets is to identify a new trend and then trade retraces before the price starts moving again in the direction of the identified trend.
But before new and experienced traders discover low-risk trades often hidden in price retraces, and learn to manage risk and obtain risk-free trade (another technique used to control and reduce risk even more), they “learn” to apply common judgment and common sense ideas to trading. A huge mistake! Totally wrong! Watch out!
For instance, in our daily life there is a widely accepted principle of “non-solution of continuity“. This has been probably borrowed and adopted from the law or physics or from nature. I am making reference to natural processes which when initiated, do not reverse quickly. For instance, before a process can be completely reversed, it will continue for a while.
Think of a body in motion like a car. If you hit the brake, the car will start slowing down, continue forward for a while, before eventually coming to a complete halt.
This is not true for market prices of EUR/USD or the S&P500 e-mini futures, and any other financial instruments for what matters. In fact, it is said commonly in the trading environment that “price can turn on a dime”. In the markets there can be events that suddenly reverse the process, as well as price direction.
Note: There may be possibly dozens of beliefs that we, as human beings, bring into trading from everyday life experiences. Most of these beliefs are what makes us losers in the markets. If you do not understand you need a ‘dedicated’ set of beliefs to function properly in the markets, you will not be successful. You need a ‘dedicated’ set of beliefs to be a successful trader- and that’s the bottom-line.
This article and the other 4 written this week pretty much cover the most relevant aspects involved in Successful Trading.
If you find any difficulty understanding any particular aspect- or have any other queries in general, leave a post in the related post or send your queries to my email address: email@example.com.
I will be glad to assist you with all your queries. I plan to have a Skype call one of these days, with all the followers. If you are interested, contact me at the email above.
I would be happy to hear from you your thoughts, ideas, feedback, or any other comments. Looking forward for your notes.
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Have a great Friday and weekend.