ULTIMATE Trading Psychology Guide (Think like the Top 1%)

 

80% of trading losses can be prevented if you become more aware of your emotions. 

If you don’t separate yourself from your emotions when you trade, your emotions will separate you from your goals

Emotional control separates the unsuccessful traders from the successful traders.

Now emotions are not the problem here.

Emotions are not evil.  

They are signals to use and learn from.

Treat emotions as signals and get curious about what they are trying to tell you.

Become a detective and be excited to gather up clues and curious to understand what they mean. 

A lot of traders still think that you need to control your emotions to be a good trader. That is not true. 

What you should do instead is to develop the ability to first recognize your emotions and then understand them.

You need to understand your emotions so you can come up with a strategy to deal with them

Emotions can be fuel

Emotions are not necessarily negative.

In trading, there are no good or bad emotions. There are just emotions.

 If used correctly, Emotion can actually fuel your performance like how Michael Jordan used his anger to become the best NBA player.

Did someone talk shit? Michael Jordan knew how to read his anger and channel it into his performance.

It’s a skill more of us could learn to cultivate.

 I had this aunt who is a very evil woman and she told me that I won’t make it in life a few years ago.

She said that I would never amount to anything just like my dad.

I took that personally and went out there to become the best version of myself.

Every single time I feel like giving up, I think about all those people who doubted me.

I wanted to succeed so badly to prove them all wrong and I did. 

 Use your anger as fuel and work harder.

Work in silence and let your success make the noise. 

How I Discovered Trading Psychology

When I was still a broke 17 college student, there was this one time when I managed to grow a small $500 account into $10,000. 

Instead of withdrawing my profits, I got greedy and I wanted to turn that $10,000 into $50,000 and just see how far I could get.

The next day, I knew that Non-Farm Payroll was going to come out at 8.30 pm so I wanted to try my luck and trade it to get some quick profits.

That is called gambling, not trading. 

When the news came out, the price started collapsing so I entered a sell with 3 standard lot sizes.

And my heart was pumping super fast because I was literally risking my entire account on this one trade. 

It was all in or nothing. Price started reversing and headed back up and went up by 100 pips.

At that moment, I got margin called and blew my account and my account went into negative.

When I saw that, I froze.

I started crying on my bed and punching my pillow. 

I regret taking that trade so badly.

I wish I could turn back time to stop myself from taking that trade and just withdraw my profits. 

Now I am back to $0.

The worst part was that I had just told my parents that I made a few thousand dollars from trading and I could do this full time. 

Now what should I tell them?

I never told them about that loss.

The next day, I asked my dad to give me $1000 so I could pay my school fees, which was a lie.

I immediately took half of that and deposited $500 into my account.

I wanted to get back the $10,000 I lost so I started revenge trading.

I forced trades even when there was no clear confluence or opportunities in the market.

Bad trades led to losses and ended up blowing that account as well 

Do you know how embarrassing it is when my dad asks me where the money went? 

I did this for a few times until one day I decided to get my shit together and start learning how to become a professional trader who does not trade based on emotions.

That's when I started learning about trading psychology and the mental game of trading.

Attachment leads to losses

The biggest mistake that you can make as a trader is to be attached to your trades.

You are attached to how you want things to be, rather than acknowledging how they are.

If you are attached to your losses and wins, then your whole trading journey will be hell. 

For example, you entered for a BUY but you start seeing the trade going against you and the price starts falling heavily because of the seller's liquidity.

Instead of being flexible and pivoting your position, you continue praying that eventually the market will reverse and go back up so you can get into profit. 

BUT NO the market keeps dropping further and further and you end up getting out of the trade with a huge loss because you can’t take it anymore.

In reality, the market was neither good nor bad because it’s doing exactly what markets do: going up and down

Accept these 3 harsh truths about trading:

1. The market is always right
2. The market does not care about you
3. The market is not a human, it is an irrational uncontrollable entity

Eliminate your Emotions

To trade well, you need peace of mind. To get peace of mind, you must learn detachment. 

Once again, Emotional control is not a solution. Resolution is the solution. 

Develop the ability to stand aside and observe not just the market action, but also your thinking.

Watch the market with a mind of interest and curiosity, not one of judgment and labeling.

Give your mind the time and space it needs to open and reflect.

From now on, I want you to monitor your emotions before, during, and after your trade.

This will allow you to know yourself better as a trader so you will know what to work on.

My 3 step system to control & eliminate trading emotions:

1) Map your pattern 

To have a clear understanding of what you will encounter on a daily basis, you should identify an overall macro view of your emotional volatility.

You also need to get a clear understanding of what those emotional reactions look like at a micro level so that you can quickly spot them and minimize the damage when you are live trading

Start looking closely at the specific emotions, thoughts, actions, and decisions that are automatically triggered while you are trading.

They are the data that will help you understand the entire problem
For example, you are scrolling through Twitter and you start seeing some traders on Twitter telling you that this new crypto is up 20%.

You immediately feel a sense of FOMO. You don’t want to miss out on this once-in-a-lifetime opportunity. 

In this case, it might look like FOMO on a surface level, on a macro level but if you dive deep, FOMO can mean more than one thing. 

It can a sense of greed because you think that if you miss this opportunity, you won’t have such good money-making opportunities in the future.

This is wrong because there are always opportunities in the market. If you missed out on this one, the next one will come in 5 mins.

In this case, FOMO can also indicate anger.

You can get pissed off because if u missed out on this opportunity, you will see other people making money while you don’t.

And this feeling violates your sense of control. 

I want u to look at the instances where you experience FOMO and try to write down specifically what’s going through your mind and what are you feeling at the moment
When you map your emotional patterns like FOMO, Greed, or Doubt, you will realize that these patterns happen very frequently and consistently.

And if you don’t fix them, they will always come up and hold you back from trading success.

When you are trading on a live account, you are dealing with an emotional higher power that has the ability to shut down the brain. 

Your own emotions shut down that part of the brain that helps you control emotions.

That’s the tricky part because it’s easy to be rational and logical before you trade because you haven’t experienced any emotions yet. 

But once you are put inside the trench facing the enemies on the other side, trading with your hard-earned money, you start experiencing all these emotions and you won’t be able to think clearly.

To fix this, you need to look at the early warning signs when the emotions are still small.

You have to be prepared by understanding your emotion patterns, understand how to disrupt this pattern and you have to catch it early.
Because if you don’t, your emotions are going to get a hold of you and you will keep making the same mistakes you have always made. 

You will just keep losing money and blow account after accounts. 

There will be no progress in your trading performance which means you will never become a profitable trader.

I have created The Rational Framework to help you map your emotional patterns and record your trades.

In addition to The Rational Framework, make sure you download The Winning Trading Journal as well.

For the next 21 days, Use The Winning Trading Journal to journal and record your trades.

Then use The Rational Framework to monitor your emotions during your trades.

If you do this for 21 days straight, it will eventually become a good habit that will help you become a better trader.

2) Identify the roots of your problem

You can’t correct a problem that you can’t see. 

To get to the real reason behind your problems, you need to dig deeper.

You need to uncover the hidden flaws, biases, and wrong ideas, including errors in learning that are preventing you from progressing. 

Refer to 1st step where you had to map your pattern. Look at The Rational Framework to identify the signals that a problem has been triggered. 

Recognize that a problem has been triggered so you can correct it.

Follow these 4 steps to identify the roots of your problem:

1. Describe the problem in detail
2. Explain why you have this problem.
3. Explain why the logic in Step 2 is flawed
4. Come up with a correction to that flawed logic

Most traders can get consistent profits in demo accounts but struggle to do so in the live market. 

On a demo account, they feel calm and relaxed and can execute trades with precision.

On a live account, they feel hesitation, and uncertain and they start overthinking.

This didn’t exist when they traded demos because the results don’t actually matter.

Losing and winning on demo doesn’t have an impact on your life at all so emotions are rarely involved.

The basketball player who can shoot all the free throws in practice, but ends up missing the free throws during NBA.

The new actor is able to speak clearly during rehearsals but starts stuttering and can’t deliver on stage.

The music artist who can sing beautifully in the studio but forgets her lyrics on stage.

Just like the basketball player, the actor, and the music artist, if you believe that the demo and the live market are the same, there’s a fundamental flaw in your concept.  

The flaw here is not that you feel some emotions on a live account.
The flaw here is expecting your body to trade live without emotions, which is simply impossible.

Most traders believe that there’s a quick fix to correcting their emotional problems with greed, anger, fear, confidence, or discipline. 

Just like how you can’t become a profitable trader overnight, you need to go through a learning process to eliminate a mental problem.

Think for a moment about the quality of your trades over the last 6 to 12 months. 

There are times when your decisions are spot on and you win every trade.

There are times when every trade you take leads to a loss.

Aiming for perfection in trading is like aiming at a moving target.

There are so many variables that can impact your trading performance like whether or not you had enough sleep, exercised, ate right, and felt physically healthy and emotionally stable before you trade. 

Now add these variables on top of how complex and unpredictable the market is.

 The key here is to focus on reducing variation in your trading performance.

Treat yourself as an athlete. Do you want to become the Lebron James or Tiger Woods of trading?

 That means that you have to make sacrifices. 

That means everything in your life must revolve around trading. 

That means you need to have enough sleep, eat a healthy diet and exercise so that you can optimize your body and your mind to be able to perform your best when you trade

3) Correct your problem

Instead of focusing on growing your account, focus on correcting your current greatest weaknesses consistently. 

If you want to improve as a trader so you can make more money from trading, you must commit to eliminating your weaknesses or your problems.

These weaknesses have the power to hold you back and if you don’t work on them consistently, you will never achieve success in trading.

This is part of your growth on your journey to become a profitable trader so you must do this.

This step is where you attack the problem by doing the correction. Here’s where you learn how to stop your reactions in real-time and minimize your mistake 

Understand that when your emotions are high, logic is low. 

That’s why your girlfriend loves to quarrel with you and even if you explain to her in a logical way, she will still continue arguing with you and telling you she’s right because all she feels right now is her anger, her emotions.

Correcting your reaction is a combination of having the correct logic and ensuring the logic is so clearly defined in your mind that it is strong enough to stop the pattern in its tracks.

After you have identified the pattern, you want to disrupt its momentum. If you don’t, the trade is going to become a loss and you will get the same result as u always do.

As soon as you recognize that your pattern has been triggered, you can take a deep breath stand up and take a walk, or even talk to your friends.

Next, you want to inject logic to drown out your emotions. 

 You can do this by talking to yourself and coming up with logical sentences about the emotions. Here’s a few examples:

• If you are lacking confidence, tell yourself “I spent thousands of hours on this plan. Am I really going to let one trade change it?”
• If you are scared to fail, tell yourself “Sometimes the risk from staying on the sidelines is the greater risk”
• If you are losing focus, tell yourself “Trading is a business so I have to run it like a serious business that demands my best. When the session is over, I can focus on other things. NOT NOW!”

I know this sounds stupid as hell but trust me this will work. The point here is to craft your own sentences using your own language. 

The whole concept here is to increase your logic when your emotion is high so that your logic can overpower your emotions and you can actually think clearly with your head.

Come up with a correction to that flawed logic

Focus on process and execution instead of your PnL.

In this way, you will be able to tolerate the ups and downs of trading much better and also enjoy trading more because you are focusing on what you can control.

Rinse and repeat this whole system.

What’s the result of this entire 3-step system?

You will realize that when you trade, you will be more calm and have peace of mind. 

You are not trying to control your emotions anymore or letting your emotions control you, instead, you are aware of your emotions and you have came to a resolution with it. 

Imagine not having greed, fear, frustration, confidence or discipline problems (AT ALL) 

That alone is worth the hard work required to get there and if you work this 3-step system, you can get there

Losses are part of the game

Throughout your entire life, you have been conditioned that losses or mistakes are bad. 

 When you go to school, you get looked down upon when you have shit grades.

When you go to work, your boss scold you for the careless mistakes you made.

So naturally we feel that mistakes are bad. Losses are bad. 

What if I tell you that losses are not bad?

Pretend that you are a gambler for a minute.

1. Roulette: if it lands on red 6 times in a row, would u expect the next one to be black?
2. Dice: if your dice does not roll a winning number, will u get angry?
3. Coin flip: If it has been heads for the past 5 turns, would it be tails now?

This is what we call the Gamblers Fallacy or the Monte Carlo fallacy.

This fallacy occurs when you believe that a certain random event is less likely or more likely to happen based on the outcome of a previous event or series of events.

In trading, anything can happen at any point of time. 

You must accept the fact that the market can do anything at any time.

Trading is not about predicting the future because that cannot be done.

Once you accept this fact, it is much easier to take losses without destroying your self-esteem.
This means when you lose a trade, you won’t feel like a shitty trader because, for each trade that you take, you expect a random outcome.

A single trade is unique and has no memory. 

No matter how confident you are, there will always still be a chance that you are going to lose that trade. 

No matter how confident you are, the chance of you winning the trade is still 50%.

Accept that losses are part of trading. 

Expect your trades to lose 50% of the time. 

Embrace the fact that losses and wins are inevitable for any strategy.

If you cant learn to accept small losses, sooner or later you will take big losses

What separates successful traders from losers is the ability to accept trading unpredictability in the short term, but equally have faith in the law of large numbers in the longer term.

When you really believe that trading is simply a probability game, concepts like right or wrong or win or lose will no longer matter.

How to Achieve Peak Performance when Trading

Just like an athelete, it takes thousands of hours of practice and training to develop into the best trader possible. We want to develop the skill to make good risk and reward decisions.

1. Plan the Trade
2. Trade the Plan
3. Review & Adjust the Plan

1) Plan the Trade

If you fail to plan, you plan to fail. You must have a solid trading plan so you can stay consistent in your decision-making, You know what trades you should take and what trades you should avoid.

A trading plan should explain where you should enter and exit, how you will manage a trade once you are inside one, and what’s the correct position size you are using.

 A trading plan must be structured to minimize losses when you are wrong and maximize profits when you are right about a trade. 

A trading plan will help to redirect your decision-making process from your emotions and prevent you from making mistakes based on emotions.

2) Trade the Plan

Instead of trying to figure out what to do after entering a trade, your trading plan should already be written before you even enter a trade. 

Trade the plan is about taking the trading plan you created and following it religiously. Your plan is useless unless you execute it. 

Fear comes from uncertainty. Fear of losing. Fear of failing. Fear of mistakes. 

If you have a trading plan that is proven to work, it will eliminate some of that uncertainty.

Do the right thing at the right time. This means follow your trading plan, use the correct position size, know when to get in and out of trades and how you are going to manage risk and cut losses.

3) Review and Adjust the Plan

Professional athletes are always reviewing their past performances and thinking about what they can do better next time. We are the same. 

We need to review our trades, look for the small improvements we can make and then test them out. 

90% of your losses occur when you do not stick to your trading plan.

You keep moving your stop loss because you would rather be right than make money.

You overleverage and increase your lot size because of your greed.

A lot of these trading psychology issues can be fixed if you just stick to your plan. We only realize this after we are done trading for the day. After we have already committed the mistakes that lead to the losses. 

Focus on what you can control

If we are doing the right thing all the time, taking trades that are aligned with our trading plan, then we have nothing to worry about.

If you focus on trading your system with unwavering discipline and focus, the profits will come. 

Focus on your process and not short-term results. 

One trade can have a random outcome but 100 trades can be used as a filter to profit from your edge.

If trading is a video game, I have literally given you the cheat codes to win.  

How are you going to live the next 5 years of your life?

5 years from now, you will surely arrive at your destination. 

The question is Where will you arrive? Who would you have become?

Now is the perfect time to design the next 5 years of your life.

- Brad Goh (The Trading Geek)