A trader’s Forex Trading Mindset, conception and beliefs are the major determining factors of his or her trading results. You will see that a good trading strategy is being followed by thousands of traders around the world, but these followers never trade in the same way! Each and every one has his own way of going for it. But why is that? Because, each trader has a definite trading mindset and a unique belief system. Their beliefs will determine their trading style and as a result their trading results will be different from others. That is why even with a profitable and proven trading approach, many traders will fail. They do not have the proper trading mindset to enable them to trade well.
In today’s article is going to discuss about how you can change the way you think about trading. Whenever you sit in front of your trading platform, instead of acting on your first impulse in the market, I would like to see you stop for a moment and think about what’s really going on, and then decide whether you should react.
Forex Trading Mindset
To be a successful trader, you must build positive feedback loops into your trading mindset. I want you to look at trading from two different perspective; one form a winning perspective and another from a losing perspective. When a market is moving one way, most retail traders jump on board somewhere in the middle or near the end of that move when it feels and looks the ‘safest’. However, often when it’s at these times when it looks ‘safe’ to enter, that the market is about ready to reverse. Do you ever stop to think “Who’s taking the other side of my trades?”
It is the professional trader who takes on the risk of the retail trader (the other side of your trades), after all, somebody has to sell you something or buy something from you when you want to place a trade. The professional therefore needs the market to move in the opposite direction to what you want it to move in, in order to profit. Thus, if you can learn to anticipate and think like a professional trader, you can begin improving your trading results…
# Take the market risk as a part of trading
In Forex market, when some traders are buying, some others are selling. Who is taking on the risk when you place a trade? The person who wants you to lose, that’s who, because if you lose, they win. Therefore, they are your opponent, and since the majority of retail traders lose, that means the person taking their risk and turning into profit, are the professional traders.
No body want’s to loose in trading, right? You obviously want to move yourself from the struggling/losing trader camp into the successful/professional trader camp. Thus, you need to start thinking like a professional trader and stop thinking and behaving like an amateur when you trade. Well, let us look at this from two different perspective again: somebody is going to win and somebody is going to lose in this game. But the winner had take all the risk of the looser, who were sure about win!
This thing obviously brings into focus the concept of a Trading Mindset. Trading Mindset is the first component of any trading model when one prepares to become a successful trader. It all starts with one’s trading mindset. Mindset can be defined as “thought patterns.” How we respond to events and stimuli that we encounter each day is directly in accordance with our individual mindset. Therefore, if we can set up the appropriate trading mindset or thought patterns suitable for the activity at which we wish to excel, then we have a chance of producing excellence.
The winners always take the market risk as a part of their trading, they are not afraid of taking decisions. But the winner always try to make sure that he is taking a calculative risk, so that the risk factors are minimum. The trading strategy of the professional, no matter how complex one wants to make it, is simply to take on the retail trader and to take on other professionals (opponents). They make large sums of money when the bets / speculative positions of the others traders go wrong and those traders ultimately end up losing as prices reverse in the opposite direction.
Let’s go for a graphical explanation:
There is a AUD/USD chart example below:
It shows us a clear example of professional trading mindset! Here, the professional traders are taking on the risk of the amateurs. The uptrend was intact for quite a while before establishing a key resistance level / horizontal level up near 0.9450. As the market came back up and re-tested that key resistance near 0.9450 and tried to push above it, it was mostly a ‘desperation move’ by all the amateurs who were entering near the top of the move and hoping for a breakout…even though the trend had already run higher for months.
Let’s look at this closely, here you can see that the uptrend was already quite stale as it ran from about mid-January to mid-April. The professional traders were already on-board and had already made their money by the time price started reversing up near 0.9450. We can then see price failed to push back above key resistance on two occasions. This was caused by amateur traders thinking the uptrend would continue and a breakout was imminent. The professionals could sense that the up move was coming to an end and they gladly took on the risk of the more emotion-fueled, impulsive amateur traders. And you see the result…
Let us look at another example:
Here is the char of DAX30 – German Stock Index daily chart:
Look at the false break of the recent high in June, followed by another test and failure at that level, then the market just sold-off hard. This is another clear of example of watching key levels closely for possible price action reversals, as it’s at these key levels that the professionals are usually stepping in to take on the amateurs…
Remember, this strategy is contrarian, it might be with or against the trend, it may be inside a trading range, it can take on many forms. The key is that you understand the concept clearly. That concept could be simply said as ‘professionals doing the opposite to what the herd is doing’.
That does not mean that every time markets go up, the pros are selling, and it does not mean every time the market goes down, the pros are buying, it does not suggest that at all. Once again, the concept I am trying to explain is a situation where one trader is taking on the risk of another trader, i.e. taking on his opponent.
# Be organized in your approach to the markets
Everyone is different but certain emotions are hard wired into us as part of the human condition. Two of these emotions are Fear and Hope. We all take actions in the hope that they will produce a desired result. If they do, we feel elated, but if they don’t we suffer. In trading we hope to increase our equity, by entering and exiting the market in accordance with our strategy, but if we are wrong, we lose confidence and begin to feel the inevitable fear. If fear is not managed, it turns into to panic and panic leads to large losses. The only thing left for a trader to do is to pray.
A trader must have a business trading plan and a trading journal. Moreover, he needs to plan out most of his actions in the market before he enters the market. The more you plan before you enter the higher-probability you will have of making money long-term. You are ALWAYS going to interpret the market more accurately whilst you’re not in a trade…so pre-planning everything increases your odds of making money since you will be working more on logic than emotion.
For god’s shake, have a trading plan!
I always wonder how traders make this big mistake of entering into real trading without having a trading plan? I have asked many traders, but did not get any proper answer! I know it can be boring, I know you might think you don’t “need” to make one, but if you don’t make a trading plan and actually use it and tweak it as you learn, you will start trading on an unorganized and probably emotional path. A trading plan doesn’t have to be a very dry and boring document; you can get creative with it. You’re trading plan could be that you write your own weekly commentary before each week begins, plan out what you will do and look for in the upcoming week…just make sure you have a “plan of attack” before you enter any trade.
Don’t you dare to forget keeping a trading journal
No matter how good trader you are, or if you have a photographic memory, you must keep a journal to keep a record of every thing! Keeping a track record of all your decisions and outcome may help you to minimise risk and errors. You need to record your trades, you need to do this in a Forex trading journal. This is a critical component to forging the proper Forex trading mindset because it gives you a tangible document that you can look at and instantly get raw feedback on your trading performance. Once you start keeping a journal of your trades it will become a habit, and you will not want to see emotional results staring back at you in your trade journal. Eventually, you will look at your trading journal as something of a work of art that proves your ability to trade with discipline as well as your ability to follow your trading plan. This is something any serious investor will want to see if you plan on trading other people’s money.
Always think before you enter a trade, not after taking a decision
How many traders have you seen, who thinks before taking the decision? Well, i believe you haven’t seen much! I have seen so many traders who think of what’s going on right after taking the stand! It’s all about having a proper trading mindset. You can compare trading with a gun. You know a gun is a very powerful weapon, we all know that we need to think before we shoot one, even if we are just hunting or shooting at a gun range. Likewise, the markets can be very powerful “weapons” in regards to making or losing you money. So, you want to do as much thinking before you enter a trade as you can, because after you enter you are going to naturally be more emotional and you don’t want to put yourself in a position of constantly entering regrettable trades. If you plan your actions before you enter, you should not regret your trades, even when you have losing trades. I never regret any trade I take because I don’t trade unless my edge is present and I’m always comfortable with the amount of money I have risked on any one trade.
# Master your trading psychology
Obtaining “The Right Trading Mindset” takes time. It will happen when it happens, and when you achieve this level of mental ability; it will come after working long and hard on yourself. It may even happen without you even knowing it. It usually happens when you least expect it. Here is a list of common psychological trading issues and their causes:
- Fear of having a bid loss: The usual reason for this is that the trader fears failure and feels like he or she cannot take another loss. The trader’s ego is at stake.
- Fear of being stopped out at anytime: The trader will small account may fear that he or she is gonna stepped out soon after trading.
- Depending on luck and Hoping for success: Not wanting to take control or take responsibility for the trade. Inability to accept the present reality of the market place.
- Becoming Angry after losing in a trade: The feeling of being a victim of the markets. Unrealistic expectations. Caring too much about a specific trade. Tying your self-worth to your success in the markets. Needing approval from the markets.
- Trading using the correct Position Size: Dreaming the trade will be only profitable. Not fully recognizing the risk and not understanding the importance of money management. Refusing to take responsibility for managing your risk.
- Over trading tendency is a culprit: Need to conquer the market. Greed. Trying to get even with the market for a previous loss. The excitement of trading (similar to Compulsive Trading).
- Afraid to Trade on volatile market: No trading system in place. Not comfortable with risk and the unknown. Fear of total loss. Fear of ridicule. Need for control. Fear of another loss. No trust in your trading.
- Close the Trades very soon: Relieving anxiety by closing a position. Fear of position reversing and then feeling let down. Need for instant gratification.
- Becoming over exited after winning a trade: Tying your self-worth to the markets. Feeling unrealistically “in control” of the markets.
- Limiting Profit potentials with fear: You don’t deserve to be successful. You don’t deserve money or profits. Usually psychological issues such as poor self-esteem.
- Not having a Proven Trading System: You don’t believe it really works. You did not test it well. It does not match your personality. You want more excitement in your trading. You don’t trust your own ability to choose a successful system.
- Trading with other people’s money: Last hope at success. Trying to be successful at something. Fear of losing your chance at opportunity. No discipline. Greed. Desperation.
# Think and act like a professional trader
You may not be a professional trader, but you must pretend to be. Even if you are trading for a couple of months, trading occasionally in your off time, still you must act like a professional trader to earn like a pro. By consciously building a model that will alter your trading mindset in such a way as to create positive feedback loops, a trader can gain in confidence and learn to manage both winning and losing trades. So what is a positive feedback loop? It is the set up, in one’s mind of a path of actions that lead to positive results. The positive results in turn lead to new positive actions and therefore, we discover that success breeds success.
Professional traders are always thinking something along the lines of, “What are the amateurs doing?” or “What is the most obvious trade that a losing trader who’s operating on emotion instead of logic and planning would take?” Asking yourself simple questions like these, before entering a trade, can significantly increase your chances of success in the market. After all, we all know about 90% of traders lose money in the long-run, so it only make sense to try and do the opposite of what they are doing.
If a trend has already run for months, chances are the professionals have already made their money on it or at least have a lot of profit locked in. Thus, if a market has been trending for months and is nearing a key support level or resistance level, you need to ask yourself if “entering here is what the pros are doing or what the amateurs are doing?”
Similarly, if a fresh trend has recently begun, and the market pulls back a little bit to a support or resistance level, the professionals are probably looking for an entry with that fresh / near-term momentum.
Amateur traders often ignore changing market dynamics until it’s too late and the move is already over. Professional traders get on new trends early, they don’t wait until the trend is almost over, as amateurs do.
The Bottom line
Trading mindset is key that works like you lifebuoy in a ocean of loss and depression of trading. If you think of the market as a sea of competitors, and within this sea of competitors is a school of traders much like a school of fish. They will stick together, follow each other in a comfort zone, most don’t know who is leading who. If you can imagine each short-term daily swing in the market as a school of lost fish following one another, you can shape the reality in your favor. “What are most people doing today?” If they are likely to be wrong (more often than not), then I need to think logically and consider doing the opposite / being a contrarian. How can I use price action signals and key market levels to guide me in taking on my opponents and taking an opposing view to the herd, the school, and the masses?
Having proper Trading mindset is a gradual process. There is a saying that the more experienced trader waits for the blood to flow and then gathers up the bargains. All of this emotional roller coaster can be avoided by learning to build a trading model that is properly constructed in terms of the trader’s goals, funding ability, time and temperament.
If you start employing this logic from time to time, taking a step back and looking at the market from the opposite side of the fence (the professionals side) you may not only find some great trading opportunities, you may start avoiding some bad trades as well. To learn more about trading like a professional by using simple price action strategies and key chart levels, checkout my trading course.
So, now what? Definitely you should put some thought into things we discussed in this article and incorporate them into as many aspects of your life as you can. Trading is a fantastic teacher of life’s greatest lessons. Allow the trading journey to shape you into the person you want to become.
Warm Thanks from my part for your time to read this. I wish you the best of luck in your trading! If you wish to share anything with me, post a comment below.