Trading Psychology (lesson 24)

Trading Psychology is one of the most important elements in trading, and most retail traders ignore it and that why they lose money.
By now you already learned all skills to trade effectively and now it's all about practising those skills in real time markets with real money and perfecting the psychological approach to trading.
Banks, trading firms, and hedge funds regularly incorporate into schedule even with most experienced traders.
So we will take you trought major psychological concepts that will be key to your trading sucess.
Remember professional traders that is performing badly doesnt need new strategy they simply need to look at their psychology to improve their overal performance.
You need to be trading in the zone.
Geting in the zone is the key to trading sucessfuly.
And banks, firms, hedge funds spend thousands of dollars coaching their traders in this manner.
You will have exact same training that top 10 investment banks use.

Welcome to the Applied Trading Psychology.
I really encourage you to immerse yourself into the program and get as much value as you can from the program, join in the activities and exercises that we do and implement what we will talk about in your trading.
The mission: to become best trading self
Think about what is best trading self, take a moment and imagine yourself in the future where you are trading at your best.
What would that be like?
What would you be trading?
How would you be trading?
Where would you be trading?
How are you fellin kinda thought to come trought your mind?
What perceptions you got, what are your motivations?
What do you notice about your behaviours and habits?
Just take a moment to get a sense of future you, trader that you need to become to achieve what you want to achieve, who will that person be?
Trader you want to become is a future projection of the trader you are now and that really nice way of looking at it.
Session 1
So today session topics are Traders, Decisions, and Discipline.
We will try to understand trading behaviour, understanding trading performance, start to think a little bit about how we make decisions.
The area we might make decisions, touch a bit topic on discipline and i will give you few practical strategies that you can start implement today to reduce the amount of energy you make in your decision making.
Let's start with understanding od trading performance.
We have 4S - the first test is skill, a second is a strategy, third state, a fourth is the situation.
When we look at trading performance and what makes you as a performer, we got that combination of your skills and knowledge, your strategy is really important, the situation can be in terms of your environment wether you are trading in a bank, in a fund or at home, and then state of psychology.
In milktary you can have great skill or great strategy but to get access to that we ahve to implement those skill to thing strategically in combat situations is very much dependent on a persons fizical, emotional state.
We see same thing in sport, penalties are classic examples where player with good skill and good strategy often dont perform well and its not lack of skill or strategy its their state, anxiety, stress, fear.
Trading really comes down to you, having an effective trading strategy is one thing but you also need then psychology to maximize the returs on that strategy.
And im sure many of you are here because you recognize in yourself that you gor fundamentaly an effective strategy, the challenge of yourself is geting the most out of that and that is what trading psychology makes important and that our focus of the program.

Interstly i did a quick survey and i asked 240 traders what to they think is the main factor that was stoping them for maximizing their returns in the market.
And themselves with 76%  say its biggest factor.

So let's start to have a look at what is a good trading decision before we start to think about discipline and all these factors.
Its really important to think about what is a good trading decision and we have an exercise.
So we got the 50-year-old man and he has hearth condition and has to stop working de to that chest pain.
But he enjoyed his work and didn't want to stop and that pain also affected his life in general.
Now there is a type of bypass operation that will relieve his pain and increase his life expectancy from 65-70.
However, there is a risk 8% of people who have operation die.
His doctor decides to go ahead with the operation.
The operation is successful.
So just keep that information in mind.

Evaluate doctors decision on the following scale:
3- Clearly correct, and the opposite decision would be inexcusable
2- Correct , all thing considered
1- Correct, but the opposite would be resonable too
0- The decision and its opposite are equaly good
-1- Incorrect, but not unresonable
-2- Incorrect, all things considered
-3- Incorrect and excusable
Interestly we had bias toward 1s and 2s
Now imagine the task except that the operation was unsucessful and the patient died.
Would that change our answers?
When we look at decision what are we basing our decision on?
Are we basing on the process or we are basing on the outcome?
This is interesting when it comes to trading, what is a good decision, and how do we evaluate what good decision is?

                                  win     lose
Good process               1        2
Poor process                 3        4

We got 4 possible outcomes, we ignore trades that could be flat scratches, but lets look at trades that could be winners or lossers and quite simply would define them in terms of two brackets good process wich would be really good discipline or if you had a plan or strategy you followed trought whole process will clasify that really is maybe knowingly breaking your rules so you are doing things really that were outside of your premises without good reason, to try to keep it relativly black and white.
So we can have a good process trade like wins likewise losses or we can have the poor process of wins and losses.
It gives us 4 possible outcomes.
Wich of those trades do you think is the best outcome, you can only choose one.
92% said 1, 4% said 2, 4% said 3, so most of you gone with good process and a win and I would agree.
But a far more interesting question is wich is the second best outcome?
89% go with 2 and 11% go with 3.

                                       win                       lose
Good process        Deserved success        bad break
Poor  process            dumb luck           poetic justice

My sugestion is to people is if you want to keep trading in the top row between deserved sucess and bad break, sticking to good process, good process evolves over time, good process wont be fixed.
Your process will need to evolve over time it evolves as you evolve.
Sticking at the top is key.
Staying away from poor process trades is important.
A lot of traders trade out of boredom, trades without a reason, that's what makes losses.
Start to monitor your trades in term of the outcome, in terms of 4 quadrants, and each trade outcome.
Its good exercise to do yourself, because it will improve your results.

Now when we start to look at proces we often think about discipline and i want to make a point here because its really important and its summed up best by this quote "No man ever steps in the same river twice , for its not the same river and hes not the same man"
Just like when we are trading the markets, when you are trading the market its never the same market because a moment to moment the dynamics are slightly diferent in term of who is in the market, why are they in the market, volume all this factors, and so there can be some similarities, it can be an uptrend, each uptrend has a uniquenes as well and every time you are trading from day to day you are actualy changing to because experience from today will shape your brain in term of how you then approached markets tommorow, you are not the same person tomorrow as you were today.

We have been consistenly shaped by our experiences, so thats realy important to remember beacuse a guess the old fashioned notion of discipline about having a plan, trading the plan.
And there is certanly good value in that but it's been researched in the US where they are looking at how do the best fund managers straight out, how they perform.
And one of the interesting things that are coming through is flexibility, what they call in military flexible responds, and that ability to have a plan but its knowing when to stick to a plan and know when not to stick to a plan.
Lots of time spent on planing and preparetion is really important but also at the moment to recognise the need to be flexible, and you can maximize your market returns, you need to develop you judment and that flexible response.

When I talk about discipline its not just about having a plan and following the plan, its really about having a plan and then knowing when to follow the plan and when not to, and that is about judment and that is developed trought experience and trought feedback loop and evaluations, not a short-term process and thats a goal.
That is part of becoming best trading self.