The Trader's Mind X - The transition to success

So now that you understand the differences in psychological makeup of a new trader versus a successful trader, let's see how to transition your mind from the former to the latter.

Replace lust with caution and skepticism
The very first step is to limit the number of trades you take. When traders say that overtrading is a very common trading error, thats only half-correct. Many of the ills of trading poorly show up as overtrading. By limiting the number of trades you can make, you prevent the amount of damage you can do to your account in one sitting. But more important, your mind needs to shift from getting into this move to getting into the biggest move of the day. Since there are only one or two big moves in the first couple of hours and perhaps another in the last hour and half, your approach switches to looking for quality trades and large swing trades.

What this means for your account is that despite a low win rate, you can still be a profitable trader if your wins are at least twice as large as your losses. Your goal as a new trader should be to exclusively focus on large moves. If you are unsure the move is going to be large, its ok not to take the trade. Don't worry if you stand aside and the move ends up being big. That is part of trading. Learn to let it go. Similarly, you will be stopped out a couple of times and the very next move will be large (or not). That's ok. You are in the process of learning to judge exactly where the large move is. With experience it will come naturally (but not without sufficient screen time).

Replace fear with discipline
Once your discrimination and judgement get better, your larger wins and smaller losses will make you a better selector of trades however, your trade management needs to be extremely disciplined. Note that as long as you are trading in a trend (HH and HL or LL and LH) with volatility (decent size swings and bars) and near support (TL/ema/swingpoint), your chances of success should be slightly greater than 50% at the very least. Add good pattern and signal bar and your win rate should be around 60% or even more. Your decision to enter the trade is all the processing your mind needs to make. Once you set a stop and target, do not change them. Your mind is vulnerable when in a trade and susceptible to errors of judgement. You should simply let the math work for you and let the market either fill your target or take your stop out. If your setups are truly 60%, you will accumulate winnings in the long run.

Replace desperation with acceptance
Many professionally successful people who come to trading believe rightly that perseverance is a virtue and its their dogged persistence that made them successful. Realize that in trading, perseverance is inapplicable and desperation is probably what you will slip into. Learn to accept that today is a losing day and stop trading. Take a trading buddy's help if you wish. Disclose your losing trades and let them tell you to stop. Soon, you will be able to stop on your own. Similarly, do not be overconfident on successive wins and end up taking untested setups. Many traders have their large losing days right after their large winning days. If you are susceptible to these, just take a day off or only take one trade the next day after a big winning or losing day, win or lose.

Refine your method continuously
Over time, you can make slight changes to the above rules and fine tune your setups. For example, you should always keep track of the success rate of your individual setups and your average win or loss per setup. That way, passing a lower expectancy setup or taking a good setup with a questionable signal bar become easier. Always keep your trading goals in mind when you refine your methods. For example, you should prefer to refine your system for higher probability than to get a better price since adding a contract to a higher probability trade is a better way to make more money than getting an extra couple of ticks on existing size.

Over time, your approach and mental state will shift to that of a successful trader. However, this is not easy and will be a constant struggle. Even after you have been winning for a while, its possible to have slip ups and lapse into your old habits. You should always be on guard and protect your mind from harmful habits as long as you are a trader.

The Trader's Mind IX - The consistent trader

The consistently profitable trader replaces eagerness and impatience with patience and caution. The simplest thing you can do psychologically for your account is to prevent getting into bad trades in the first place.

Never be eager to trade but when your setup shows up, act without hesitation. This seems counter-intuitive, but this is how many predators work. You may have seen shows on discovery channel where a camouflaged fish stays without moving until a prey comes close enough and then it jumps suddenly and eats it. That's basically what the trader tries to be: patient but alert.  With some exceptions, its usually better to miss a trade than to take a trade and be stopped out.

Once in a trade, a winning trader simply follows fixed trade management rules. For example, price either fills a fixed target or stops the trader out. There should be little discretion here, since your judgement, which was strongest before you got into a trade is now at its weakest. Every tick against a weak trader makes him panic and want to get out for breakeven or tiny profit. Every tick in his favor makes him push the target further out. The consistent trader does neither. Its not that he is any superior, its just that he uses mathematics to ensure that his odds of reaching a profit are higher than his odds of being stopped out and over time, he accumulates winnings regardless of what happens on this individual trade. The individual trade does not matter and losses are part of trading. Do not try to use your judgement now, its at its weakest. Use well tested trade management rules.

After a win, a poor trader is jubilant and will trade larger size and weaker setups (trading the house money). After a losing trade he is in dispair and curiously may do the exact same thing: trade larger and weaker setups to "make the money back." This is a well travelled shortcut to a blown account.

A consistent trader does no such thing. He simply tries to go back to pre-trade mode where he is patient yet alert.

A winning trader also knows when to stop for the day. Its utterly important not to have large losing days and too many losing trades in a day. Your mind cannot after a point control your emotions because you may not even realize you are in a state of desperation. A winning trader stops trading at a well defined daily loss limit.

Eventually, the winning days become larger than the losing days and a trader becomes profitable. For some traders this is a sudden change but for most its gradual and occurs with improvement in their trading skill.

The Trader's mind VIII - The basics of emotions

What exactly are emotions and why do we feel them?
Emotions are a form of self-communication. When our ancestors were primitive creatures facing an uncertain world, the mind would sense imminent danger and opportunity and activate the physical changes need for immediate action.

Obvious examples are when a predator is sensed, the body needs to quickly switch to fight-or-flight mode. Similarly, when food or mating opportunities are sighted, the mind becomes alert and eager.

Practically all your emotions and behavior stem from millions of years of survival adaptation. In the ancient world, reacting to good or bad situations immediately and appropriately meant life instead of death. Modern humans rarely face such challenges and have developed some degree of control over their emotions. Occasionally, the limbic system keeps escalating emotion and may be hard for you to control it.

Emotions are about expectancy and preparedness. Events that you are well aware are likely to happen and are prepared for do not cause strong emotional reaction. For example, if someone close to you dies suddenly, you may feel shock and dispair and cry for days. On the other hand, if they were terminally ill for a couple of years, their death may actually bring you closure and relief instead. Similarly, if you do not win the lottery, you don't really go into an emotional fit because you never expected to win. But when you win, you are delighted.

Events that you are unprepared for can cause your body to go into "just do something" mode. For example, countries where there are fire-prevention drills see systematic evacuation on a fire alarm while those without may see stampedes.

What does this mean to me as a trader?
When you are watching the market, your mind is in a mode similar to the mind looking for mating opportunities. You'll probably hit on every potential trade till one works. Once you are in a trade, you watch anxiously for prey or potential danger. This compels you to exit trades early with no loss than to stand your ground and be stopped out. When you are stopped out, your mind acts like a parent gazelle whose calf has been attacked by wolves.. Your mind goes into "just do something" crisis mode. This is also called classic tilt mode, when a couple of losses force the trader to abandon all risk management and trade management rules and just try to get his money back.


Lets call these three emotions lust, fear and desperation. Of these desperation is the hardest to control. Your mind is in a state where its willing to go to great lengths and take severe risks to get back its precious young. You will do the most damage to your account in this state. Fear prevents you from following through with your trading plan and you will end up with small winners and large losers and you will be a net loser over the long term. Lust traps you into poor trade after poor trade and your account will bleed slowly from a thousand cuts.

So how do I address this in my trading plan?
Once you understand the forces driving you, you can work on managing them. One way to manage this is to try to observe yourself and see how you act. The very act of observation will change the observed (the observer effect).

Desperation: When you are in desperation, you are unlikely to be able to observe yourself and think rationally. Having someone else observe you will often help with a reality check. This could be a mentor or trading buddy. Its important you disclose all your trades to your observer or it wont have the full effect. Your trading buddy can watch out for signs of poor emotional state and support you with feedback. Having a maximum trade count per day and a maximum loss limit will greatly protect your account from an untimely demise.

Fear: More important than entering a trade is what you do after you enter. If the trade was ill-advised and caused by chasing an unexpected large bar, you should probably just exit at the best possible price. If the trade was a legitimate setup, you need to follow your trade management with discipline. Only discipline will help you overcome fear and develop confidence. Making trade management a mechanical affair with fixed stops and targets frees your mind of fear.

Lust: Before you enter a trade and before you have encountered a losing trade for the day, your mind is best prepared to make clear judgements. If you can read the market reasonably well, take every clear setup until you hit your daily loss limit. When starting out, your read of the market will naturally need a lot of improvement and losses are routine. What you do not want to do is to react to unexpected moves. Any trade you took on an expected move is far more likely to be successful than a trade taken on unexpected moves. Tame your desire to be part of the action. Only take well defined setups. Start with one setup and add more with time.

Naturally, these are not the only emotions you face. Greed, which makes you hold well beyond your expected target is another great killer. Hope, which persuades you to loosen your stops prevents you from developing any kind of discipline. All of these need to be understood and addressed.

In summary, realize that your emotions are telling you that an event occurred that you did not expect and were unprepared for. Learn from the event and incorporate it into your trading plan rather than reacting to it immediately by trading. Use understanding, preparation and discipline to tame your emotions.

The Trader's Mind VII - The Chase

So far we have seen inherent character issues of a trader that work very well in the outside world but sets up the trader for failure in the trading world. These are character issues built over years and are hard to shake. However, with careful planning of rules and discipline, a trader can avoid triggering them. For example, entering only on or after the breakout beyond the signal bar, we can prevent a trader's bargain hunting behavior from causing losses.

In this post we look at a complementary part of the trader's mind, his reactivity to the market. When a trader is watching the market and is expecting a big move up, he is disciplined and waits for a good signal or pattern. Bar after bar forms and the trader chooses to pass up since they do not meet his criteria. Suddenly out of the blue a large breakout bar occurs and the trader is caught unprepared, he simply cannot stand idly by as the market apparently is shooting up. He gives in and buys way above where he would have bought if the bar was acceptable. The market promptly stops him out in a deep intra bar pullback and either fails or resumes its march up.

This is a familiar scene many traders have played over and over.  When the market moves in a way you did not expect and you feel forced to act, you are likely to make a mistake. Even if you are not stopped out, if the bar starts pulling back, your confidence will be weak because this is not a trade you have taken many times and is not a natural setup and management for you. Your mind is very vulnerable to making several mistakes at this point. One way to handle this is to realize that a weak breakout will fail and a strong breakout is likely to break into a trend and the first pullback in the trend is a far better entry.

Another classical reactivity is to a prolonged channel. You see a heavily overlapped or other poor setup in a channel and take a trade and are stopped out. You enter again and again, trying to get it right this time and lose several times before you can finally enter it just right. This leads to a phyrric victory, since your gain from the winning trade is unlikely to be larger than the accumulated losses. Traders often "persist" since they know that the direction is right, they just need to figure how to enter the channel correctly. Unless you want to fade counter-trend entry bars and scalp, the only reasonable way to enter a channel is to wait for a an attempted break of the channel or wait for the channel to break into a trend.

Realize that being right about direction is insufficient. Trading chatrooms are full of traders predicting an up or down move accurately, without being able to find a good place to enter with a tight stop. Entering with a wide stop may allow you to enter nearly anywhere but such trading carries the risk of large drawdowns and is unsuitable for new traders. Patience and the willingness to sit out until your setup appears is paramount to consistency.

In the world outside trading, persistence and chasing your dreams may be great characteristics. For trading, patience and discipline are far more important.

The Trader's mind VI - Conviction and doubt

In the world outside trading, persistence and conviction are good traits. A persistent man is likely to solve the problem, get the date with the woman of his choice or get a job. We judge people's conviction in their positions by how well they can defend their own views. A telling example is the characterization of an election candidate as a flip-flopper resulting in their election loss. Holding fast a misinformed opinion is seen as a sign of strong ethos than switching position based on new evidence.

Your conviction or faith in your opinion endears you to your social clique. Conservatives feel comfortable hanging with other conservatives and greens with other greens. This piece of human nature is something we learn very young and use it to adopt various facets of our identity and stick to it lifelong.

I'm a Mets fan. I'm a libertarian. I'm against the death penalty and so on. The adoption of identity facets is an automatic social behavior and its function is primarily social.

When this behavior is carried to the trading world, it works against the trader from the very beginning. Trading is ultimately a non-social function as far as your account is concerned. Your losses are your own and forming an opinion and sticking to it in the face of hell or high water works against you every time.

A trader who is convinced the market has gone up too far may short the market and when it stops him out, try again on the next high and eventually short his way to the top. A seasoned trader often does not have an opinion as to the general strength or weaknesses of the market and follows the principle: "Trade what you see, not what you think."

To develop the ability to abandon a damaging view when you are wrong, adopt a rule where if you are wrong twice, you won't trade in the same direction until the price moves substantially away from the current location. Remember that you are always wrong and the market is always right.

The flip side of conviction is doubt. A trader who has a long series of losses (including consistent winning traders) are subject to losing confidence in their system, their ability to read the market and follow their own system. Such traders are subject to buyer's regret right after entering a trade, being shaken out on even the smallest pullback and tightening stops too early and thereby exiting on a loss just before the market makes a huge move in the direction of their trade.

Even when the market moves in their favor, they are unable to hold for many points. The very first pullback causes them great distress and forces them to exit at a small profit. Imagine seeing an open profit of four points and then panicing and exiting at +1 when the market pulls back. To build confidence and enable yourself to hold through pullbacks, always take a partial profit on the first push in your direction. Especially during the first hour, reversals can be abrupt and take out your stop and change your winning trade to a losing trade, which damages your confidence even more.

The partial profit enables you to hold your runner beyond the first pullback after which it gets easier since your swing stop moves into profit once the next swing point forms. Taking partial profits and sticking to your trade management rules builds confidence.

In general, you need to work on abandoning your precious opinions regarding the economy, news, the government or anything else you think may be impacting the market. These things may impact the market long-term but you have to realize that your opinions and identity relations are worthless for trading the market. You can only rely on what you see, your trade management rules and your discipline.

The Trader's mind V - The anchor

Humans do not actually have any ability to measure intrinsic value of any item. Practically all estimated values are fuzzily calculated from any claims of value the person may have encountered.

For example, if I show an object never seen before and ask what the value could be, people are likely to go blank. When pressed further, they may guess based on its size, weight, shininess and beauty.

You may have grandparents that long for the good old days when coffee was 5 cents a cup. The entire notion of paying $5 at starbucks seems absurd to them. And to actually line up to pay that ridiculous amount is quite insane in their opinion. This because your grandpa's valuation circuitry is stuck in the 1950s. A similar thing happens to all of us on smaller timescales. This is called anchoring.

When you see an item (say a pound of coffee) for sale at $5, you expect it to remain at $5. If suddenly it jumps to $10, you wont buy it right then, you wait for prices to come back down. But if the price remains at $10 for a few months, you are likely to give in and buy it for $10. Your mind is now anchored to the new price.

Anchoring is subtly employed by stores all the time. The 50% sale tells us that the fancy hat at $200 is cheap because its real value is $400. We are so lucky to get it half-off. Why, its like we just earned $200. All we have to do to earn it is to spend $200. The store has subtly anchored the value of the article to $400 in your mind. If there was no sale, you wouldn't buy it because $200 would look expensive. This is why when JC Penny decided to forego sales in favor of everyday low prices, they took a huge loss. Nobody has any reason to buy because nothing looks cheap.

Anchoring is what makes markets stay in trading ranges (coffee should be $5) and trend ($10 is the new normal). Anchoring is also why pullbacks, especially deep pullbacks work very well (50% off sale). In fact, anchoring is why price action works very well in general.

For a trader, this means that he can simply imagine he's either a seller of buyer of a pound of coffee or any other item that he is familiar with and correctly guess the behavior of the crowd most of the time. If the price gets too high or too low suddenly, there will be resistance and the price will pullback. However, if it stays there for a long enough duration, it can become the new normal. Deep and sharp pullbacks are more likely to continue and slow slides are likely to eventually break a trend for this very reason.

Once you can understand how price moves, you will find price action far easier to read and understand.

The Trader's mind IV - The bargain

If the mad rush on black Friday's shopping is any lesson, humans love a bargain. Who doesn't like to get a $100 item for $80? That's 20% off! You can use the $20 to get something else.

Humans like bargains because it maximizes your purchasing power and is an inbuilt efficiency behavior. Efficiency is not limited to shopping. All things being equal, you should obviously choose a toaster that toasts quicker, a commute that is shorter and so on.

A person who can more efficiently spend his resources has higher survival ability and efficient use of our resources is therefore an inbuilt characteristic of humans.

When it comes to trading, a trader's efficient mind makes him want to buy low and sell high. Buying low is a good thing, unless you are in a down trend and the price is going further down. The bargain hunter forces the trader to enter into dangerous trading patterns such as:

• Bottom picking -- It fell to $3 from $10, what a deal! (All kinds of counter-trend trading)
• Adding on to a loser -- At $1 its 3 times cheaper, my profit will be 3x as big when it goes back to $10
• Entering before a signal bar forms -- its going to be a bull bar anyway, may as well buy now to save 3t

I have personally struggled for months to break these habits before I was successful. The key element is to realize that the price is not what's important, its the difference between the entry price and the exit price and the probability that your stop is not hit in between.

Focus on probability and nothing else. Measure probability of success by taking SIM trades before you take action. You need to have a modicum of discipline to do this. Focusing on probability will automatically shift your mind in the right direction.

The Trader's mind III - Eagerness and Dispair

Eventually, the trader settles in and realizes that trading is not easy but he can see patterns much more clearly. This is chop; this is a breakout and so on. However, in the eagerness to trade, the trader enters too early. The market stops out the trader and gives a better entry and resumes the move.

The trader may go into dispair at this point. An emotionally sensitive trader may have also reversed his position, thinking that the failure of a great setup is a very strong signal and may get stopped out a second time. If this happens enough times, the trader will find his confidence shaken and weak.

The good news is that the reason the market goes where you expect it to go is because you are now able to read the market. The bad news is that the human brain is extremely efficient at recognizing patterns and will alert you as soon as it can. This is a survival advantage. The earlier you spot a predator or prey, the better your chances of having a good meal and seeing another sunrise. Because of this, you will see the pattern a lot earlier and you eagerness will force you to act prematurely.

The right mental adjustment you need to do is to separate the pattern recognition from the action. Once a pattern is recognized, take it as directional advice and wait for a definitive signal. Some traders manage by using large stops. While this may work ok for many, I prefer precise entries since it maximizes my reward to risk (R multiple or RX). A larger RX in various kinds of price action is essential for me personally for trading large size with confidence.

Patience and the willingness to pass on a potential large move are essential for consistency. Once you are able to wait patiently and make a rational choice regarding any signal, you may take slightly lower probability trades if the RX is statistically very large such as 1PB in the first hour.

Patience -- the ability to wait for the right setup depends on detachment -- the ability to pass on a trade and miss a large profit. Combined with discipline, the ability to follow your own rules by resisting short-term temptations to meet long term goals is key trading behaviors for success.

The Trader's Mind II - The Rush

When a trader first begins trading, regardless of whether he is successful, he experiences a rush. A trader who has beginner's luck is likely to experience exhilaration of suddenly coming into money that he never imagined. This leads him to think trading is easy and make a conscious or unconscious commitment to trading as a profession.

The rush of trading is similar to the rush of gambling and other addictive behavior. This will lead him to make significant investments when he doesn't really comprehend the kind of risk for each of these investments. Even a cautious investor will risk more and move to riskier investments until failure hits.

This sort of behavior is automatic and part of human nature and most people find this understandable.

What may be unexpected is that intense emotional experiences can cause sustained changes in the person's behavior. The trader will crave the excitement and rush and continue to engage in trading just to feel the rush of trading. This will automatically put a trader on the track to some very bad habits.

For example, most new traders overtrade. A consistent winning trader may take four to ten trades a day while a new trader is likely to take 40. This is because the initial rush is driving the trading behavior. A second common habit is trading out of boredom. The trader's need for excitement and knowledge of what is possible drives him to seek that experience over and over again.

As a result, the trader does not even realize he has overtraded. He may have thought that he has taken 10 trades and be shocked to find that he has taken 40 trades. Once a trader introduces himself to the trading world in such a fashion, he already doomed to overtrade and go on tilt. Many traders blow their accounts in a few days and are shocked when it happens.

If you are in this stage, stop and ask yourself if you really want to trade to escape the drudgery of your life. Getting a motorcycle is far cheaper. Trading has to be a deliberate, carefully considered business decision. You need to think like the casino, not like the gambler.

The Trader's Mind I - The Trading Contradiction

One of the real contradiction traders face is that the forces that attract people to trading are exactly what make them lose in trading.

For most traders, trading is attractive because they can:

• Make a lot of money
• Get rich quickly
• Have the best commute
• Make a good living trading only 2 hrs every day.
• Live anywhere
• No bosses or employees needed
• Be unaffected by economy, political shifts, natural disasters, etc.
• No hard assets, office space, etc needed.

Do you want to have an income in the top 10% working for yourself two hours from your home while you can browse the computer? Well, who wouldn't?

Lets step back a moment and see how someone outside the trading world may evaluate these criteria:

• Make a lot of money - greedy
• Get rich quickly - impatient
• You have the best commute - lazy
• Make a good living trading only 2 hrs every day. - super lazy
• Live anywhere - mercurial
• No bosses or employees needed - poor social skills
• Be unaffected by economy, political shifts, natural disasters, etc. - fearful
• No hard assets, office space, etc needed. - unattached.

As you can see, the worst developed personalities are naturally attracted to trading and its no wonder that 80% of traders lose everything they ever put into trading. To be successful, you need to fight the very qualities that brought you to trading in the first place. This is the contradiction that traders face on the very first day that they begin to trade.

This is how each of the above qualities impacts your trading:

• Greedy - Makes you stay in a winning trade too long until it becomes a loser.
• Impatient - Forces trades, enter too early on poor signals
• Lazy - does not work on improving one's understanding of the market and trading system.
• Mercurial - Emotional trading, revenge trading, chasing price with every turn.
• Poor social skills - Inability to learn from the experiences of other traders
• Fearful - Cant take trades, exit trades too early, unable to hold through a pullback
• Unattached - Jump from trading system to trading system whenever current system gives a bad day

I know of no single trader who started without at least half of these afflictions.

Once you acknowledge that just choosing to be a trader automatically sets you up for failure, you have the opportunity to amend the very qualities that brought you to trading and modify yourself to be the very opposite and thus be successful.

The hard road to consistency X - The elusiveness of discipline

One of the great surprises in trading is that knowing what to do and the ability to do it are two unrelated things. Knowing what to do is knowledge, the ability to do it is skill. Its fairly easy to describe price action post-facto. Its simple to know to hold through a pullback or to exit on the next push if you aren't under pressure from holding a position.

Traders need to work on improving their trading to be close to the ideal post-facto decision as much as possible. For the most part, this is a constant struggle. Information is always imperfect and decisions are often hard to make correctly. The process of working on yourself to make the best possible decision given the information you have is what traders do constantly and may be simply called building discipline.

Discipline is more than just following your rules. Its also the ability to make correct decisions in the face of recent failures. Even the most seasoned traders would be impacted by successive failures or missed opportunities.

For example, a trader who was stopped out on a 1CBO buy above b14 may be hesitant to buy b19. A trader who missed the reversal at b13 may enter a larger size on b27, which he may see as a deep 2L PB. Every loss and missed opportunity are likely to cause some distress in the mind of even the most experienced traders eventually forcing more and more mistakes. Similarly, a well executed trade may give a heightened sense of confidence and invincibility, forcing rash behavior.

The resistance to such pressure is something that needs to be worked on and can only be developed with practice. The ability to see a trade setup independently of recent price action and your bout with the market is something you need to focus on constantly.

The guide to doing this is to evaluate the market movements as information and disregard trading as something you need to do. "I need to make 2 points today" or "I better take one more trade so I can end the day without a loss" are terrible advices.

Focus on the information you get from the market. Constantly work on keeping your evaluation as objective as possible. Ignore statements about the economy, foreign crises or anything else that other traders and the news are discussing. They have absolutely no weight compared to what the market tells you.

Building discipline is like quitting smoking. Easy for those who don't have to do it but extremely hard for those who do need to do so. Constant slips of discipline and breaking your own rules are to be expected. Look at the few examples of success around you for inspiration and keep working at it. Know that even fractional improvements in discipline add up and build you up as a trader.

The hard road to consistency VIII - The tyranny of psychology

Many traders and other professionals in the trading world tell us that poor trading is mostly a psychological issue. While there's some truth in this statement, its incomplete and inaccurate. Otherwise, all psychologists should be fantastic traders.

The reality of trading is a bit more complicated. Obviously, you first need a system and understanding of the mechanics of trading. You need good risk management and trade management practices because having the best psychological state of mind is no substitute for stops.

I have searched far and wide for psychological articles regarding trading and found many books, articles and webinars, some with deep insight. However, most psychologists are not traders and their treatment of psychological issues is academic. Most of the material is generalized rather than actionable. For example: "Its more important to enhance well being than to reduce stress while trading" or "ask yourself before taking any action, am I doing whats in my best interest?"

Most of these observations are not actionable or otherwise useful. Benefits of prescriptions not related to actual trading such as marking off your trading area, feng shui, etc. may provide marginal benefits but should be viewed as borderline superstitions.

The entire development of a trader is two stages:

1. Develop or learn a proven winning system
2. Strengthen the discipline to follow it

Developing a winning system is complicated, tedious and time consuming. You are usually better off finding a mentor and learn a proven system and adjust it to fit your personality.

Once you have a system, discipline is what enables you to follow it closely. What is discipline? Discipline is simply the ability to resist short-term temptations in favor of long-term goals. Discipline is actionable. Just follow your system's rules and nothing else!

Its most important to note that many systems work only during specific kinds of price action and you should not trade if preconditions are not met. For example, my system works very well on trending and large range days and works poorly on small range days.  Fading systems work very well on trading range days and fail on trending days. Tick and bar scalpers can trade almost any price action but their win / trade is low and therefore they would need to lease a seat on the exchange to be profitable.

The ability to sit out during price action not fit for your system is discipline. The ability to stick to your stops and your daily stop loss is discipline. The ability to resist poor behavior (chasing trades, adding to losers, shorting all the way to the top, etc) are discipline.

When you chase a trade for example, you have overruled your judgement regarding passing up the preceding signal. You can never develop confidence in your market reading if you are easily swayed by a single bar. Accept that your system cannot detect every setup and at best you can catch a high percentage of moves. For example, do not buy b22 if you passed up b21 as a poor signal. Instead, add the observation to your list of things to investigate. Given enough samples, you will be able to pick on such moves eventually. You should have always anticipated a move, not react to it in urgency.

Over time, these observations will add to your system and make it richer and you will grow as a trader.

The hard road to consistency II - The off day

"A Samarian warrior does not fear death, nor does he rush out to meet it"

                                                            --Conan the Barbarian

Trading requires you be at your very best. You need to be alert and focused. You need to be rested and undistracted. You need to have eaten and your body should be healthy. Do not party unless the market is closed the next day. Despite diligence to your alertness and despite years of good trading, you will most certainly have an occasional off day when you are just not in the game.

Many traders who have an early brush with consistency accumulate enough points to think they have made it and start increasing their trading size. This is dangerous because a single off day can wipe you out. The most dangerous thing about nacent consistency is that you won't believe you can be wrong repeatedly on the same day and will have the confidence to think that you can win back everything you lost.

This is why I have a strict two failed trade limit. You may take a PM trade if you lose two trades in the AM but only if a great trade sets up  (for a maximum total of three losses a day).

The following signs should alert you that today is an off day:

1. You already have a reason to believe you may not be at your best (did not sleep/eat)
2. You lapsed into poor habits you thought were broken long ago
3. You are repeatedly reading the market worse than usual
4. You already hit your max losses

The moment you realize you are off, you need to stop trading. Even many years later, you will certainly encounter a day where you simply are not in tune with the market. Stop before you damage yourself more. Release yourself from the pressure to make money and focus on studying your newfound situation. This day is a poor trading opportunity but a great educational opportunity. Study your behavior and study the market's behavior. 

The hard road to consistency I - Overtrading

The trouble with trading is that you are in a position to do whatever you want and need to struggle to develop the discipline not to do things that hurt you. This is exactly the opposite from the real world where you are in a position to do very few things and have to struggle to do things you want to do.

You will learn very quickly that doing everything that comes to your mind leads quickly to ruin. The only way out is to learn not to do things. Your focus needs to change to stop doing things that cost you money even though they work some of the time.

In trading nothing is guaranteed. No setup is guaranteed to work every single time and even the best setups can have a repeated sequence of many losses. Everything is a probability and probability works only with a large number of samples. Even a 50% setup should be expected to see at least 6 consecutive losers in 100 attempts. (Go ahead, toss a coin 100 times).


Despite having a profitable system, many traders fail and this is because they are unable to follow their own rules. A trader needs to figure out what habits are damaging their trading and root them out.


The most dangerous bad habit is over-trading. What over-trading is depends on your style of trading. If your goal is to trade the 3 to 5 large swings of the day, then any day over 10 trades is probably over-trading. If you are a scalper who wants to take 10 trades a day, 20 may not be that bad but 40 certainly is. The best measure of overtrading is a poor win/trade ratio. 2 points from one trade is decent, 2 points from 20 trades is not.

Overtrading usually is caused by the trader reacting poorly (emotionally) to a loss. There are two kinds of reactions to a lost trade: Retrying and flip-flopping. A trader who has decided the market is going down will continue to short the market over and over, regardless of stop-outs. He thinks he is right about the direction of the market but incorrect about timing or stop size. The next time has to work!

The flip-flopper is far worse. He will go long if stopped out of a short trade and vice-versa. If a great long setup was  stopped out, then the market certainly should drop, right? (Answer: wrong. See b14)

The correct way to react on a loss is to look at the market objectively and enter only if there is an extremely good reason. A trader susceptible to overtrading should just sit out a few bars even if there appears to be a good reason to re-enter. Usually, if you were stopped out of a good setup, the market probably is in chop and you should not trade for a while.

Wait for the price to move away from the area you were stopped out from or give two swings in opposite directions after the bar that stopped you out. Most traders who enter right away after being stopped out have a state of mind thats a possible combination of disappointment, surprise, sense of urgency and desperation all of which are likely to cloud their judgement. Until you are consistent, stay out until price moves away or gives two more swings after a losing trade.

The mind treats losses like a mini-trauma and needs time to recover. Most losses due to over-trading are caused by poor judgement due to recent loss.

You also need to protect your account from being blown up because you cannot accept to have a losing day and will keep trying to trade your way out of a drawdown. Over traders should have a strict rule regarding the number of losing trades they have per day. If you are in a state of mind that  is causing you to lose over and over, trying harder is likely to make it worse, not better.

Understand that your main goal as a trader is to manage risk and once you have crossed a certain number of losing trades, your risk of ending the day with a larger loss is higher if you continue to trade and manage the risk by stopping trading.

Reversing your postion on a loss

One of the prevalent causes of overtrading is reversing every time a trader gets stopped out. Many traders fall into this trap because they only pay attention to bars and have no choice but to flip on anything that may look like a reversal bar.  For example, if a trader shorted b29 as two legs up in a bear and then on b32 he may interpret that the trend may have flipped and buys b32 and then sells b34 and so on.


The second reason traders fall for this is that have heard that a failure is a strong signal and a failed failure is an even stronger signal and two failures in the same direction are extremely strong etc. Therefore if a trader sold b34 as a W24,29,34 he may see b37 as two pushes down and reverse to long. The chop in this area may end up being read as fL2 or fH2 or any number of things causing him to interpret a new direction with every bar.

The real problem here is that the trader is focusing on a micro level. A trader always needs to keep in mind if the market is trending (b1-b17) or chopping around (b25-b45), breaking out and failing (b46-53) or breaking out and continuing (b56-70). Being aware of the nine transitions reduces directional error.

Reversing very often is rooted in the fear of missing an impending very large move. This symptom also suggests that a trader's sense of market direction is undeveloped. This can be combated by realizing that if you are stopped out twice near the same price area, you are probably in chop and your entry is effectively trying to predict a breakout. Predicting breakouts is one of the hardest things to do in trading, whereas waiting for a breakout to occur and jumping on the first pullback is far easier.

My way of avoiding falling into this trap is to assume that if my trade fails, the market probably in a chop and except in the first hour, I will avoid re-entering until the price moves away from the area. For example, if I read b34 as a W and sold it, I will not trade until price moves away from b34, i.e. until b49.

There are two exceptions to this rule. If an opposing trade fails twice, I may consider entering again in the same direction. For example, I was stopped out of my trade on b17 long, b20 setup a short and failed twice when b25 triggered. This should only be done if you are expecting a very large move.

In the first hour if the stop out was due to a fixed stop and not a theoretical stop, I will usually re-enter. For example, if I shorted b1 and my 6t stop was taken out, then the trade hasn't theoretically failed until b2 high is taken out. I will enter on b6 even though the price hasn't moved away from my losing trade.

Remember that there are one or two and occasionally three good swings a day. Focus on capturing a decent portion of those. This ensures a very high risk to reward ratio and eventually a very high win to loss ratio.

Adding to a losing position

Among all the trading sins, none is venial as adding to a losing position for a better average price. On trading range days, adding-on may work eventually although a trader would end up trading way beyond his comfort level before he sees a price better than his average price. On many days, he may only get away with a scratch.

On trend days such as today, counter-trend traders are likely to get killed if they add on anytime the trade moves against them. For example, a trader may short b10 as a first attempt to reverse (which is profitable on many days), but when the trade moves against him, instead of letting the market stop him out, he may decide to move the stop way up and add on where he would be stopped out or on the next signal.

The psychological issue at hand is the desire to pick the exact high or low of the move to get the best possible price. This combined with a wrong sense of direction will destroy the trader's account rapidly.

The way to deal with this issue is to resolve to never trade reversals. A trader should always wait for the reversal to succeed and establish a successful trend in the opposite direction and enter on its first pullback. Unless a reversal is obvious, it is likely to fail.

On a day such as today, a trader looking to short would do much better if he waited for the short trend (b41-47) to establish and then enter on b50 than to short every bear bar on the way up from b1 trying to pick the exact turn.

Letting a winner turn into a loser

Greed, fear and hope are the terrible curses that afflict traders. Hope can be eliminated with clear fixed stops. Greed and fear need to be balanced against each other and will never really go away.

Not every trade will be a winner and for a lot of traders, taking a first profit greatly improves their equity curve.  This is especially true for reversals and attempted breakouts out of a trading range since these setups fail routinely.

For example, traders expecting an imminent reversal of the trading range (since b38 was a 2L LH after a trendline break -- a major reversal setup) will often hold all-in and will refuse to take a profit. Such traders may even keep their stop above the signal bar until an additional LH is formed. Those traders would have lost today. A trader that took an early profit on the other hand, was a small winner even though both were wrong about the overall market direction.

If a trader sold b38, he is best served by taking a profit when he is right and moving the stop to breakeven when his target is filled. If the market moves against him twice, i.e., ticks beyond a bar twice against his trade (above b48), he would need to exit if he has not been filled. If he was filled, he should move his stop to breakeven on the balance of his position.

A trader who sold b23 today as the first pullback after a W made a profit of 4 pts. He should keep his stop on any runners at breakeven. Keeping the stop above the signal bar or worse, above a prior swing is a symptom of hope and not objectivity. No matter how obvious the reversal at b12 and the first LH at b23 may look, the trade can always fail and its best to let it stop you out and look for a fresh trade.

Even in a very strong high momentum trend, you are usually better off taking an early profit. This is because if you entered early in the move, the chances of a sustained trend are unknown and if you enter late, the chances of a trend reversing or going into a deep pullback stopping you out are always existing risk factors.

Fading a strong trend instead of trading with trend

One of the classic trader's error is to fall in love with their first position. If a trader bought b2 since he may be expecting gap closure or b5 as a possible second attempt to close the gap or 1PB, he may be surprised when the market stops him out and takes out the low of the day.

When he later sees b9, he may see a reversal bar. b12 may appear as a reversal bar after a possible 1 bar FF at b11.  b12,13 may appear to be a rather strong 2 bar reversal. The trader may end up buying every one of these and getting stopped out every time. (The alternative, adding on at every new signal is far more dangerous).

One of the reasons I prefer to trade on breakouts of signal bars rather than simply buy on close is that it prevents me from entering into many incorrect trades such as these.

The complementary situation  is the trader who was right about the initial direction but fails to see the trend break (b19-b27) and test (b49) and insists on shorting every move up. After a major reversal at b49, there are no more short trades and b58 therefore is not an A2 short. (A common reason for failed A2s is being in denial about trend termination or trend reversal).

A common reason for such behavior is the trader's bias about market direction. This bias may be a fundamental bias caused by reading too many economic blogs or watching TV or other inherent biases about the strength or weakness about the world economy that the trader wants to see reflected in the market today.

Traders who don't watch news are possibly subject to technical bias. They may have an inherent belief in some pattern or indicator and are expecting a strong reaction. It is correct to trade those and natural for some of them to fail. The trader however, should not repeatedly enter a trade in the same direction assuming he would eventually be proven right. This is the need for acceptance and is a strong human trait. You should not let it meddle with your trading since the market is too impersonal to either accept or reject you.

The trader needs to realize that all biases and opinions are always wrong regardless of their direction. Only the market is right and for a day trader, the strength and underpinnings of the economy are meaningless. Patterns and indicators are tools and they fail occasionally no matter how reliable they may have been.

The right way to trade is to accept only what the market presents and be aware that trends can break, trading ranges can breakout and nothing is guaranteed to run forever or reverse eventually.

Revenge Trading I - Reversing where you would be stopped out

As I've previously posted, a trend first bar is just a trading range. However, a strong bear close that overshoots a bull channel TCL from the prior day is a sign of a move down. If a trader chooses to sell below b1 instead of waiting for a breakout pullback of b1, he may follow standard price action principles and move his stop above b2. Since b2 is had a strong close, he may simply decide to reverse where he is being stopped out. This is an unplanned trade and is a form of revenge trade.

This is caused by the trader having a plan for success, but not a plan for failure. He has very carefully visualized his setup, entry and targets. He may have chosen his stop, but being so sure of his trade, does not really expect it to be hit. After all, the setup is just too beautiful. How could it ever fail?

The failure of a beautiful setup usually means you are still in a choppy trading range and there is a very good chance that any setups near this area are likely to fail regardless of direction. The right thing to do is to wait out two swings or until the price moves some distance away from choppy action.

Since I had taken b7 and was stopped out, my plan required me to stay out for two swings or until the price moved some distance away from this setup, both of which meant I would enter on the 1st PB after the reversal at b15.

While some traders can retain clarity of thought after  a loss, many just wont be able to. For example, if an experienced trader shorted below b71 after reading it as an A2 short (since b69 is an L1 variant) and was stopped out, he may retain the clarity of mind to correctly short b74 as a W pullback. (but he could probably never do so if he reversed and went long during b73.)

However, under most circumstances its best to wait out two swings. A short below b50 DT was stopped out at b55.  Naturally, a short after 7 bull bars is likely to fail even if this was not  BW. After waiting two swings, i.e., close of b63, chances of a successful trade increase. The price has also moved the size of a recent bar or two away from the original price and has also given the trader some time to regain composure.

In summary, when you encounter a loss, always avoid getting back in right away. Have some criteria for re-entry. The chances of you reacting emotionally and urgently right after a loss is very high and puts you at severe disadvantage. In this state you are unlikely to be reading the market at your finest skill level. Let the market go for now and wait for better price action. Entering on strong bars is a great way to filter poor price action areas. Strong setup bars failing actually gives you a lot more information about the market since poor bars could fail anywhere but strong bars only fail in trading ranges/channels.

Unable to hold, exiting early III - Recent losses

One of the most difficult tasks a trader faces is to not let recent outcomes impact their current decisions. For example, a trader who may have sold b3 and bought b5 and lost both trades may have also entered a short below b8. However, instead of letting it run, he may be tempted to take a quick profit and exit his position completely. This is mainly because the two very recent losses have impacted his emotions and judgements pretty intensely even though he may not realize it consciously. The human survival mechanism kicks in and forces the trader to get out at a small, certain profit and be closer to flat for the day rather than risk making the loss larger.

It is very hard to overcome this emotional impact and start with a clean slate so to speak since there is insufficient time for the trader to calm down and regain composure. The way I address this is to avoid trading for at least two swings or wait for the price to move away from the area where you had your loss.

Not trading for a couple of swings protects you from going into tilt mode. Not trading around the same price protects you from choppy action. If you took a decent looking signal and were stopped out, there is a very good chance you are in some choppy waters and should expect to be stopped out again. Letting the price move away allows some time to pass and is likely to give you a better setup for the next trade.