The world of Forex trading is by far one of the most interesting I have ever encountered. Here we have an environment where someone can work from literally anywhere in the world, call their own working hours and be their own boss. Even if we don't include the potential financial rewards, being a full-time trader has plenty of attractive benefits! I guess this is why many individuals around the world give trading a shot and dream of making a consistent income from it. However, as we all know, very few achieve this goal and fall quickly to the wayside with the rest of the herd. In previous newsletters, I have explored some of these reasons for failure, attempting to shed a little light on where ninety percent of novice traders go wrong. We have talked about Supply and Demand, having a sound trading plan and various other aspects; however, it's sometimes necessary to take a step back and get right down to the roots of all these issues: The Individual.
This week, I have had the privilege of teaching a Global Futures class in London with my fellow XLT instructors Sam Seiden and Brandon Wendell. It has been a fascinating few days as the three of us have shared our various market experiences with a great group of students and together we have explored different approaches to technical analysis and risk management. We have talked about Supply and Demand, Moving Averages, Trend, trade management along with various other market tools; however, one subject we paid particular attention to was mindset. In the early days of trading education, many newcomers to the market read that psychology is a key aspect of consistent trading, yet as soon as they discover charts and indicators, they quickly shift their attention to the tools they hope will make them rich. In the search for the "magic formula," they try out various strategies and indicator settings hoping to achieve a high win rate in the markets, going from book to book and seminar to seminar in the never-ending quest for perfection, but we know how the story ends...in failure. You see, success does not lie in the strategy or the indicator, but rather in the application of the strategy, and the efficiency of this application lies firmly in the hands of the individual. Ever heard the saying, "A bad workman always blames the tools?" Well, in Forex trading the same rules apply. Let me explain.
Since I started my trading career, the market has taught me countless lessons. You learn many things from both the successes and failures but with time, you also learn plenty about yourself. Take risk for example. The vast majority of people out there consider trading to be a risky business, where in the blink of an eye, an account can be wiped out like it was never even there. Sure this a common event in the day to day activities of most novice traders but only because most of them buy after a period of buying, or sell after a period of selling and very rarely use stop loss orders. This is obviously a recipe for disaster as successful trading requires disciplined risk management and a consistent strategy. Yet even before gaining these skills, let's face facts: The application of these skills is the real difference maker and a trader will only be ready to effectively apply these skills when they accept that true risk lies within the trader, not the market itself. Nobody forces you to take a trade or overload on position size. Control and application comes down to you and your psychology, not the market. Take accountability for your actions and be honest with yourself before blaming anyone or anything else for your failures.
Once the trader has mentally accepted that they have full control over their financial risk, they then need to apply this same mental discipline to their technique or strategy. This could involve using say, Bollinger Bands to measure overbought and oversold conditions for entries in the currency markets, or maybe through identifying objective supply and demand levels. As we know, there are literally hundreds of different tools available in the technical analysis world; however, once again it's how you use them which makes the difference, not the tools themselves. Success comes from consistency and we can only measure success after consistently applying strategy over a sustained period of time. The trader has to be disciplined enough to patiently go through this journey and allow time to do its work – easier said than done for those who are weak of mind! However a sound mental state plays a key role in all aspects of life and trading should be no different.
Take sport for example. Tiger Woods has deservedly earned his place as one of the world's top golfing superstars and he clearly demonstrates time after time that he has a natural affinity for the game, yet we rarely hear his admirers talk about his mental strength. We always focus on his physical ability, his drives and those winning putts, but at the deepest level, it is his internal psychological game that wins through in the end. I once read a quote referring to Tiger's thought process and it goes something like this:
"He's able to fully immerse himself in the execution of each and every shot without attaching consequences to it."
Now read that back, but change just a few words to make it look like this instead:
"A consistent trader is able to fully immerse themselves in the execution of each and every trade without attaching consequences to it."
Food for thought isn't it? You see, Tiger may have the best set of golf clubs and the greatest caddy on the planet but neither can play the game for him; that's up to him and him alone. It's just the same for trading. A trader can invest in the best indicators and buy all the top books on risk management but at the end of the day, these won't be able to make the decisions for them. Traders have to decide for themselves when to push the button, where to set their stops and which currencies to trade and all of these decisions should have been made well in advance while adhering to a strict set of rules. Once the trade has been set, the market will do the rest. Only the most disciplined of traders will execute each and every trade in the same manner, without getting emotional about how much they will make or lose. This discipline is simply the result of a grounded psychology – nothing more, nothing less. When Tiger makes a bad shot, he doesn't beat himself up over it and then try to make up for it with the next by taking a risky shot to make up some ground. He plays on exactly the same way and knows, through experience, that his consistency will pull him through by the end of the round. It's exactly the same with speculating in the markets. We shouldn't chase losers and change the rules to catch up quickly. Instead, we should just stick to the plan and let the application do the rest.
Over the last few years of my own personal trading journey, I've had the pleasure of mixing with and discussing various trading ideas with a variety of market traders and mentors. Trust me, I tried everything to find a style and discover a structure I was happy with and I would most definitely encourage all traders reading this article to do the same. Once you have found your path, walk it with conviction and do everything in your power to stay on track, avoiding the detours along the way. The detours may seem like tempting shortcuts but will only make the journey that much longer. The key to maintaining this momentum is to stay on track and get your head in the right place by becoming a master of your own mindset. I was once told by a fellow trader that success in the markets comes from attaining "technical precision." As great as this sounded, I quickly realized that even if I reached the lofty heights of being the world's greatest technical trader, it would all descend into nothingness if I ignored my number one priority of achieving personal "psychological precision." What's my point, you ask? As a trader, you have to deal with an environment where things can change in a second. Market emotions, news and impulsions are all factors which shape price and no single one of us can control, yet we do have the ability to control our own actions with a grounded mental approach to trading. To me, when faced with a market full of variables, the only thing I can rely on is myself and only myself. If I block out the variables in my mind, then it simply makes dealing with the ones in the market place that much easier. In summary, the past is history and the future is a mystery. Both are out of our control. The real power rests with our actions right here and now in the present. Get your head in check, stick to your plan and be consistent. Only you can make this happen...the rest is in the hands of fate.
[Source: tradingacademy.com, by Sam Evans]