BFI Psychology (6/7)
Introduction To Psychology
Now we can get down to business and discuss the stuff that actually matters; the psychological state of the trader. This will be a very personal discussion between you and I. What we need to understand is that a BFI trader has a very unique mindset when it comes to trading. The “psychology” of this trader differs from the psychology of the average retail trader, who is wired to find the most slanted-line and indicator confluences in order to "predict" an outcome. This is not the proper approach and we will understand why as we go through the following sections.
For the past few years, I have spent the majority of my time attempting to understand the psychological aspect of trading; the neuro-anatomical aspect. Rarely will you find me back-testing these silly candles and entirely focused on the charts. What is much more important and much more profitable for me is to spend my time understanding the “why” in “why do we do what we do” as traders.
After understanding the basics of candlesticks and the analysis of
charts, there is not much more that can be done in that regard. Buying low and selling high can only be so simplistic. What few traders understand is that all the analysis and tools and gadgets in the world will not fix a flawed psychology. There is no success with a flawed psychology. Let us make that clear from the start. In this third part of the course, we will see why perfect analysis and flawless execution does not guarantee success. In reality, the fact that your analysis was correct and you entered the trade flawlessly, but still did not benefit financially from the movements, makes it much more stressful on the trader, which is why most traders discover a rude awakening when they begin to realize that trading is actually a “mental” game, not an “analysis” game.
After all these years, I would say that the majority of trading the financial markets is primarily a psychological skill, and not an advanced analytical system. For most traders, they believe their system always needs changing, and they focus more on the "analysis" side by reading more books and taking more courses, hoping to find that secret system. The system can be based on a coin toss, and with the proper psychology, this trader can outperform a psychologically-flawed trader but is using one of the best analytical methods.
I am very sorry to inform you that everything you have learned is absolutely useless, IF you do not address the psychological issues that you may now have. It will be more painful to have a great entry but a psychologically flawed trader will find a way to sabotage the entire trade.
Remember, we are only going to change the way that you think; nothing else. We need to get you to “see” the whole idea of trading in a much more productive and unique way, so remain open-minded throughout these sections and be self-aware of where you stand, psychologically.
You must understand the purpose of this section. You are about to “attempt” to understand why we do what we do as traders, and this is a noble pursuit that you are on. This section is specifically designed to transform the psychology of the average retail trader to the psychology of an elite BFI Trader.
Throughout these sections, I will refer to two individuals; the average retail trader and an elite BFI Trader. You must see the clear difference in the mindsets and thus in their decision-making capabilities whenever I refer to them. One trader has many fears, and the other trader is fearless. The fearless trader truly believes that there is nothing to fear.
This should be a very transformative part of the course, and you should take advantage of that and use it to begin your cycle of momentum. Just like we are able to exponentially grow an account like a snowball, we can also use this opportunity to trade properly and snowball your own success, one proper trade at a time.
It all begins with a decision to change the way that you think about trading.
THINKING IN PROBABILITIES
Does two plus two equal four?
Do you believe that?
Did any other number cross your mind, even if for a microsecond, when I asked you what does two plus two equal?
There is very deep neuroscience in this question and the way your brain digs quickly to find the answer, but for the sake of simplicity, we will keep the science to a basic. Trading psychology is all about changing the way you think. When we talk about “changing the way you think”, it means replacing your current approach and style of thinking regarding trading.
There is no course that can cover the psychology of trading.
Most of the psychology of trading is learned the hard way, by trading, and making mistakes while trading, and then learning and adjusting and continuing along the way, slowly improving both your accuracy and your risk-to-reward ratio. This will be slow developmental processes that most would rather try to find a way to avoid.
The shortcut does not exist, and you will have to build these mental skills just like you would build any physical muscular skill. Slow and progressive growth; and mastering psychology is like taking steroids, and building those mental skills. The peak point of mastery is when you perform a skill yet the majority look to it and believe it is easy to perform and replicate. This is the furthest thing from the truth, unfortunately.
Learning to trade can be a gruesome process, but we can make this gruesome process more bearable and favorable, so that we can increase the probability of you actually applying it, and leaving off all else. For the average retail brain to apply the concepts, they must be made very simple, or else they will avoid it.
We just need you to taste success, and you will realize for yourself the possibilities.
We have two main flavors of traders; a trade-by-trade “predict an outcome” approach, and the series-of-trades “outcomes are irrelevant” approach.
Trade-By-Trade Approach
This style of thinking is where you will mainly find the “slanted-lines + indicators” approach. This is based on finding as many confluences as possible to try to predict what will happen next in the market. These types of people try to find so many ways to make the trade “look good” thinking that more confluences will give the trader a “sure-thing”.
Trying to predict what will happen next, is a very difficult up-hill battle approach, although it may work here and there. But we are traders, not investors. We thrive by exercising extreme levels of fluidity within the markets. You must be willing to accept all your fancy tools do not guarantee a thing, and reverse in a heartbeat.
There are psychological levels in trading the currency markets and in general most financial markets. The larger the position size that you can handle without feeling discomfort in the least, then the stronger that muscle of fearless trading.
All manual trading is emotional trading. But you cannot have zero emotions, so as humans we need to learn how to handle them when they do and will present themselves. We cannot allow them to affect our trading decisions, because most emotion is devoid of logic, and the illogical decision is usually made, versus the logical decision. Such an event may trigger the cycle of regret.
Series-Of-Trades Approach
This is the proper approach but it is the approach that a few minority of the traders use. This approach is not based on predicting anything; rather this is a precise pre-defined system of pulling the trigger when your system or edge presents itself, and the outcome of the trade is irrelevant.
If your edge or system is designed to validate a macro-zone and draw it properly, and to find a valid micro entry-signal inside that zone, then this approach calls for doing just that and thus for pulling the trigger on any and all trades that meet the criteria of your system or edge.
We take a series of trades, and we are entirely focused on the outcome of the series, and NOT the outcome of each individual trade. The outcome of each trade and attempting to predict the outcome of each and every trade is an uphill battle because humans are designed to expect what they predict. It is difficult to implement your system or edge in the markets flawlessly if we become attached to any one single prediction. The truth of the matter is that we do not know what will happen next; the only certainty is the market's uncertainty.
Laws Of Probabilities
1. Anything Can Happen
Do you believe anything can happen at any moment in the markets just like you believe 2+2 equals 4?
Those who risk it all on one trade, do not believe that anything can happen. Those who add to a losing position hoping it will reverse, do not believe that anything can happen. Humans have biases and they want certain things to happen in certain ways. We all hope for the best, but hope is one thing and logical decision making is something else. At any single moment, we cannot predict what the flow of orders entering any exchange is going to be; a large amount of Buy-OFV or will it be a large amount of Sell-OFV. Around the world there could be a decision being made where the outcome of that decision could negate your decision. You must understand that and accept your inability to control a thing. We are powerless. All we have is our ability to click, and this is the physical essence of trading, but we know that the mental essence of trading is a much deeper rabbit hole.
By now, you should be realizing that we have zero control over anything except one thing: the one and only thing we have complete control over, and nothing else, which is the amount of exposure or dollars we are willing to risk on any one trade idea.
You could click buy on a trade that is destined to be a loser, because there is a large flow of sell-OFV coming your way.
You could click sell on a trade that is destined to be a loser, because there is a large flow of buy-OFV coming your way.
You could click buy on a trade that is destined to be a winner, because there is a large flow of buy-OFV coming your way.
You could click sell on a trade that is destined to be a winner, because there is a large flow of sell-OFV coming your way.
Accept the fact that anything can happen at any moment in time, and perish the thought that we can know what will happen next on any one trade idea, regardless of how strong a zone may be or how powerful the entry signal may look.
2. Every Trade Is Unique.
As humans, we are wired to predict. We require knowing what is going to happen next to be comfortable. Uncertainty is uncomfortable. This creates a huge problem for us and a major dilemma; trading is full of uncertainty and we cannot be certain, but the brain is wired in a way to be very uncomfortable in an uncertain environment.
Does this mean we will forever be uncomfortable while trading? Absolutely not. This just means we must endure a period of discomfort before we are able to function in an uncertain environment, like the financial markets, comfortably. This would be a very valuable skill to have, and it is your duty to trade until you can trade comfortably, and eventually, accurately.
Let us study more deeply this “law” that states that Every Trade Is Unique.
For every trade that you take, there is a certain scenario playing out. The moment that you clicked, for that moment of time, there were a certain number of market participants buying a certain amount of Buy-OFV, and there were a certain number of market participants selling a certain amount of Sell-OFV. Do you believe that the same participants transacting when you clicked for one trade, are the same market participants transacting when you clicked for another trade? Absolutely not; it is an impossibility. Every moment there exists market participants entering and exiting, and transacting OFV in various shapes and sizes. No two trades are ever exactly the same. Although they may look the same, behind the scenes, there was a very different mix of events occurring that resulted in that certain outcome.
Here is where the problem occurs:
Let us say for example that you took 10 trades and you started with a smaller account and you ended up with a larger account, by the time you closed that 10th trade.
This is simply a conceptual series of 10 trades, taken one after the other.
A series of 10 trades; taking all the trades in the series will take you to your destination.
A few losses in a row may already throw a trader off their system.
Now let us make things very bad, and say that you experience even more losses in the series.
After five losses in a row, very few traders retain their ability to function confidently in the markets.
Now, rarely have I seen a trader who does not experience issues after five losses in a row, but this is in fact where the most awareness is required from the inconsistent trader.
For example purposes, let us assume that these are “natural losses”, and the market invalidated every valid setup we took.
What is the average retail mindset wired to think about regarding this very next trade?
Notice the thoughts that occur to a trader before executing the next trade in the series.
They are very likely hesitating, or doubting, or experiencing discomfort, before pulling the trigger on the next trade.
Where does this conflicting negative energy and these inner-conflicts arise from?
Why is there even a hint of difficulty in pulling the trigger and executing the next trade, even though the zone for this trade idea is valid, and the micro-signal printed inside the zone is also valid?
Why are we not pressing on the gas when the light is clearly green?
This is a very dangerous and a very subtle disease. The reason stems from the fact that you do not truly believe that anything can happen, and that this trade CAN end up as a winning trade idea. There still exists doubt in the system, and there cannot be a state of fearlessness wherever there is doubt.
While the average retail trader hesitates and doubts, while the elite BFI trader does the exact opposite; they execute on the valid trade, without hesitation, because it is valid, and they have been doing it over and over again for years, so that doing it requires the manual trader to have little conscious thinking, such as an experienced driver or doctor doing something for the thousandth time.
If the macro-zone is valid, and the micro-entry-signal is also valid, then it is your duty as a trader to take the risk on that trade, because our system has shown us that the potential reward can outweigh the risk.
The average retail trader “feels” that this next trade is likely to be a loser as well, because they falsely believe that what happened previously, will happen again. They, for a moment, do not believe that ANYTHING CAN HAPPEN. They cannot even conceive of the possibility of profit. The average retail trader would go home in frustration, because the market is against them and .
The elite BFI trader understands that anything can happen, and based on the laws of probabilities, the next trade could possibly be a winner, and a valid zone with a valid signal at the zone, means that the edge is present in the market, and the elite BFI trader takes action, without thinking much about it. If they do not take action (brake) when the system requires you to click (gas).
Just like they know without a doubt that 2 plus 2 equals 4, the elite BFI trader knows without a doubt that the trade can go either way.
Every loss brings the trader closer to a win; based on the law of probabilities.
The elite BFI Trader understands that with every loss, they are actually getting closer to a win, based on the laws of probabilities.
They understand that in order to get to the winning streaks, a trader must endure the losing streaks, and continue trading their system.
Let us imagine the reverse scenario; the scenario which I assume most of you have experienced.
Let us imagine if every trade was a winner; for every trade in the first five trades of the series, the trader experiences a winning trade and is always on the right side of the order-flow.
Notice the thoughts that occur to a trader before executing the next trade in the series.
Wow! Five winners in a row! You are unstoppable!
For the average retail trader, euphoria sets in. When we are in a state of euphoria, the human brain cannot perceive risk; risk does not exist (from their emotional perspective, temporarily).
It is very hard for a trader to even fathom the idea that they may be wrong. That thought is the furthest thing inside their head, from their emotional perspective, temporarily.
But in reality, based on the law of probabilities, an elite BFI trader realizes that the next loss is right around the corner.
They understand that the longer the winning streak continues, the more likely the next trade is going to be a loss.
The average retail trader doubles down and may risk it all, because to them, in their mind, it is a “sure-thing”. They do not believe that anything can happen. They will expect what they wish and hope would happen because it is convenient for them. The market does not do what is convenient for the trader; the market does what is convenient for the BFI's.
As for our average retail trader, they do not believe every trade is unique. In fact, they believe the streak will continue, and they cannot imagine the idea of losing. Remember, in their mind temporarily, they mistakenly believe that since the previous trades were winners, the next one is also going to be a winner.
Every win brings the trader closer to a loss; based on the law of probabilities.
An elite BFI trader believes that every trade is unique, and the next trade is more likely to be a loser the longer that this winning streak continues.
They know, without any doubt, that every single trade is unique, and that the buyers and sellers who were buying and selling at the previous trade, are definitely not the same buyers and sellers who are buying and selling in the next trade that they take. The elite BFI trader would never even think about increasing their risk. It would never cross their mind just like the number 27 does not cross your mind when I ask you again if two plus two equals four. In fact, an elite BFI trader may even lower their exposure until they secure a winner.
Slowly, your mindset should be shifting, and you should be “changing the way that you think” about trading; we think, function, and operate within the markets, from a probabilistic mindset.
We believe, at the core of our souls, just as we believe that 2+2 equals 4, that anything can happen at any moment in the market, and that every trade is unique and different from any previous one or the next one, even though we are using the exact same system or edge.
As I stated previously, there are many contradictions in trading and this third part of the course is entirely based on resolving these inner-conflicts, and aligning our expectations of trading the financial markets.
We are entirely focused on executing a SERIES-OF-TRADES basis all in the same way, based on a valid micro-signal printing at our valid macro-zone. We do not predict each trade and operate on a TRADE-BY-TRADE basis.
Since anything can happen and every trade is unique, the outcome of each individual trade is truly irrelevant, because the outcome should not change a thing. Only after the result of a series of outcomes can you determine what can be changed (usually 10 to 20 trades).
The truly important part of trading is the outcome of a SERIES OF TRADES; after taking a bunch of trades all in exactly the same way, we should end up with a larger account than the account that we started off with.
Your job in trading is to add zeros to your accounts; not to subtract zeros.
Dissolving Trading Fears
There are several trading fears that we need to discuss and understand. The fears people have are countless, and since this is a trading course, there are several very important trading fears to discuss and dismantle, and most of you reading this should already be familiar with them.
In this course, we will only cover the main and most important trading fears that, as we have discussed in the previous section, the average retail trader constantly suffers from. In fact, when they get on a chart, the fear sets in immediately. The chart scares them, because the chart is where most of the pain originates from; in their minds, charts = anxiety = pain = they tend to hate trading.
For those who have been trading for a while and have yet to develop consistent results, which is likely due to a lack of a clear and specified trading system (which this course provides; valid micro-signal at a valid macro-zone) and the lack of a clear and specified profit system, which we describe in the next section, Systematization, a key integral component of an elite BFI trader. An elite BFI trader lives and dies by their systems.
In this section, we will focus the discussion entirely on trading fears; identifying them, understanding them, and hopefully dissolving them by realizing how ineffective they make us as a trader trying to conduct their business.
The most common trading fear is the fear of being wrong. Let us begin with this one, which is the most powerful.
Fear of Being Wrong
Remember, the way we dissolve trading fears is by understanding them, deeply. The deeper you understand the fear, the more likely you will overcome it and dissolve it, rendering it absolutely ineffective and powerless.
When we discuss fear, we need to remember that we are discussing something that is not physical; fear does not exist in physical reality because you cannot touch it or grab it. It exists, but only in the mental reality; inside your head.
A good definition of fear is: F.E.A.R. : False Evidence Appearing Real.
This should make sense because it is usually a false perception that the trader has, but to them it is very real and it feels very real. They feel nothing before they enter the market, and they fear everything when they enter the markets. That is why demo traders are so fearless and accurate.
Although the trading fear exists, it mainly exists because you are not able to control it and limit its effectiveness: you believe in it so, in your head, it is real. But as we have learned how the Judas Rally’s & Collapse into a zone can be fake, we will also learn that every one of these trading fears is absolutely fake, and very deceptive; the Judas fear of being wrong.
First, let us clarify what being “wrong” means. Let us define the word “wrong”:
What does "being wrong" mean to you? What do you neuro-associate with this word?
Now for some odd reason, when a trader determines that they are “wrong”, they may assume that they did something “not correct” or “incorrect” or they have been “mistaken”. They associate these words and those definitions. Notice these few words and notice the impact they may have on the way you read them and what they mean to you.
We need to be crystal-clear on one thing when becoming an elite BFI trader: THERE IS NO SUCH THING AS BEING WRONG.
Take a moment and think about it; when you validate a zone using a BFI-footprint, and price returns to that valid zone and prints a valid entry signal inside that zone, preferably in the deeper half of the zone, on your micro-timeframe; a valid zone and a valid signal, so you pulled the trigger and clicked.
Are you right or wrong?
Do you need to know the outcome to answer the question?
No you do not. You did the right thing; you did the correct thing. You are correct and not mistaken; REGARDLESS OF THE OUTCOME OF THE TRADE.
In the previous section, you should have discovered by now how important it is to trade A SERIES of trades, ALL IN THE SAME WAY. If you do this, then you are correct, and you are never wrong.
Now, of course you have trades that are invalidated, and setups that do not work out; where you do not gain; rather you take a “loss”, but that does not mean you are WRONG, because you can take a loss and still have done exactly the right thing.
Let us wrap our heads around this very different and unique approach to trading the financial markets.
I am not referring to those who do not follow a system and trade randomly, and they trade incorrectly, and they do not manage their risk nor do they calculate their position sizes properly, but take a loss. For those traders, you are WRONG. Those are all trading errors and if you do that then yes you will be WRONG and MISTAKEN, and you will pay the price in tuition to the market and in charitable donations to your broker. We are referring to those traders whose trades are valid, using a valid macro-zone and a micro-signal inside the zone, but still experienced a trade that did not work out; an invalidated setup.
Those are normal and natural losses, and we are referring to those whenever we discuss the concept of there being no concept of “wrong”, if you followed your system.
To summarize; there is no such thing as WRONG, if you did the right thing and blindly followed your pre-determined system; a trading system and a profit system.
A trading system tells when and how to enter;
A profit system tells you when and how to get paid;
However, this is not the case when dealing with trading the financial markets. This is not a normal business, and we do not offer a product or service. In trading, you trade one thing for the other; your loss is someone else’s gain. For you to gain, someone else MUST lose. Some traders have not reconciled this inner-conflict within themselves, and in order to become an elite BFI trader and trade fearlessly, you cannot allow inner-conflicts to affect, in any way, your approach to the financial markets. It is crucial that we resolve them all, preferably in this section and by the time we complete this third part of the course.
The fear of being wrong: There is no such thing; if you followed exactly your system, and you did the right thing, and the outcome is irrelevant.
Fear of Losing Money
This can be likened to fearing the inevitable, such as death. Since death is inevitable, and inescapable, then it does not make much sense to hide in a room and try to avoid it. The same goes for trading the financial markets and dealing with losses. This is where we need to define another word: “loss”.
What does a "loss" mean to you? What do you neuro-associate with this word?
The average retail trader associates with the second definition of this term “loss”. For most traders, a loss in trading is equivalent to being in a state of grief or deprivation, the second definition for the word. Compare this to the first definition, which classifies the loss as a personal state of “feelings”, which we know to be a dangerous quality to exhibit when trading the financial markets.
In reality, what we call this is a neuro-association that you have with mentally with the wrong definition and understanding. We will discuss neuro-associations and how to apply it to change ourselves; a difficult thing for most to do.
Fear of Missing Out
This is another one similar to fearing the inevitable. Absolutely you will miss out. Of course you will miss moves. Your job is not to catch everything. Your job is to make use of what you can and are able to catch, during your trading period.
Dissolve this silly fear and confront the reality of things; missing out is inevitable, so focus on the ones you don’t miss out on and worry about your own live trades; your entire job is to catch an A to B price movement, and benefit financially by that occurrence.
Fear of Leaving Money on the Table
This is a very important one because it stems from the trader having no clear profit system; or the one you have sucks and you don’t believe in it. If you do not believe in your method of getting paid, or you don’t have a method, then this fear will exhibit itself and you will not know when to get out or how much to close out; there will always be regret.
This is not the proper approach. We cannot operate in a calm and clear state of mind with these silly fears nagging us. Now, I understand that these can be powerful at times, but it is your job and duty as a trader to control them, and dissolve them, because they are not profitable in any way, and that reason shall suffice.
Neuro-Associative Conditioning
I doubt that there is a trading course that exists today that discusses neuro-associations, neuro-associative conditioning, and the neuron itself, but it is this neuron that is responsible for transferring the thought that eventually became the action which resulted in every trading mistake that you have ever made. Not only trading mistakes, but every mistake you have ever made in your life was once a thought that was in the form of an electrical impulse moving along one of the tens of billions of neurons within the brain. It deserves our respect and it is profitable for you to understand why traders repeatedly do that which they know is damaging to them.
Neuro-associative conditioning is a topic that has been heavily studied in the past few decades as scientists learn and discover more about the brain and the way it functions. In this section, we will only focus on how we can apply and benefit from understanding the way our brain operates and our neuro-associations, with regards to trading the financial markets.
As always, let us first define the term neuro-association, which means to associate with something, neurologically. This is the branch of science that deals with the way the nervous system operates; mainly the brain. The brain consists of neurons, which are specialized cells whose primary function is to transmit nerve impulses, or information. Every thought you have ever conceived, was transferred by these neurons. If you had a thought of closing a trade early, or if you had the thought to risk more than what is prudent for your account size, this information was transferred and relayed through these specialized cells called neurons; simply put, they are the messengers of information in the brain.
A neuron; the cell responsible for transferring every wrongful trading thought that you have ever conceived.
Why is this important to understand?
Because the key to changing the way we think about trading is to first understand “how” we think. Only through a proper understanding of the way we think and operate as humans can we begin to understand the proper steps to take in changing for the better. Every trading mistake you have ever made first originated as a thought in the brain, and that thought was transferred in the form of an electrical impulse to a series of muscle groups, which then resulted in an action; whether that be an action that you later regret or an action that you later approve of. Every single trading error you have made was once passed through a neuron in the form of an electrical impulse. This neuron is the messenger of these thought impulses; whether they be positive and constructive, or negative and destructive.
Some of you who have been trading for years may have experienced a “mind-freeze” moment, as discussed in the Amygdala Hijack section, where a trader finds themselves in a trade or in a series of trades in which the trader is only able to recognize the trading mistake after the mistake has occurred. It almost seems to be a blur until the episode is over and we look back at our account equity and realize the catastrophic losses we have blindly accumulated.
It would not be much help if we only realized a trading mistake after it occurred; we need to catch the thought before it is transferred through our neurons and manifests itself into a physical action. Some of you may get the urge to risk more than what is safe for your account size; some of you correctly disregard the thought and some of you incorrectly act upon it. The true problem lies in the fact that the thought impulse was generated in the first place.
Imagine if we associated the idea of hitting the gas whenever we witnessed a red light?
Imagine if we associated the idea of hitting the brake whenever we witnessed a green light?
These are examples of false neuro-associations and they can be extremely deadly. The same type of methodology applies when trading the financial markets.
So what does the brain immediately associate with when a certain event occurs as we trade the financial markets? What does the brain associate with, neurologically, when a trader experiences an invalidated trade setup? What does the brain associate with, neurologically, when a trader experiences a retracement in the market against their current positions? What kinds of thoughts come to mind when such events occur? These are examples of neuro-associations and they can be positive or negative, and the difference between the two can be the difference between success and failure.
Let us study some common false neuro-associations with regards to trading.
An Invalidated Trade Setup
AKA Business Expenses
As we have discussed earlier, there is no such thing as right or wrong in the financial markets. There is only either properly following your trading system, or not following your trading system. If you followed your trading system flawlessly and implemented your profit system, then you did the correct thing, regardless of the outcome.
However, most traders do not associate positively with an invalidated trade setup. This can be extremely dangerous and very expensive. For example, some traders may engage in revenge trading, because they are angry at the markets for not fulfilling their expectations. These are the same traders who take everything that the market does as a personal insult, against them as an individual, and they do not consider trading strictly as a business. Taking any action the market does personally is the quickest way to wipe your account clean.
When you are handling large funds, a simple invalidated trade setup can take you down a treacherous path where the trader throws all rules out the window and unleashes a barrage of trades that are neither at a valid macro-zone nor are they using a valid micro-signal. This trader neuro-associates negatively with invalidated trade setups, and this negative neuro-association must be resolved before they can ever achieve consistent results that produce a steadily rising equity curve.
Negative Neuro-Association:
a personal insult; an attack on the ego; being wrong and mistaken; a loser with losses; the market is against me personally; trading is not for me.
Positive Neuro-Association:
Every invalidated setup gets me closer to a validated setup; invalidated setups are the cost of doing business, and every business incurs expenses, and I am blessed to be in a business where my expenses are completely under my own control.
A Retracement
A retracement in the market where the market retraces against a trader’s current market positions may expose some flaws in a trader’s thinking process. They may magnify the fears of a trader and retracements are a major cause of trading errors in the financial markets. Understanding these natural occurrences in the markets is key to avoiding classic trading mistakes that occur when the market performs a retracement. As we know, a retracement is a completely natural part of the way price moves; they are a natural and inevitable part of trading.
Negative Neuro-Association: the market is taking away my profits; the market is reversing against me; I must be wrong; I must bail out of the trade and settle with whatever profits remain.
Positive Neuro-Association: the market may be presenting an opportunity to add to my position; I understand that the market will not move towards my target in one straight line; I understand how markets move and I expect retracements as a perfectly normal and natural part of price movements.
A Losing Streak
Every trader on the planet will experience a losing streak. Yes, even the best traders on the planet. The only difference between a professional trader and an amateur trader is in how they handle them.
Negative Neuro-Association: I am a loser; I should risk more on the next one in order to recover the losses; my system is not working and should be changed immediately; the next trade will not be a winner.
Positive Neuro-Association: I understand that based on the laws of probabilities, it is inevitable to experience a series of invalidated trade setups; I will not change my system until I see the results of completing the entire series of trades; every trading system experiences losing streaks, and the important thing is to end up net-positive in the long-run; I am going through the invalidated trade setups in order to get to the validated trade setups; I understand that increasing my exposure is a sure way to increase the size of my losses, so I will keep my exposure constant or I will lower it until I close one or several winners.
A Winning Streak
Every trader will experience a winning streak, and these can be much more dangerous and destructive than a streak of losses. From my years of experience in trading, I have found that a trader usually experiences their worst losses, after their biggest winners. For the average trader, a series of winning trades is so unexpected that they have no proper method or system of dealing with them. They experience the highest highs and that is the point where it becomes easiest to experience the lowest lows. Expect winning streaks, but also understand them and what your brain neuro-associates with them as they happen.
Negative Neuro-Association: I am invincible and I am the king of the markets; Risk does not exist and I cannot be wrong, so I will increase my risk exponentially.
Positive Neuro-Association: I understand that this is where the dangerous feeling of euphoria may set in; I understand that with this winning streak, an invalidated trade setup becomes more likely as the winning streak continues, and thus I will not increase my exposure.
A Missed Trade Opportunity
Every trader on the planet will miss trade opportunities. There is a never-ending opportunity flow in the markets, and associating negatively with a missed trade can have dire consequences and can make a trader feel inadequate and begin to question themselves and their trading system in general. Study your own neuro-associations with this occurrence and question them in order to rectify them.
Negative Neuro-Association: I need to change my trading schedule again; I missed out on making X amount of money; I could have paid for this or that if I did not miss that opportunity; I need to spend countless hours on trying to find the perfect time where I never miss out.
Positive Neuro-Association: I understand that missing trades is an inevitable trading experience, as I understand it is impossible to take advantage of every opportunity in the markets; I was not destined to be there at that time, and my focus is solely on taking advantage of those trade opportunities that present themselves during my trading session.
Breaking The Neurological Cycles
Hopefully by now you are beginning to understand the concept of neuro-associations, and how they are primarily responsible for the position that we are in today. These are extremely powerful neuronal cycles that, if done repeatedly, form a subconscious habit and a certain type of wiring in the brain. This makes the thought-action cycle much easier to execute, whether it be constructive or destructive. It would be of no benefit if we did not conclude the section by giving you a method to break these destructive cycles and change our neuro-associations, from negative to positive.
Step 1: The Decision
The first step is to decide what is it that you want out of the markets, and the majority will say that they want to extract consistent profits from the financial markets. They desire a steadily rising equity curve, with only very minor healthy drawdowns that are only the result of natural losses and invalidated trade setups that will inevitably occur within a series of trades as we wire ourselves to think in probabilities and not in certainties.
Step 2: Identifying The Barriers
The next step is to identify exactly what is preventing you from achieving that which you desire.
Is it a lack of a clear and concise trading system?
Is it a lack of a pre-defined profit system?
Is it a lack of proper risk management?
The causes of a trader's inconsistency can be many, and it is your job to clearly identify your own unique barriers to achieving consistent profit extraction from the markets. Usually, if the trader is honest with themselves, the source of the problem is quite clear and evident, if the trader is not in denial. The only person you cannot lie to AND GET AWAY WITH, is yourself.
Step 3: Neuro-Associative Conditioning
The next step is to associate massive amounts of psychological pain to these destructive barriers and bad habits which are preventing them from reaching that which they desire. The trader must associate pain to these destructive actions to the point of disgust. They must learn to find it repulsive to not only perform the old bad habit, but they must find it painful and be disgusted by the thought alone.
The trader must associate massive pain to not changing these bad habits, and massive pleasure to the idea of being able to change them and the potential powerful results that the trader will encounter if and when they do begin changing for the better.
Associating With Pain and Pleasure
We are emotional creatures. As humans, we are genetically designed to seek pleasure, and avoid pain. There is no denying or changing this fact. All we can do is change what we associate pain to, and change what we associate pleasure to. Every single thing people do revolves around this fundamental concept; we are constantly seeking ways to minimize pain and maximize pleasure, whether that be consciously or subconsciously.
For example, those who are obese and overweight tend to associate negatively with the idea of exercise; a completely false neuro-association. They tend to associate massive amounts of pain to exercise and healthy eating, and massive amounts of pleasure to overeating and a lack of exercise. Compare this with the healthy and fit individual, who associates massive amounts of pain to NOT exercising and to overeating, and they have wired themselves neurologically to associate massive amounts of pleasure to the idea of exercising and eating healthy.
The only difference between a fit individual and an obese individual are their neuro-associations about the concept of health and fitness.
The same applies to chronic smokers. They associate massive amounts of pleasure to smoking and those deep relaxing inhalations, and they associate massive amounts of pain to quitting. They may even believe that it is impossible to quit, because of the massive amounts of pain they associate with giving it up. Just the thought alone or a discussion of quitting may make them extremely uncomfortable. Compare this to the non-smoker; they associate massive amounts of pain to smoking, and are disgusted by it. They have learned to associate massive amounts of pleasure to NOT smoking and it is almost impossible to convince them otherwise.
The only difference between a smoker and a non-smoker is their neuro-associations about the concept of smoking.
The Most Difficult Part Of Changing
The most difficult step in this neuro-associative conditioning procedure is interrupting the limiting habit when it is only a thought within the subconscious mind. This is the most difficult step; noticing the destructive thought itself and realizing its destructiveness, and consciously taking the step to interrupt the pattern and stopping the thought in its place from expressing itself into an outward action. If the destructive thought is acted upon and becomes an outward action, then it is too late and you have ingrained the habit even further. Every time you act upon a destructive thought, you are digging for yourself a deeper hole and you are reinforcing the destructive thought-action cycle.
However, when you notice the silly thought itself before it becomes an action, you are disrupting the neurological pathway and that makes it much more difficult to conduct the action the next time. The next time you have the thought, you will notice it even quicker and more strongly, and you will immediately recognize it as destructive, and now it becomes even easier to prevent the action from manifesting itself in the first place. The more you recognize these destructive thoughts, and the more you act upon them by NOT implementing the destructive action, then the more difficult it becomes to repeat it.
The neurological pathways in the brain work in a very unique way. Unfortunately, we are not able to remove them. However, we are absolutely able to replace them, and replacing them is the key to changing them. There must be something to take its place in order to override an existing habit. Obviously, if a trader suffers from the destructive habit of mismanaging their exposure, then the only solution is to replace that habit with the constructive habit of properly managing exposure.
There is no other way. The destructive habits cannot be removed; but they can be replaced if you interrupt the limiting pattern and notice the destructive thought itself by questioning it extensively, before it manifests itself into an outwardly action.
This is hard work, but it must be done and you must work towards wiring yourself in the proper way so as to achieve those desires which you claim to want to achieve.
Hopefully, you have realized by now that trading the financial markets is an endeavor that will take you into the deepest parts of your soul. Trading the markets is the most difficult line of work on the planet because it is mental work, not physical work; the kind of work that very few people on the planet engage in.
Trading is essentially like looking into a mirror; there is nobody but you and you alone who is behind the click. You are solely responsible for every decision you make, and as you make those trading decisions, you will begin to learn more about yourself as an individual. Sometimes, what we discover about ourselves may scare us. As we discussed earlier, the markets are designed to exploit every weakness in your character and it will exploit all your inefficiencies as an emotional individual, until you learn to rectify them.
It is absolutely crucial that we confront the realities of our weaknesses, accept them, understand them, and work immediately on ridding ourselves of them and strengthening our character so as to callous our minds so that we may be mentally prepared for any scenario that the market will inevitably throw our way. In the end, nothing should surprise us as traders.
Change begins first with changing our neuro-associations; from negative to positive.
Although this may take a great deal of mental effort, the strength of your effort will be in direct measure of your results. The same click that makes us $1 can be the same click that makes us $1 million. We do not need to click harder. Rectify yourself and understand your own unique neuro-associations, so that you may be able to take advantage of the powerful income potential of trading.
Comments
Post a Comment