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TradeYourEdge

Content (Clickable) Disclaimer ....................................................................................................... 3 About Author .................................................................................................. 4 Preface............................................................................................................. 5 Introduction ..................................................................................................... 6 The 5 Ingredients ............................................................................................ 7 1

2

Positive Mentality & Attitude ................................................................. 9 1.1

“Can Win” ................................................................................. 9

1.2

“Never Give Up”..................................................................... 10

1.3

Commitment ........................................................................... 10

Emotional Awareness ........................................................................... 12 2.1

3

4

Belief ..................................................................................................... 14 3.1

Market ..................................................................................... 14

3.2

Trading System ....................................................................... 14

3.3

Self (Belief) ............................................................................. 15

Money Relationship .............................................................................. 16 4.1

5

Prevention ............................................................................... 12

Money Objective ..................................................................... 17

Routine .................................................................................................. 18 5.1

Trading Process ....................................................................... 18

5.2

Discipline ................................................................................ 19

5.3

Continuous Improvement........................................................ 19

The Need to Balance ..................................................................................... 20 Thank You .................................................................................................... 21

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Disclaimer The information contained in this guide is for informational purposes only. I have written the book based on my personal experience and research only. It does not take into account your personal circumstances; please don’t act solely on this information. By Viewing any material or using the information here you agree that this is general education material and you will not hold any person or entity responsible for loss or damages resulting from the content or general advice provided by the owner of this website.

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About Author

Hello, my name is Alwin Ng and I am the owner of TradeYourEdge.com, a website to help Traders improve their Trading Psychology. I’m not a Trading Guru nor have I made my millions from trading (yet!!). However, comparing myself to many, I do consider myself pretty lucky to be where I am now. Trading is a journey and I’ve got a long way to becoming a Market Wizard. Nonetheless, I love what I do and I truly believe that anyone can trade profitably – provided they have the right Education, Support and Commitment. If you like what I write, please share my website with your friend and family (oh, and while you’re there, please “Like” my page as well, Cheers!) and feel free to check out my work on my website. NOTE: If you would like to share this guide, please direct people to the link below, so they have a chance to join the newsletter as well. Thank you. http://www.tradeyouredge.com/subscribe/

Cheers. Alwin

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Preface When I started trading a few years ago, I often asked, “What do I need to be a successful trader?” Clearly I was curious. Then, on the first day of trading class, the phrase that really struck me was this – “Trading Success is 80% Psychology and 20% Technical”. Sadly, throughout my training, there was limited support given in the area of Trading Psychology. And that was what inspired me to start my website and to share my experience. Through my research, I truly believe the 5 ingredients here are crucial to building, not just a good but, an Excellent Trading Psychology. Nonetheless, Trading Psychology is a pretty mysterious and a fairly broad subject. As much as I would like to cover all of it here, that would be too ambitious.

Trading Success is 80% Psychology and 20% Technical

Hence, this is only meant to be a beginner’s guide to this subject. The recommendations provided are meant only to be a suggestive and not a onesize-fits-all solution. Hence, please use the information with discretion. Lastly, I have to give credit where it’s due. Some of the ideas here were inspired and incorporated from materials by renowned traders/authors including Van K Tharp and Ari Kiev. I learnt a great deal from them and I hope to share these with you. With that, I hope you’ll enjoy the read.

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Introduction Stories of successful and flamboyant Traders goes around very often and this inevitably attracts lots of people into the Financial Market. Some succeed while some fail, this routine is exceptionally common. Nonetheless, when questioned, many successful traders cannot explain why and how they become successful. Typically, they only talk about the technical know-how or about the systems they’ve developed. Don’t get me wrong, I believe they have earned it and should be given credit for that. On the other hand, when asked about Trading Psychology, they all agree that Psychology is crucial. However, no one really explains it in detail. They would talk about what their personal experience and that’s about it.

Struggling traders almost always blame the market.

Struggling traders almost always blame the market. They claim that they are losing because the market is not in their favour. Meanwhile, Traders who constantly breakeven love to jump from one system to another, they hope to find the Holy Grail (which doesn’t really exist).

What these traders don’t realise is that the market is fair and it treats everyone the same way. It is the traders’ decision when they take positions in the market and, hence, it is the responsibility of the Trader if they lose. Instead, if you understand the Psychology of Trading, you’ll realise that Trading is fairly simple and there’s no one to blame but yourself. This may not be the ultimate guide for you but this is definitely the starting guide.

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The 5 Ingredients

A Trader’s Psychology is heavily influenced by the person’s upbringing, living environment and background. Those are the things that made us who we are and, believe it or not, it has tremendous impact on how we trade the market. Hence, you will soon come to realise that mastering Trading Psychology is not difficult (though not easy) and there’s nothing more than making an effort to become better. The real problem with improving our Trading Psychology is that it’s difficult to pin point a starting point.

Trading Psychology is not difficult (though not easy)

On that note, I’ve managed to narrow down what seems like an infinite list to what I believe are important ingredients that Traders should have when working on their Trading Psychology. I hope that this guide will provide a stepping stone to help you start.

The Psychology Mind Map (see Diagram on next page) shows 5 Ingredients that each trader should master to achieve great trading psychology. Along with that, I’ve also included some sub-categories of areas to help you focus.

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Fig1: Trading Psychology Map

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1 Positive Mentality & Attitude A trader’s mentality or attitude (or what ever you may call it) is the back bone of his/her trading psychology. And this is because a trader’s attitude will determine the very first image that he/she holds in his/her sub-conscious mind. This is very similar to how First Impression (when meeting new people) works. That image is built within the first few minutes of meeting the problem and that image will stay on for a period of time until a new image replaces it. If the image in the sub-conscious mind is a positive one, the trader will subconsciously work towards a positive outcome. And vice verse. So how do we perceive mentality? My simple analogy is to ask if a cup is “Half-Full” or “HalfEmpty”? Essentially both of these answers are the same but it’s the person’s perspective that really matters. The situation can be a problem, a process or just an average opinion. My interest is to see if he/she approaches it with a positive attitude or has he/she already given up right at the start of the approach? The interesting part to this is that a person’s true colour is usually only obvious when he/she is under pressure. For example, it is difficult to tell if a trader’s attitude is positive or negative after he lost 3 trades. On the other hand, we can easily access a person’s attitude if he has had 3 losing months. Hence, often, we cannot jump strong into the conclusion when analysing one’s mentality.

1.1 “Can Win” This is not rocket science but this is a major problem that many Novice Trader faces. They all want to make money (well, who doesn’t?). Nonetheless, a “Want” attitude is actually very far off from a “Can” attitude. Traders will, without a doubt, go through many obstacles in their trading career. The bigger the obstacle, the more “Can” one should have.

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However, as a trader, the challenge becomes slightly more complicated and somewhat different to other problems in “Greatness Exists life. And this is very much due to the in All of Us” lonely nature of trading. When the going gets though, traders will really need to fight to survive. And this fight is really between You and Youself. Don’t blame the market because it is YOUR decision when you enter the market. As Will Smith says it in the video (Click here), “Greatness Exists in All of Us”. Likewise, building a Can Win attitude towards a Trading career is essential to trading success.

1.2 “Never Give Up” It is estimated that Thomas Edison failed at making the light bulb 10,000 times before he succeeded. As cliché as this may sound, I want to emphasise that having a Can Win attitude is slightly different from having a Never Give Up attitude. A Can Win attitude gives you the fuel and drive to move forward. However, during the days when Trading results are not going any where, it’s like hitting a major road block. Throughout days like these, you really need to stand firm to your conviction and Never Give Up. You need to hang on and be persistent in your beliefs and stand up from your fall to try again.

1.3 Commitment Every successful trader, in the past and present, would have in one way or another, committed themselves to achieving success. Having a full commitment to success is crucial to a trader’s psychology. Once traders are committed, the commitment comes not just in the form of Time and Money, above and beyond that, they also come in

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the form of Energy, Emotions and Creativity. The “commitment” that they hold will give traders the strength to make things work and to find resources that traders would not normally realise exist. Commitment is indeed a powerful attitude to have. While it is not difficult to obtain, it needs to come from within, from your desire and your dreams.

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2 Emotional Awareness

Source: Link According to Wikipedia, there are 6 main types of Emotions. Within those, there are sub-types as well. To be honest, the list is endless. Like it or not, Human Emotions are part and parcel of life. Unfortunately, emotions often distort a trader’s mind and prevent them from making rational decisions. Emotions can be a Trader’s worst Nightmare. However, the idea here is not to ignore or avoid emotions. Instead, traders should embrace it, be AWARE of it and manage it. Institutional traders spend a significant of money getting it right. They either invest heavily in education or they invest in sophisticated Risk Control strategies as part of their Risk Management. However, these are the precautions that are often overlooked by self-employed or retail traders. The end result will vary and some can be devastating.

Human Emotions are part and parcel of life.

In my view, traders should nip the problem in the butt before emotions become devastating. Hence, I cannot emphasise enough that Emotional Awareness is crucial for the development of trading psychology.

2.1 Prevention The clear step after awareness is prevention. Preventing a crisis is a much effective and efficient way of managing emotions.

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Here comes the next big task. For traders to prevent emotional issues from happening, they need to understand themselves as individuals and emotions that causes problems. Unfortunately, there is no fix and hard rule to doing this. The only recipe that has always worked is Practise.

Preventing a crisis is a much effective and efficient way of managing emotions.

Practise getting emotional, practise feeling the emotional turmoil, practise being aware of your heart beat, practice feeling the pain when a trade doesn’t go your way. Seriously, the list goes on. If you really want this to work, be innovative and creative and find ways to learn about YOU. It can be a slow and painful learning process but the reward of knowing your emotions is just too great to be ignored.

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3 Belief A person’s Belief is the core reason why one would be comfortable in taking action to achieve specific goals. For example, if you belief that a car works, you accept it and you’ll drive it. The bigger the Belief, the bigger the action will be.

The bigger the Belief, the bigger the action will be.

Another important thing to note is that your initial Belief comes from gaining knowledge and, sometimes, experience. Hence, believing in the car manufacturer is only one part of the equation. The other part is where the driver needs to learn to operate the car and drive it in a safe manner. And there’s no other way

but Education. Once you’ve established the initial Belief, you grow it through the Belief Cycle. This is discussed further in the “Routine” section.

3.1 Market All financial market behaves differently and most of them have their own Personality. Sure, some of them are co-related but, nonetheless, there will be unique characteristics that make it what they are. For example, the S&P is fairly related to FTSE 100 but both of these markets are driven by different speculators and governed by different regulations. Before you trade the market, you would have established a certain pattern in the market and you would probably have taken a position based on that pattern. That pattern, which you have established, is essentially your Market Belief.

3.2 Trading System Your Trading System is a methodological approach of taking and closing a position in the market. This system will have specific risk profile, trade criteria, exit criteria and requires specific market conditions. Also, the result of the above is that the system will produce a set of trading results within a specific scope as well, including trading frequency, Reward:Risk Ratio, Expectancy, expected drawdown and so on. In my view, your trading system should also incorporate your risk management system and money management requirements. This is just a

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practical approach because you should not enter the market without first establishing your risk and potential financial rewards.

3.3 Self (Belief)

“Nobody can make you feel inferior without your consent.”

This is one of the most crucial parts of trading psychology. This is because you, the trader, are positioned between the Market and the Trading System. It is pointless to belief in the market and/or the trading system when the trader fails to take trades.

Above and beyond that, Self Belief is about you, your values and your ability to eliminate the doubts within you and make a difference in trading (or in life in general). Remember that “Nobody can make you feel inferior without your consent.” The opposite is also true; having Positive Self Belief is a choice. It might not be the easiest thing to achieve but it’s not impossible to change if you’re currently in the negative zone.

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4 Money Relationship Money is a unique asset but, more importantly, this asset can make or break you. As money is such a personal matter, everyone views it differently – some people love money, some need money and some see it as a means to an end. Essentially, what you really need to know is this – “What is YOUR Relationship with Money?” The biggest problem with this is that many traders THINK they understand money. Unfortunately, this is not a typical question and many traders have not thought about it thoroughly. The following is an example of how traders would get confused. Case 1 – Trader A is a successful trader. He took a personal loan to top up his trading account a few years ago and he has now repaid all his debt. He believes that to make sufficient returns, you need more capital. Case 2 – Trader B is also a successful trader. He believes that the quickest way of making money from taking is by trading leveraged financial products only. For example: trading stocks and equities are less attractive compared to trading stock options or futures. Now, I’m not here to debate which one is a better money manager, nor do I want to see whose money belief is better. In fact, in my view, both these traders are doing exactly the same thing – they are both trading on leveraged finances.

“What is YOUR Relationship with Money?”

However, if Trader A did what Trader B had done (and vice versa), the results of both the cases might have been completely different. Trader A might not be able comfortable with the P&L fluctuations of a leverage financial product. And Trader B might have sleepless nights due to the

liability in his personal account. I hope you get the picture, traders needs to dig deep to understand how money affect them and how their money beliefs can be very different from the conventional view.

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Once you’ve established that, you can then decide if Money is a Friend or a Foe of your Trading Psychology and move on by taking appropriate actions.

4.1 Money Objective Once you understand your relationship with money, it is also useful to identify the reasons for having money. Questions like these are critical:  

What do you want from Money? Is Money the Only solution? Or is it the best alternative?

And that’s the point of this “Ingredient”. If you want a trading success, make sure to establish clearly the psychology and relationship you have (or would like to have) with money. Without establishing clear and valid purposes for achieving financial goals, a trader may find it difficult to take relevant actions to achieve these goals.

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5 Routine You may ask what “Routine” has to do with Trading Psychology. Well, in my view, your routine is where you build your Belief Cycle.

Belief-Action-Results-Review... A simple Belief Cycle is based on the above chain. Trading the financial market is fairly routine activity. In fact, the more you trade, the more repetitive it becomes and, without even realising, you’re continuously increasing your Belief. A good routine is imperative because good routines would ensure that Actions are managed and Results are monitored. This would then lead to a reasonable Review process. With that, any Review outcomes become constructive feedback that reinforces the Belief, before new and improved actions are taken. On the other end of the spectrum, if there’s not routine, no Belief Cycles would ever be built.

A good routine is imperative.

5.1 Trading Process As Van Tharp says it in his book “Super Trader”, the trading processes are the things that you need to do on a day-to-day basis in order to be a good trader. In my view, the following items are vital and are the minimum requirement to establishing a good trading process. 

Trading Plan

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This is a written document to show what, how, when and why you intent to achieve trading success. 

Trade Review

This can be in the form of a trading journal. Which is a record to show what you actually did? This will eventually be marked against your trading plan to identify any variations.

5.2 Discipline Just to be clear, discipline is NOT a sub-set of Routine. However, I’ve deliberately put Discipline under this heading because, essentially, you need to have some sort of discipline to be able to execute a fixed routine. It’s easy to follow the plan a few times but if you had to repeat the same routine in the long term, you’ll definitely fail without discipline. This is especially true in the trading world because trading can be lonely and there is less chance of relying on others to get you going.

5.3 Continuous Improvement In the war time, soldiers are often told not to let their guards down no matter how victorious they were. And this is because you’ll never know when your enemies will strike again.

Traders should constantly find ways to improve themselves and their trading

This metaphor is applicable to Traders as well. Traders should constantly find ways to improve themselves and their trading because once they become comfortable, they become sluggish and that’s when mistakes start to crop up. If you don’t make an effort to prevent one mistake, more will along and stay. Also, having a routine which integrates continuous improvement will most certainly enhance your trading belief and make you a greater trader in the long term.

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The Need to Balance

I strongly believe that Excellent Trading Psychology is built upon the confluence of all the “Ingredients” mentioned above. Yes, I’ll say it again, traders will need all the ingredients mentioned. Above and beyond that, the trader needs to be good in all of them individually. One ingredient cannot do without the other because they are all interlinked. Unfortunately, because each trader has a different story, they only focus on areas where they THINK needs most help and often ignore anything else. Hence, they often overlook the need to use these ingredients in parallel.

One ingredient cannot do without the other because they are all interlinked.

Just like baking a cake. You can’t bake a good butter cake without good butter but you also can’t bake it without the lack of sugar, flour or milk (ok, I don’t know how to bake a cake, but I think you get the point).

If you cannot focus on everything at the same time, my advice is to find your weakest link and work on that as your starting point. And then, you can gradually move from one ingredient to another until they all work in parallel.

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Thank You I hope you’ve enjoyed the book as mush as I’ve enjoyed writing it. I can’t thank you enough for taking time to reading this and for your support in my work. Please leave a comment at http://www.tradeyouredge.com/subscribe/, or if you rather contact me personally, please contact me on my Contact page. Lastly, if you haven’t already, please follow me on TYE’s Facebook page, on Twitter or LinkedIn. Thanks again and I wish you nothing less than success!

Cheers, Alwin Ng

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5 ingredients you need for excellent trading psychology a beginner's guide