[Geko]

Learning to trade is a psychological process.

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A big mistake that beginners make when first learning to trade, is to assume that developing technical or fundamental analysis skills alone will allow them to become successful. In fact, learning to control emotions is the most important skill that allow a trader to become successful, because emotions have the biggest impact on your results.

The role of psychology in trading
Successful trading is not down to any single trade, but a number of trades using a strategy. This means that a trader must be disciplined enough to stick to their strategy, even throughout a losing streak. However, human beings often do not behave in a logical way and there are many times that emotions influence us and we act differently to normal.

Do you remember the last time you were very angry? Maybe you did something and you were surprised by your actions. As much as you regretted it afterwards, at the time you probably couldn't help it and furthermore, you are likely to act the same way again if you become angry in the future.

This is because the psychology of a person is made up of thoughts and feelings that are an incitement to act, and so psychology shapes our behaviour in every aspect of our lives – trading is no exception.

Emotions are inevitable – especially for a new or unskilled trader and they can prevent you from making an objective decision. For this reason, learning how to control emotion becomes paramount to successful trading over and above everything else.

The zone
When a trader is thinking clearly and uninfluenced by emotion, he is said to be in the zone. When you are in the zone, you are in control of your behaviour and are able to follow a trading strategy in a logical and systematic way.

Some traders find it easy to get into the zone, but even those who struggle can learn to control their behaviour and become emotionally detached from trading.

Tharp's chart and the importance of psychology
Dr. Van Tharp is known for breaking down the trading process into three categories that affect traders. He categorises them by importance as follows:

• Trading strategy (10%)
• Money management (30%)
• Psychology (60%)

According to Dr. Tharp, the psychological outlook and an individual’s way of thinking towards trading is the most important factor for success.

The fact that the actual trading strategy is ranked the least important by Dr. Tharp, suggests that regardless of how successful a strategy is, psychology is the key to being successful.

Emotions that influence trading
The emotions in trading that have a negative impact on results are greed and fear. These emotions cause a trader to deviate away from their plan, which can lead to further issues, such as ego and revenge trading.

The following are examples of these emotions and how they can negatively affect trading results.

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Fear of losing can lead to further losses
When a trader has a fear of losing, they try to avoid them. This can actually increase losses.

For example, a trader may open a trade and place their stop loss, say, 20 pips away – based on the strategy they use. In other words, there is a technical or fundamental reason for it being placed where it is.

However, a trader that is influenced by fear may close the trade prematurely, simply because the trade temporarily goes against them. So if the trade goes against them by, say, 10 pips, then the trade results in a 10 pip loss. If the trade turns out to be a winner, then the trader has just turned the winning trade into a losing one out of fear.

Another scenario is when a trader closes their trade as soon as it has gone into profit, out of fear that they can lose that profit. If the trade then goes on to hit the profit target, then the trader has reduced a full winning trade down to a much smaller win.

This behaviour ultimately turns a profitable strategy into a losing one, because the trader reduces the amount of winning trades and/or reduces the profit overall because of fear of losing.

Greed results in trying to take too much profit and end up with less.
When a trader experiences greed, it means that they try to go for too much profit and deviate from their strategy. For example, a trader may place their profit target in accordance with their strategy. This means that – as with placing a stop loss – there is a technical or fundamental reason for doing so.

However, when greed influences a trader, they do not close their trade when the strategy has dictated they should – they try and go for more. What can happen is that the trade can turn against them, ultimately ending up with less profit, or worse, a losing trade. This means that they actually reduce the profitability of a strategy because they try to increase their profit through greed.

A trader influenced by ego will never admit they are wrong
A trader under the influence of ego does not want to admit they are wrong.
For example, if the trade does not go well, instead of closing their trade according to the strategy, they carry on taking a bigger loss than necessary because they cannot admit that they are wrong.

Another scenario may be that after taking a loss on a perfectly good trade, they do not go on to look for the next setup according to their strategy. Instead, they continue taking trades based on their original analysis because they believe they were right in the first place.

Revenge trading is chasing the money you have lost on a trade
Revenge trading is when a trader chases the losses they have made – they are so focused on winning the money back that they fail to realise that they are not trading with a set of rules and each trade ends up resulting in another loss.

The importance of discipline when trading
To avoid emotionally influenced trading, you will need to build discipline that will allow you to think as objectively as possible. There are several ways in which you can do this:

Trade with a tried and tested strategy
You are much more likely to remain calm under pressure if you have confidence in your trading plan. If a strategy has not been tested enough, it may lead to doubts that could allow fear to overwhelm the trader.

Demo-account trading
Testing and further development of a strategy should be done on a demo account first before using real money. Using real money creates an additional pressure that is likely to amplify negative emotions that are involved when trading, which can lead to further losses.

Accepting the risk
A strategy with a 100% winning ratio is unrealistic. You must be prepared to accept losses. It is normal to hope that every trade turns out to be favourable. However, inexperienced traders are likely to experience a stronger emotional impact when they take a loss. In contrast, a profitable trader is able to accept losses as part of the trading strategy and move on to the next trade, without allowing greed or fear to affect future decisions.

Article from Tradimo - Link

[Geko]

There are various models to highlight steps the new traders go through, and may experience, when they start learning to trade. The most commonly used is the 4 stages of competence by Gordon trading international. The model is expanded by some users to include a fifth stage (the Awakening Moment), which is not part of the original model. The more aware traders become of these psychological aspects (Greed, impatience, Pride and Fear), the easier it is to avoid the pitfall while learning.

I have first seen this model posted many years ago on a forum I think, and I saved it because it made a lot of sense. As I read it again today, I still think it carries a lot of wisdom, and that’s why I want to share it.

The five stages of learning to trade
• Unconscious incompetence
• Conscious incompetence
• An awakening moment
• Conscious competence
• Unconscious competence

UNCONSCIOUS INCOMPETENCE
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This is the first stage that a trader goes through and they do not know that they have a lack of knowledge. In this stage, beginner traders will take their first few steps by downloading a platform, opening an account and begin to place trades.

However, they are influenced by emotion – usually lured by the thought of making a great deal of money in a short period of time.

Either one of two things are likely to happen for traders in this stage:

1- The trades turns against the trader immediately. Without experience, they only watch while the losing trades reduce their trading capital. They may even close their trades and open positions in the opposite direction, to try and get on the "right side of the market", only to have those turn on them as well. They simply lack the experience to deal with the market environment.

2- The trades initially go well, but motivated by a false sense of security, new traders take large risks without a basic knowledge of risk management and they wipe out all previous profits and more.

Eventually, the trader may move to the next stage or they may stop trading altogether.

CONSCIOUS INCOMPETENCE
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Traders in this stage now understand that they need to learn. Guided by the thought that the more trading knowledge they have, the better they will be able to trade, new traders will try to put what they have learned – from books, articles, DVDs, and forums – into practice.

Beginners also seek the help of expensive "experts" and fall for "get rich quick" strategies.

When the trader continues to experience poor results, they begin to blame losing trades on the strategies or "bad" information that they received – not their own behaviour.

This stage may last a week or it may last several years – everyone is different.

The stage of conscious incompetence is the most dangerous for any new trader.

To see if you are in this stage, ask yourself:

• Have I stuck to a system?
• Am I using a trading journal?
• Do I look over previous trades?
• Do I know why I enter/ exit a trade?
• Do I take responsibility for my losing trades?

Answering no to any of the above may mean that you are stuck in this stage.

AN AWAKENING MOMENT
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Traders in the awakening moment will realise that successful trading comes down to the psychology of the trader and their approach to the markets.

A basic understanding that you will never be able to predict what will happen in the markets, starts to form. You begin to realise that making money is based on a series of trades that incorporate winners and losers, and that it takes discipline to stick to a system, cut losses short and let profits run.

A trader in this stage will begin to enter and exit the markets whenever their system tells them to, without judgement and despite the emotion they are feeling.

CONSCIOUS COMPETENCE
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A trader that has reached the conscious competence level will have progressed to the point where they stop trying to "pick" the winning trades. Whenever the system dictates that a position should be opened, they do so despite how the trader feels about it.

At this stage a trader is subject to emotion and it still takes effort to be disciplined, however losing trades are easier to deal with because it is understood that this is part of the process to make money overall.

Risk management becomes the key trading element and the approach is taken to build an account up over time and not to try to get rich quickly.

By continuing to gain trading experience, a trader can move to the next stage.

UNCONSCIOUS COMPETENCE
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A trader is said to have reached the stage of unconscious competence once they have traded with so much practice that they are able to trade in an almost automatic mindset.

A disciplined approach requires very little effort and has become second nature.

Here are some other articles to go further on this phycological process:
https://en.wikipedia.org/wiki/Four_stages_of_competence
https://www.mindtools.com/pages/article/newISS_96.htm

[Geko]

Traders are not born – they are made !

Starting out as a trader can be daunting. With so many strategies, principles and concepts to learn and choose from, it can be difficult to pick a path and stick to it.

Trading can also be an emotional roller coaster, taking you from the thrill of winning to the anxiety and self-doubt of losing in one short session.

An experienced trader knows how to stop emotion influencing trading decisions – becoming capable of jumping straight back in the markets even after a loss.

These are not skills that any trader was born with though. They are skills that are acquired through study, discipline and practice.


HOW TO BECOME A GOOD TRADER?
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Learning to trade is not an easy journey, but it is one that many have made before you. We will now look in more detail at some of the ways you make this journey easier.

Practice trading strategies
Just like a concert pianist has to work hard at perfecting the basics before he performs a concert, it takes practice and dedication to become a winning trader.

The difference with trading is that the process of practising – learning from your mistakes – can cost a lot of money. This can be psychologically and financially hard to take.

Demo accounts are therefore a must for beginners. They allow you test out strategies and different trading methods in real market conditions, but without risking real money.

Moving on to real money
After you have practiced your strategies and are comfortable with how to execute your entry and manage your trade, you are then prepared to work on the next stage of learning, which is to control your emotions.

Whilst a demo account can mimic the emotions that you feel when trading real money to a certain extent, you will not experience the full brunt of emotional influence until you move to a real trading account.

If you have practiced a strategy on a demo account beforehand, then you are in a better position to learn how to control your emotions, because you have practiced the decision making to the extent that it is almost automatic and you simply need to concentrate on taking a series of trades and get used to the emotions.

Break it into bite sizes
Experienced traders incorporate technical or fundamental analysis, risk management and strict entry/exit rules into every single trade they make.

They know that by applying each of these elements consistently, their trading will produce favourable results over time. They also know that skipping any one of these stages could ruin their strategy and lead to heavy losses.

If you are a beginner trader, trying to master so many links in a chain at the same time can feel overwhelming.
Therefore, don’t expect to learn a trading strategy in one go.

Rather, work on different elements of each strategy in bite-size chunks until you understand them and can fit them together like the pieces of a jigsaw.

For example, dedicate yourself to studying and experimenting with different money management principles until they feel second nature. Then move on to the study of entry or exit levels.

Approaching your education in this way will not only give you a much clearer sense of direction, it will ensure that you are making the best use of the time you dedicate to trading.

Of course, you will still have losing trades, however, as long as you know that you applied each trading rule carefully and consistently, any losses will be easier to digest.

Master your emotions
It is vital when trading to keep a firm focus on what you are trying to achieve long term.

Many traders start in the industry because the flexibility of trading for themselves might improve their lifestyle. Others do so because they want more control over their earnings potential.

Whatever your reasons for trading, remind yourself of them regularly. Write down your goals and stick them on your wall so that while you are learning and going through the difficult process of mastering your emotions, you can always refer back to your aspirations.

Reminding yourself, for example, that your whole reason for trading is that you can spend more time with your family can make it easier to put in perspective the disappointment and stress of losses when they do occur.

Reminding yourself of how much income you hoped to earn from your trading can also be a great way of refocusing your attention and getting you back into the market.

Take emotion out of your trading when you are actually trading
However, you must make sure that you are in a logical mindset when you are trading. You must be able to let go of emotions and you need to learn how to only think about the trade and only refer to your goals and dreams afterwards.

The reason why is that you do not want to influence your own trading. Take, for example, the scenario of experiencing a losing trade whilst thinking about the money that you hope to make with it. The losing trade now makes that dream seem further away and you are in danger of getting caught up in chasing losses.

This can lead to warped expectations, which can result in chasing losses.

One way you can overcome this is to write down your trade beforehand. By writing down your entry, stop loss and profit target on a piece of paper, you begin to switch your mind into a logical state and concentrate more on the trade itself, rather than what it is trying to achieve. You are then in less danger of becoming influenced by emotion.

Treat it like a business
Treating your trading like a business is an excellent way of helping to keep emotions at bay.

Write a trading plan that clearly defines your trading strategy, the principles it rests on and your targets.

Your plan should include a checklist of entry criteria that you consult before each trade. Having this written down can help you resist the temptation of making emotionally driven trading decisions.

Approaching this plan in the same way as an entrepreneur might approach his business plan can help clarify the reasons why you trade how you do, as well as highlighting any potential pitfalls.

Article from Tradimo - Link