15 LESSON OF FOREX

LESSON #15:
Discipline, Mental Skills and the Psychology of Trading.

There is a common belief that only 10% of people who set out to become traders actually achieve their initial desire for consistent high returns over the long haul. Objective data to verify this belief would be extremely difficult to obtain in practical terms. In fact, we haven't seen any hard data on it, but an application of the Pareto Principle: 20% of the traders take 80% of the money seems to confirm the belief.

Then the question arises, "why a few win and most don't?"

First, think about this. Every trader has access to the same tools, the same research, the same charts, the same quotes, the same proven trading methods, etc. So, just like the Real Estate broker who has 20% of his agents bringing in 80% of the income for the office (yep, The Pareto Principle again), why is it that, with everybody having access to the same stuff, only a few make consistent profits over time?

Well, its clear that the common denominator is the PERSON. Yes, YOU!

So, if somebody asked us to list the BIG THREE mental / emmotional characteristics that define the majority of successful FOREX traders, we'd list:

- Discipline & Passion

- Confidence & Courage

- Patience & Persistence

And, yes, being the currency-pair traders that we are, we have to list these attributes together in PAIRS ! Ya wouldn't expect anything different, would ya ? :-)

DISCIPLINE & PASSION:
We realize most people hate hearing the word "discipline" (it conjures up visions of either a Marine Drill Sergeant or a well-meaning Basketball Coach, doesn't it?). As Jack Schwager points out in his second famous book, 'The New Market Wizards', "Discipline was probably the most frequent word used by the exceptional traders that I interviewed. Often it was mentioned in an almost apologetic tone: 'I know you've heard this a million times before, but believe me, it's really important'."

So why is this mental skillset so very, very important to get a hold of?

Well, because proper trading discipline basically goes against human nature. We all want to be right. We all want to hang on to something that didn't work out for us...to vindicate our beliefs and our ego, and when we ARE "right", and a position goes our way, we want to get out of it -- to make sure we stay right, to hold onto our power, our pride, and our security.

In short, Discipline allows you to more effectively plan your work (trades) and work (trade) your plan. NOTE: always be sure that you have a plan in place BEFORE you start to trade. The plan must include stop and limit levels for the trade, as your analysis should encompass the expected downside as well as the expected upside.

"Okay guys," you say, "I understand the whole Discipline thing ... but passion? What's that all about?"

Well, in short, how can you be naturally successful at something, continue to fine-tune your trading skills (be willing to purchase courses, like ours, from experienced traders who can get you up and running quicker than if you didn't have our info.), and stomach the ups and downs of the business if you don't know WHY you're doing it? As Michael Jordan once said, "If you have a love for the game, your talent will eventually catch up to you."

But, don't mistake the "passion" for what you do - or will be doing - as a career Currency Trader for the "emotion" that will be generated when trying to pick a trade without using entry/exit indicators/rules. The former feeling is good. The latter bad. As some traders say, "What feels good is often the wrong thing to do." So, with the business of currency trading, have fun, learn, grow / develop and love what you do but, when it comes to actually getting in and out of a trade, remain as emotionally indifferent as possible! If you do Rapidforex, you'll go far!

>>> To sum-up this Mental skillset PAIR (Discipline / Passion): You must be disciplined AND remain emotionally detached from the market.

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CONFIDENCE & COURAGE:
On of the basic traits of successful traders is that they believe in themselves first. They have the confidence and courage to stick with their plan, not stray from their rules, go against the crowd if need be, and see the end result (the Big Picture) in their mind.

As one of the wealthiest traders in the country said on a conference call once:

"Your perception is your reality folks. You see, it's what you EXPECT in your life to happen *for you* or to you. Well, get rid of the 'to you' crap so it will start happening for you."

Or, to say it another way:

"What you hold in your mind with energy and focus will tend to be created in your reality." -- from the book, Spiritual Marketing

***** Interesting Story *****

Joe Girard was once asked how he sells more automobiles than anyone else in the world. His reply: "I simply sell the world's best product, that's all. I sell Joe Girard!"

Joe's objective was to make every customer *want to* do business with him. He obviously did a good job at it. For eleven consecutive years, he sold more automobiles and trucks than any other retail automotive salesman anywhere.

WOW ... But, here's the rub ...

They were ALL Chevrolets - certainly a good make representing a good value - but certainly not a product that couldn't be purchased somewhere else.

Bottomline. Joe certainly had a good product line that he believed in; however, his posture and attitude towards himself and his ability to be liked is really what won over each customer.

An Ultimate TRUTH: you will never convince anybody (including your opponents in the market) to believe in you until you FIRST believe in YOU. Think about it. Twice if you have too.

So, how does ALL this apply to ensuring success in the FOREX market?

It's this: when focusing your search for commonalities in the market don't forget to look for what every successful TRADER has in common. From the book, 'Poker, Sex and Dying': "Poker is an explosive game combining money, ego, and emmotions. It is not enough to know, have information, and insight regarding your opponent (the markets), you must know of yourself."

We can't begin to tell you how many times, in the beginning, that we faced a situation where we "knew" exactly where a currency pair was going, had a trading plan, but failed to follow it. Of course, greed, fear, and our other emotions stood in our way. When you let this happen to you...all your knowledge, planning and information quickly becomes useless.

In other words, no matter how good you are at analyzing the market, if you don't have confidence, all you're really doing is repeatedly creating experiences to which you will respond with similar frustration and anxiety.

How do you achieve confidence? You gather knowledge, practice discipline, and grow as a person. The more you learn about the markets, your approach to trading the markets and, more importantly, yourself...the more effective you become as a trader. The more effective you become, the less fearful you are. Confidence is the lack of fear. That's it. Lack of fear. When you are confident, you can win.

Ask yourself:

- How do you handle your emotions? Is there a process? - What is your perception of the world? How did you arrive there? Is it accurate? - Are you able to have the same emotion whether you win or lose? - Do past mistakes make you hesitant to pull the trigger today? - Do you have the belief system of a winner or loser? - Do think in terms of probabilities? - Is the way you attach meaning to things too wrapped up in personal emotion?

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PATIENCE & PERSISTENCE:
In this day and age of instant gratification and vicariousness, people want thrills without risks, wine without alcohol, more money without effort, beer without calories and, yes, a profitable currency trade as soon as they can get it.

Look, if we could give you one QUICK piece of advice, in regards to this necessary mental skillset, it's this: The market knows better than you and I when the time is ripe. Don't rush it.

The successful trader realizes that patience pays! Every successful trader has a special talent for 'watching and waiting' and waits until trading behavior has dictated when to enter the market. The prudent FOREX trader specifically applies patience to his/her advantage by:

- Listening To The Market

The market is continually donating valuable trading information, and you must get into the proper frame of mind where you are in reality taking your orders from the action of the market itself or the signals your trading system is sending you. Your judgment will become poorer from the very time that you decide you know more about the market than the market itself is telling you, and you throw patience aside and give in to fear or hope.

- Sitting On The Sidelines While Waiting For a Trend to Develop

It has often been said that looking at one's screen during the trading day is like sitting in front of a slot machine and trying to resist gambling. It's hard. Just as the one armed bandit tempts recreational gamblers, the constant stream of quotes on a computer screen tempt seasoned and novice traders alike to make hasty trading decisions.

Successful traders in the FOREX have learned that they cannot buck the major price trend of the individual currency-pair they are trading. Or, even if you're not a long-term or position/swing trader, but daytrade like we usually do, you still don't want to let impatience cause you to trade against the short-term trend -- buy on a micro- downtrend or sell on a micro-uptrend.

The successful FOREX trader will enter his/her trades in the direction of the prevailing trend or wait until a new trend is established. Several hours, or perhaps days/weeks, may elapse before this trend becomes apparent.

While patience is important not only in waiting for the right trades, it's also important in staying with the trades that are working. Although trades are held for much shorter windows, as a daytrader you must know how to wait patiently for the optimal time to sell. Selling a winner too early is not going to allow your account balance to increase exponentially at an ideal rate. So, this is where a the 'persistence' mental factor comes in as well. You can be 'patient' until the cows come home but if you don't persistently control your impulses and don't persistently follow your exit rules, then your profits won't balance out losses overt time. As a famous trader (William Eckhardt) once said, "while amateurs go broke by taking large losses, professionals go broke by taking small profits."

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"Be patient with winning trades; be enormously impatient with losing trades. Remember, it is quite possible to make large sums trading/investing if we are "right" only 30% of the time, as long as our losses are small and our profits are large."

- Dennis Gartman