Trader Psychology

Sir/Madam:

My interest in market wizards has lead to a simple conclusion – a great trader isn’t necessarily smarter than we do, he just has an access to a colossal fund. Great traders also lose. Though they survive losing streaks, the only difference is the hugeness of their accounts.

I heard of a rogue trader in Europe who lost close to 50 billion Euros, while I know a humble trader who manages $5000 successfully. Someone isn’t a wizard simply because he has access to a huge fund.

If someone makes 20% per annum on $1000, who would call him a great trader? But if he makes the same 20% on $10 billion per annum, why wouldn’t you call him a great trader? $2 billion is a great amount of money. If I had $1 million to play the markets, I could be very much comfortable if I’m making only 1% per month. But if I funded my account with $10, no-one would even take me serious if I boasted of 50% per annum, unless it was 50% of $50 billion.

You see, great traders don’t necessarily double accounts to be called “successful.” Although some of them risk too much of the funds they manage, and you know the possible consequences of that. For them, only a small percentage profit will make a big difference. But most traders don’t have a great amount of money. You might want to fund your account with $100 and make 10% – 20% on daily basis (if you’d been trained to be a suicide trader). So this is where frustration comes in; we want to trade with a small amount of money and live a big life. You wouldn’t appreciate 10% profit in 3 months if your account is small. Please let’s have a rethink!

Van K. Tharp declares: “From my market research and other sources, I know how a number of ‘market wizard’ caliber traders function. They have good systems with positive expectancy. But those systems are not much different than the kind of systems the average person can get. The difference between making a fortune in the markets, as most of them have done, and average performance is simply one of position sizing. Great traders apply great position sizing to good systems and have the discipline to carry it out.”

A hugely successful trader was reported as using mathematical models in making trading decisions. One would first think the models are his secret, but when I delved further, I saw that he usually uses 1:2 or 1:3 risk-to-reward on swing trades. Honestly, the good RRR is also part of his secret.

You can be great with any entry criteria you use – whether technical or fundamental or a combination of both. But all systems have losing streaks, whether temporary or protracted. So you need a good RRR.

To conclude, we need to continue working and developing to have the real LUCK, (Labor Under Constant Knowledge).

Your questions and opinions are highly welcome.

Thank you.

Yours sincerely,

Azeez Mustapha
Forex Signals Strategist, Funds Manager &Coach
Email: amustapha@fxinstructor.com

Many scoff at the idea of “Forex for a Living”.

The disbelief in this idea is further encouraged by tales of trauma received by many an unfortunate trader. We have all heard the horror stories, the tragic accounts of so-called “newbies”, and are tempted to dismiss the idea of trading for a living right off.

On the other hand, we have success stories.

Traders come forward to say – “Yes, it’s very possible! Look at me, I live off my trading.” Some people who read or hear such talk say, “I think he’s a dirty liar!”. They think, “If he has money, its because he was rich before – it wasn’t trading that made him so!”, or “I don’t know how much he lost before he made a profit.”

Read the rest of this entry »

There was an article in yesterdays London Sunday Times Sports section on the Formula 1 phenomena that is Lewis Hamilton.

For those who are not aware Lewis is the leader of this years Formula 1 racing championship. Perhaps nothing too amazing there until you realise that he is a complete rookie. He has only competed in 7 Formula 1 races however his results have been fantastic; a third place, four seconds and two victories – a trophy (and podium finish) for every race and a respectable 10 point lead.

The author (himself an ex F1 driver) makes a serious point about the mind management help he has received in his training and pays attention to the Mental Conditioning Coach that Lewis uses to help provide him the edge in his driving. Read the rest of this entry »

In this my last installment on Fear I will cover the final action block to success as a Trader. You should remember I said the first block was over-analysis which led to self-doubt which in turn leads onto:

Hesitation at the very moment when you need to pounce!

How many times has this happened to you? How many times have you sat there over-analysing a perfectly good set-up whilst listening to your inner voice creating self-doubt in your mind only for you to hesitate on pulling the trigger at the very crucial moment when all of your energy should be focused on following your plan?

Read the rest of this entry »

We have seen in our previous posts that there are many dangers awaiting those traders who use high leverage when trading this volatile and unpredictable market.

Let’s now have a look at the other side of the coin…

If leverage is dangerous, then using a very small one – or none – should protect a trader against any danger resulting from trading large positions, right? WRONG!

This confusion is caused by a misunderstanding of the word ‘leverage’, which can have at least two different meanings.

First, leverage has a purely technical meaning and refers to the instrument offered by a broker in order to boost a trader’s power to make profit (or suffer losses). Broker X can offer a 50:1 maximum leverage for trading on its platform, while broker Y may offer a 400:1 maximum leverage.

When we are talking about leverage in its technical aspect, there is nothing wrong with using the highest leverage allowed by the broker. It is not the use of this instrument per se that places us in a risky situation, and in what follows we will explain why. Read the rest of this entry »

If you remember from my last entry I stated that there were 3 blocks to success. The first was Over – Analysis which leads onto the 2nd block:

Self-Doubt which is often experienced as Fear. Having become paralysed by over-analysis you then find yourself doubting your own analysis and your own ability. That internal voice keeps telling you:

• “Your last trade was a loser, so will this one be...”
• “You don’t know what you’re doing do you?”
• “You want to go long but the talking head on Bloomberg is saying traders should be short, surely he knows more than you?”

And a hundred other such self-defeating comments. Read the rest of this entry »

The first aspect of our leverage myth refers to the belief that a high leverage can work in favor of the trader, and even compensate for losses in periods when trading does not give the expected results.

A trader that is aware of what leverage can do for him may tend to increase the size of his trades as losses accumulate, hoping for a recovery in the very last moment. This approach can only work against the trader, and usually leads to margin calls and huge losses in trading accounts.

Whenever a trader tries to apply a casino player mentality to trading (on purpose or not), the probability of his success is in fact much lower than if he were gambling in a casino with a 50%/50% chance. Read the rest of this entry »

Carrying on from my last entry – as Traders, there are, I believe, 3 blocks to a Traders success.

The first one is: Over-Analysis. The old analysis paralysis syndrome.

• Do you find yourself looking at more and more charts trying to gain a better understanding?
• Do you find each of your charts is littered with dozens of indicators, moving averages and trendlines as you search for the perfect trade?
• Do you find yourself unable to pull the trigger until you have a 100% possibility of success?

Read the rest of this entry »