Monday, December 14, 2009

Lessons in Trading Psychology... Removing Intuition

As I told you last time I talked about my little project to help two completely "new to forex" and young people learn how to trade forex, trading psychology and the ability to control ones emotions is vital in order to be successful in this business. However there is no greater enemy and no worse problem in forex trading than trading above one's own emotions and personality traits. The evident reason why it is not easy to see this when your starting to trade is mainly because there is, at the beginning, no "strong" evidence that suggests that your emotional trading is "wrong". As a matter of fact, many new traders start with very good results, doubling or tripling their accounts in little time. However these results are never permanent and with time the market cashes on the uncapped exposure that is "emotional trading". How can we remove this daemon from our trading ? How can we teach new traders to trade with rational analysis instead of red blood emotion ?

This is not easy task. During the years I have made and tried many emotional techniques but I haven't found one that works all the time. Depending on the actual person's traits and their actual commitment to the technique it may be difficult or sometimes even impossible to do. However I have seen that the best approach to defeating yourself when trading is to learn, truly learn why your emotional decisions are not the decisions you should follow.

My approach is quiet simple, I will ask a new trader NOT to restrain itself from any type of trading decision he or she wants to make. You want to buy because the sun is shinning ? Buy. You want to sell because you have a "hunch" that the GBP/USD is going down ? Then sell. The only thing I ask from traders is that they keep both things separate. In one account you will trade emotionally and on another account you will trade rationally. When you take a rational trade you need to log into your journal the exact reasons why you entered the trade, how much you traded, when you entered, when you will exit, etc. All these criteria needs to be crystal clear. On you emotional account, you will do the exact same thing, only that "any" criteria will be valid since it is just an account to trade "whatever".

The very important aspect is that the emotional account will be a live account while the rational account will be a demo account. Then you will truly see all your emotional aspects into play when managing real money while you will have no incentive to be emotional on the other account because it just does not represent real capital. In the short term people may find that their emotional trading is much better than their rational trading. Of course, this success will be limited and it will eventually lead to the wiping of the live account while the demo account will be far from a wipe out, with some draw down in the worst case scenario. When I have done this I let people wipe the live account which is usually a 100 USD micro account which is a small price to pay for the extremely valuable lesson learned.

The only way to defeat your emotions is to realize through experience that your emotions and "hunches" do not allow you to be profitable in the long term and that emotional trading leads to an uncapped market exposure. The only way to truly know this is through experience, there is no shortcut, the experience can be a very meaningful and efficient experience as I mentioned above or it can be a painful experience involving thousands of dollars and even 10 to 20 years. It is really the decision of the trader and whether the trader is alone or learning with the help of an already profitable experienced companion.

My advice, have a plan and analyze things. If you make 100 trades and analyze non of them then it is like if you had made 0. Every time you make a trade go through its life and learn from it. The important thing is to learn from our mistakes, after all, in the words of Oscar Wilde, this is just the name we give to our experiences. If you are interested in algorithmic trading don't think that it will rid you of all emotion, on the contrary, automated trading is emotionally harder than manual trading and involves a different psychological approach. If you would like to learn more about this please consider buying my ebook on automated trading or subscribing to my weekly newsletter to receive updates and check the live and demo accounts I am running with several expert advisors. I hope you enjoyed the article !

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