Trading Essentials Framework Trading Psychology€¦ · A trader’s mindset is his/her most...

Trading Essentials Framework

Trading Psychology

Learning to Profit from Futures Trading with an Unfair Advantage!

™2.0


Trading Psychology

Introduction (PDF pages 4-6)

A trader’s mindset is his/her most important edge or his/her largest liability.

Many fortunes have been lost in the trading world by those who do not understand how to harness the

power of their minds. Why do 70% of lottery winners go broke after just a couple of years? It’s the

same thing – their mindset.

Through enough time and exposure to the markets, sooner or later, you will learn that there are no

guaranteed “Holy Grail” systems in the market – regardless of their marketing messages.

A great trader is built from within.

The Holy Grail of trading is located between your ears.

In this module, you will learn the trading psychology BASICS of…

How to execute your trading plan flawlessly and

How to manage yourself and your trading business efficiently so that you can trade with greater

consistency and profitability.

It’s a journey that no active trader ever truly finishes; once they accept that successful trading comes from

the inside, they relish the journey more than the destination.

Take a deep breath, open your mind, and begin your own journey.

© Trading Concepts, Inc. 2

Recommended Readings for Further Study

The following materials are resources that can be helpful to understand this science, and they continue to

provide insight and wonderment:

Trading in the Zone by Mark Douglas

The Disciplined Trader by Mark Douglas

Mastering Trading Stress by Ari Kiev

The Mental Strategies of Top Traders by Ari Kiev

Hedge Fund Masters by Ari Kiev

Super Trader by Van K. Tharp

Secrets of the Millionaire Mind by T. Harv Eker

The Secret

Psycho-Cybernetics by Maxwell Maltz

Think and Grow Rich by Napoleon Hill

If you would like to accelerate your development with some professional help, then you might want to

consider Norm Hallett’s “Disciplined Trader” program at www.thedisciplinedtrader.com; this program covers

many elements of what I consider to be foundational to trading psychology – obviously in great depth since

it’s the focus of his course.


Trading Psychology


The Two Different Minds (PDF pages 7-8)

Have you ever had a completely mystifying experience making a trade, as if you yourself did not make the

trade? The “how could I have been so stupid” kind of trade? The one that leaves you shaking your head and

wondering just what you did?

The part of you that thinks that it was in control was really not in control.

You have both…

a conscious mind which is task-oriented and requires you actually to devote thought towards the task

at hand and

a subconscious mind which does everything in the background, automatically, and without effort.

Think of the subconscious mind as the “inner core” of your brain – chugging along in the background,

quietly handling the millions of things that happen every second.

The subconscious mind is considered many orders of magnitude more powerful than the conscious mind,

and the subconscious mind really can be in charge.

Truly successful traders do not conflict with their subconscious minds, and they are able to use this

powerful core processor to its full potential.

We’re just going to scratch the surface of the power of this concept in this chapter; I hope this begins a life-

long journey of discovery for you.


Trading Psychology


Thoughts Become Things (PDF pages 9-10)

I’m sure that you’ve had some exposure to “the law of Attraction;” regardless of what you’ve heard about it, I

really do believe that thoughts become things. You’ve already seen this happen in your life, probably more

times than you can count.

Ever wanted a particular brand and model of car? Really wanted it?

Didn’t you also notice that they were literally everywhere, beckoning you?

What is happening is that your subconscious mind narrowed its field of interest and simply instructed your

conscious mind to let it know if any of the “objects of interest” fit the pattern.

Those of you who have kids can relate to the fact that you can pick out your child in a crowd of

hundreds simply by how he/she carries him/herself.

Your subconscious mind is incredibly powerful at sifting through literally terabytes of information very

quickly and determining an answer.

This is why you often can “intuit” an answer at lightning speed, well before your rational side pieces

together an answer.


Trading Psychology


How Does This Relate to Trading?

The point here is that the subconscious mind can be in charge and can make all the decisions. It may

make only those decisions that are congruent with the current “programming” that has been applied to it

over the years.

Here are some ways that the subconscious mind may affect your trading success:

Your subconscious mind may ensure that you attain a limited level of success – and no more.

Your subconscious mind may find a way so that you surrender profits back to the market.

Most traders will go on for years without understanding that there are actually much deeper forces at work –

inside of THEM – that directly may influence their financial success.

It’s not the MARKET that they’re fighting; the true battle is one waged WITHIN every trader, and truly

successful traders have won that battle.

The more experiences that you’ve had in your life, the greater the “catalog” of responses that the

subconscious mind has to judge your activities and make appropriate corrective actions.

Your subconscious mind doesn’t consult you about the decisions that it makes about your blood

sugar, pulse rate, sleep schedule, digestion, hair replacement, or any of the millions of decisions that it

makes on the fly. Why should it give you any insight as to how it will govern your trading decisions?

Since it’s not going to tell us how it thinks, we’ll just have to flip the equation around and tell the

subconscious mind WHAT to think!


Trading Psychology

6

Train the Brain (PDF pages 11-12)

Your subconscious mind has no idea if the inputs that it receives are real or not or true/false.

What this means is that the subconscious mind can be reprogrammed.

Since the subconscious mind cannot judge if something is real or not or whether it is true or false, your job

simply is to feed it with the correct inputs to “reprogram” it over time.

How Do You Reprogram Your Mind?

The first thing is that you have to WANT to change, and it may be easier if you’re under the pull of inspiration

or the push of desperation.

You can choose either to continue in the same manner as you already are – in which case you should

expect the same old results, or you can decide what you really want and drive towards that direction.

The formula for effective subconscious change is so simple that it’s right under our noses every day:

Determine what you really want.

Visualize that desire.

Schedule time during the day to play this movie in your mind over and over again.

Start visualizing your trading success and how you will operate every day.

Repeat until the vision morphs into reality.


Trading Psychology

7

The TCI Trader's Mindset

1)Your Trading Objective/Goal is to Trade:

Calm, Confident, Consistent, and Profitable!

Trading is Easy, Simple, and Stress-free. Execute your Trading Plan and your Trades flawlessly.

2)Disciplined, Focused, and Confident:

Remain Disciplined to do what needs to be done over and over without hesitation.

Remain Focused on the information that helps you spot opportunities to make a profit.

Remain Confident in your trading methodology.

3)Think in Probabilities:

If the market is offering you a legitimate edge, determine the risk and take the trade without the

slightest reservation or hesitation.

The Trade either works or it doesn't. In any case, you wait for the next edge to appear and go

through the process again and again.

If your edge puts the odds of success in your favor, then every loss puts you that much closer to a

win.


Trading Psychology


4)All you need to know is:

the odds are in your favor before you put on a trade (defined by your edge);

how much it's going to cost to find out if the trade is going to work;

you don't need to know what's going to happen next to make money on any trade; and

anything can happen.

5)You are a Consistent Winner because:

You objectively identify your edges.

You predefine the risk of every trade.

You completely accept the risk or You are willing to let go of the trade.

You act on your edges without reservation or hesitation.

You pay yourself as the market makes money available to you.

You continually monitor your susceptibility for making errors.

You understand the absolute necessity of these principles of consistent success and, therefore, you

never violate them.

A Winning Attitude is a positive expectation of your efforts, with an acceptance that whatever results you

do get are a perfect reflection of your level of development and what you need to learn to do better. You

don't have any reason to think less of yourself when you do make a mistake. Mistakes simply point the way

to where you need to focus your efforts to grow and improve yourself.

FOCUS ON THE PROCESS and NOT THE OUTCOME!


Trading Psychology

9

Managing the Trader (PDF page 13)

Now that you’ve learned the importance of training your subconscious mind, it’s time to build your value

as a competent trader by offering some suggestions on how you should manage your whole body to

maximize your profitability – while still having the freedom that you’re after.

The classic image that we’ve all been programmed to think about is someone lying on a beach, laptop in

one hand and a drink in the other, casually checking on his/her portfolio while the dollars roll in.

You need to earn that ability to trade from your hammock.

I have been around many truly successful traders, and not one did I meet while he/she was guzzling a

Mai-Tai. They all worked very hard at their jobs and were absolutely in love with what they did.

Trading is serious business. You’re stepping into the lion cage with the best in the world!

“Treat this like a business, and it’ll pay you like a business. Treat it like a hobby, and it’ll cost

you money like a hobby.”


Trading Psychology


Becoming Contrarian (PDF page 14)

You must work extremely hard to avoid having a “bias” or a predisposition to the direction of the market.

You must have a theory based on concrete fact of price levels or technical signals, and there is

absolutely no room in this business for opinion based on a “gut” feel.

Not sure of the difference?

Opinion: “This market is toast. I feel like it’s going to go much lower”

Theory: “The market is currently in a range; if it breaks above, I will become bullish, and if it breaks

below the prior swing low, I will become bearish.”

You can see that there is a great deal of difference between the two.

The person with the opinion rarely will base it upon any kind of data point or fact.

The person with the theory didn’t have any opinion; rather, it was based on making decisions based on

what the price did – totally objective.

You absolutely MUST take opinion and bias out of your evaluation process and replace them with solid,

cold, rational facts. You must become a contrarian to be consistently profitable. Some of our trading entry

rules will help establish this skill.


Trading Psychology


The Principle of Maximum Adversity (PDF pages 15-17)

“The market exists to cause the maximum amount of pain to the greatest group of traders.”

This rather draconian definition seems cruel, but there are reasons for it. It occurs because traders still can

make decisions based on fear and greed, two very powerful emotions in the human makeup.

Traders historically have been ruled by fear and greed, and they seem likely to continue to be.

Prices often move because someone gets fearful or greedy, and they probably will move due to those

emotions forever.

The Principle of Maximum Adversity - Maximum Adversity Part 1

The market will do whatever it has to so as to disappoint the most traders.

The markets will do whatever it takes to throw the most roadblocks, obstacles, and disappointment in

the path of your journey to profitability and success as a trader.

Maximum Adversity…

will do its very BEST to make trading, a relatively simple procedure, as hard as possible. It will make

you doubt every trade you take and your very thought process.

refers to the discipline the market imposes on market participants. This is part and parcel of the

market's mechanism that makes certain that the funds of the many flow to the few.

The trader who does not recognize, comprehend, internalize, and respect this principle is doomed to trading

failure.


Trading Psychology

12

The Principle of Maximum Adversity - Maximum Adversity Part 2

Maximum Adversity also has another component – PAIN. Lots of pain! From the new trader to the most

advanced trader, there IS pain.

Maximum Adversity will…

do its absolute best to make your trading life as uncomfortable and painful as possible.

attempt to make your trading hard, harder still, and then even harder.

heighten your anxiety about "missing" the next move, and that will hurt.

seek to ensure that your trading life is full of pain and hurt!

Maximum Adversity does then make certain demands on us.

Maximum Adversity demands…

we each take total responsibility for our trading decisions,

that we always expect to get bushwhacked and ambushed at every turn,

that we expect the unexpected, and most of all,

that we actually have to determine IF we are each up for the challenge.

that we actually have to determine IF we have the intestinal fortitude for the task in front of us.

Do we accept the higher probability that our lives as traders will be miserable in spite of the potential

financial rewards?

IF your answer is yes, ALWAYS keep the Principle of Maximum Adversity in the back of your mind.


Trading Psychology


This is why it’s so important for you to manage your trader’s psychology; those successful traders have

recognized the Principle of Maximum Adversity, and they understand how they can use it to HELP their

trading rather than shying away from it.

If you saw a likely place on the price chart where the Principle of Maximum Adversity was about to hit

the “herd,” you could position yourself correctly to be able to take advantage of that.


Trading Psychology


A Trader’s Best Friend (PDF page 18)

A trader’s best friend is a job. Yes, believe it or not, having a day job is actually a blessing in disguise for

most.

Obviously, the whole idea is to get RID of your job and work from home or fund your retirement. However, I

cannot overemphasize the amount of stress that you can be under trying to trade when you know that your

ability to feed and shelter your family is being threatened.

The lesson from this that I would like to pass along to you is to stay employed for as long as you can stand

it. Make yourself a “departure plan” that gives you more than enough capital to fall back on – to the point

where the loss of a trade does not generate an emotional response.

The best capital to trade effectively and to place at risk is the capital that you don’t care about. Any “heat” on

a trade that causes you to feel threatened can invoke the pleasure/pain response from your subconscious

mind. We all know how that can end.


Trading Psychology


The Trader’s Progression (PDF pages 19-22)

So, where are you in your trading career?

Everyone came into this program at a different stage of his/her trading career. Where are you today?

Like everything else, your path to consistent profitability will follow a progression – from outright Novice to

Expert.

Stage One – Mystification

This is where the neophyte trader begins. He/she has little or no understanding of market structure.

He/she has no concept of the interrelationship among markets, much less between markets and the

economy. Price charts are a meaningless mish-mash of colored lines and squiggles.

Stage Two – The Hot Pot Stage

This is where the trader does not yet understand that a loss is an inevitable part of any system /

strategy / method / what-have-you; that is, there is no such thing as a 100% win approach. Instead,

he/she keeps touching the pot and getting burned, never understanding that it's not the pot

(pattern/setup) that's the problem, but a failure on his/her part to understand that it's the heat from the

stove (the market) that he/she is paying no attention to whatsoever. So instead of trying to understand

the nature of thermal transfer (the market), he/she avoids the pot (the pattern) and moves on to

another pattern/setup without bothering to find out whether or not the stove is on.


Trading Psychology


Stage Three – The Cynical Skepticism Stage

This is where the trader has studied so hard and put so much effort into his/her trading and this

“universal failure in the patterns only when he/she takes them” causes him/her to feel betrayed by the

market. Since one of the most painful experiences is to fail when success looks easy, this

embarrassment is transformed into anger. What's the point in trying to analyze and improve your own

trading when there are so many dark forces out to get you? This excuse-driven blame game is a dead-

end viewpoint, and it explains a lot of what you find on message boards. Those who can't pull

themselves out of it will quit.

Stage Four – The Squiggle Trader Stage

If a trader doesn't quit, he/she may move into the "squiggle trader" phase. Since he/she failed with

patterns and so on, he/she figures there's some "secret weapon" – a "Holy Grail" that's known to the

select few. He/she spends whatever it takes to buy success. This is all characteristic of scared money.

Without a genuine acceptance of the fact of loss and of the risks involved in trading, he/she flutters

around like a butterfly in search of anything or anybody who will tell him/her a “Holy Grail” for trading.

This process can be useful if the trader learns from it what is popular – i.e., what other traders are

doing and, if he/she lasts, how to trade traps and panic/euphoria. If he/she doesn't slip back into the

Cynical Skepticism Stage, he/she may have a more profound appreciation – achieved through

personal experience – of what is sensible and logical and of what is nonsense. He/she also might

learn something more about the kind of trader he/she is, learn what "style" suits him/her, and learn to

distinguish between what is desirable and what is practical. The vast majority of traders never leave

this stage. They spend their "careers" searching for the answer, and even though they eventually may

achieve piddling profits, they never become truly successful.


Trading Psychology

17

Stage Five – The Inwardly-Bound Stage

The trader who is able to pry himself/herself out of stage four uses his/her experiences there

productively. The trader learns, as stated earlier, what styles, techniques, and tactics are popular.

However, instead of focusing entirely on what's "out there," he/she begins to focus on what sort of

trading suits him/her, taking all that he/she has learned so far and experimenting with it.

Traders at this level…

have learned the value of curiosity, of detached interest, of persistence and perseverance, of taking

bits and pieces from here and there in order to fashion a trading plan and strategy that are uniquely

theirs – one in which they have complete confidence because they have tested it thoroughly and

know from their own experiences that it is consistently profitable.

accept full responsibility for their trades, including the losses, which is to say that they understand

that losses are inevitable and unavoidable.

accept losses for what they are, a part of the natural course of business.

understand, after all, that they are in control of their risk in the market.

don't succumb to hope, fear, or greed. Impulsive, emotional trades are gone. They just trade.


Trading Psychology


Stage Six – Mastery

At this level, the trader achieves a peaceful, powerful trading state. Planning, analysis, and research

are the focus of his/her time and effort. When the trading day opens, he/she is ready for it. He/she is

calm, relaxed, and focused. Trading becomes effortless.

Traders at this level…

are thoroughly familiar with their plan and know exactly what they will do in any given situation.

understand the inevitability of loss and accept it as a natural part of the business of trading.

can’t be hurt, because they’re protected by their rules and their discipline.

are sensitive to and in tune with the ebb and flow of market behavior and the natural actions and

reactions to it that their research has taught them will optimize their edge.

know that they don't have to know what the market will do next because they know how they will

react to anything the market does, and they are confident in their ability to react correctly.

understand and practice "active inaction" – knowing exactly what it is they want, exactly what it is

they’re looking for, and waiting patiently for exactly the right opportunity.

act decisively and without hesitation; then, they wait patiently again for the next opportunity.

do not convince themselves that they were right.

watch price movement and draw their conclusions.

acknowledge that market movement is the ultimate truth. They don’t try to outsmart or outguess it.


Trading Psychology


Once a trader reaches Stage Six – Mastery, he/she is, in a sense, acting as his/her own coach.

Mastery traders are continually asking themselves questions and explaining to themselves without

rationalization what they’re waiting for, what they’re doing, reminding themselves of this or that, keeping

themselves centered and focused, and taking distractions in stride.

They don't get overexcited about winning trades; they don't get depressed about losing trades.

They accept that price does what it does and that the market is what it is.

Their performance has nothing to do with their self-worth.

It is during this stage that the "intuitive" sense begins to manifest itself. As infrequent as it may be, they learn

to experiment with it and to build trust in it. At the end of the day, they review their work, make whatever

adjustments are necessary (if any), and begin their preparation for the following day, satisfied with

themselves for having traded well. The knowledge proved through research that a particular price pattern or

market behavior offers an acceptable level of predictability and risk to reward to provide a consistently

profitable outcome over time.


Trading Psychology


Where Were You?

What stage were you in?

By the time that most traders understand that mindset and discipline hold the key to trading success,

they are soundly stuck in stage four. That’s fine if you are in stage four; you’re just in the middle of the

bell curve.

It’s also my experience that it is difficult to “skip” a stage:

Everyone generally will pass through these stages sequentially. The driven and focused student

spends less time on the earlier stages and more time in stage five as he/she patiently attains the skills

necessary for mastery, stage six.

The more that you dedicate yourself to this profession, the deeper you will allow yourself to enter into the

study of the trading mindset. You actually will begin to enjoy the journey instead of fighting it.

So, honestly, it really doesn’t matter in what stage you begin. You’re going to be doing this for a

number of years, right? You have to have the right perspective and a long-term vision of what it would

take.

So, you might not yet be a successful trader because you’re in an early stage of your development; that’s

absolutely fine. What counts is your determination and your vision of what you want to achieve.


Trading Psychology


Where Do You Want to Go?

This question really is aimed at two levels:

What level of trading expertise do you want to attain?

What level have you attained?

What will it take to get to the next level and beyond?

The keys to this question will be found in this program; the answer to this question is already in your

subconscious mind. It’s already thinking thoughts like:

“I feel guilty about taking money from others”

“I’ll bet that this is hard, and I probably won’t get it”

What will trading success mean to you?

What will you do to get there?

I recall a friend talking about a conversation he once had with a head of a recording studio. My friend’s

question to him had been, “How do you make it in this business? How do you get started?” The studio

head’s response was simple, yet powerful: “You have to be willing to walk through a brick wall”.

I’ve never forgotten his response. I ran through that brick wall again and again when I first started trading,

and I have the scars to prove it. I’d do it all over again (the next time, without all the mistakes, please).

However, the view’s pretty good on the other side of the wall. I’d like to see you on my side, if that’s where

you want to go. Only you know the answer to that question.


Trading Psychology

22

Conclusion to Trading Psychology

You must know where you are starting and have a plan to get you where you want to go, but it will be difficult

to accomplish anything without the right psychology.

Apart from the usual problems with focus and persistence, the biggest reason why most plans to

become wealthy don’t work out or why wealth is not reached is because of the trader’s mindset.

Your mind can be your biggest obstacle to success and wealth, and there’s no doubt that it can be a

great enabler as well. Your mindset can be the difference between success and failure in your ability to

earn financial independence.

Of all the chapters in this entire program, the ideas presented in this chapter can be the most important

to your success.

I’ve learned some very powerful principles through my own journey, and I decided to share them with

you in this chapter so that you might grab the torch and explore your own path.

Thoughts become things:

Once you stop blaming others for your performance, you can see that your trading performance is

about the battle inside of you and not about the battle between you and the market.

Understanding how to manage yourself and your time, how to control your opinions and bias, and how

to make sure that you’ve prepared yourself effectively for your trading day is the true mark of a

professional.


Trading Psychology


Recommended Readings for Further Study

The following materials are resources that can be helpful to understand this science, and they continue to

provide insight and wonderment:

Trading in the Zone by Mark Douglas

The Disciplined Trader by Mark Douglas

Mastering Trading Stress by Ari Kiev

The Mental Strategies of Top Traders by Ari Kiev

Hedge Fund Masters by Ari Kiev

Super Trader by Van K. Tharp

Secrets of the Millionaire Mind by T. Harv Eker

The Secret

Psycho-Cybernetics by Maxwell Maltz

Think and Grow Rich by Napoleon Hill

If you would like to accelerate your development with some professional help, then you might want to

consider Norm Hallett’s “Disciplined Trader” program at www.thedisciplinedtrader.com; this program covers

many elements of what I consider to be foundational to trading psychology – obviously in great depth since

it’s the focus of his course.


Trading Psychology


No claim is made by the Trading Concepts, Inc. that the Futures trading

strategies shown here will result in profits and will not result in losses.

Futures trading may not be suitable for all recipients of this Training

Program. All comments, trading strategies, techniques, concepts and

methods shown within our Course are not and should not be construed as

an offer to buy or sell Futures Contracts – they are opinions based on

market observation and years of experience. Therefore, the thoughts

expressed are not guaranteed to produce profits in any way. All Opinions

are subject to change without notice. Each Futures trader/investor is

responsible for his/her own actions, if any. Your purchase of the Trading

Concepts Comprehensive EMINI SUCCESS FORMULA™ 2.0 Mentoring

Program constitutes your agreement to this disclaimer and exempts

Trading Concepts from any liability or litigation.


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