Forex trading is one of the toughest, if not THE toughest mental challenge you will ever face in life.
You can get two traders, give them the same set of rules and they will produce totally different results.
You wouldn’t even believe they were trading the same system.
It all comes to their mental integrity, and ability to stick by the rules under pressure. Nobody is perfect, even the best traders will ‘color outside the lines’ from time to time, and need some good psychological mentoring to regain their focus.
One of my go-to guys for inspiration on Forex psychology, is Mark Douglas.
He wrote the book which is famous among the trading community “Trading in the Zone”. We can all learn something from Mark – he has dedicated his life to help people mentally and emotionally with their trading.
In today’s article I wanted to share some of my favorite quotes from Mark Douglas, quotes that helped me a lot in my trading on a psychological level and hopefully will have the same impact on yours.
You DON’T need to be smart to trade
“I haven’t seen much correlation between good trading and intelligence. Some outstanding traders are quite intelligent, but a few aren’t. Many outstanding intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important.” – Mark Douglas
Mark basically highlights one of the misconceptions that people have about Forex trading.
A lot people (including myself at one stage) thought to be an active trader on any financial market, you needed to go through the motions of: university degrees, being in sync with political events and have the means of receiving ‘up to the minute’ news before others did.
This is far from the truth and just a fictional stereotype.
It takes hardly any effort to set yourself up as a Forex trader. Thanks to the advances in technology we can download the required software and setup up an account literally in minutes.
Mark’s quote states that intelligence has little effect on trading performance. Would either Einstein or Isaac Newton have made good traders? Maybe not.
The Forex market is filled with ‘average’ everyday people.
Obviously you need some level of common sense, but that’s true with every profession. At the end of the day, it doesn’t matter what degrees or qualifications you hold, they won’t help you in the markets.
The high school dropout could potentially reign supreme in the Forex market.
The Disadvantages of Fundamental analysis
“Fundamental analysis creates what I call a “reality gap” between “what should be” and “what is.” The reality gap makes it extremely difficult to make anything but very long-term predictions that can be difficult to exploit, even if they are correct.” – Mark Douglas
Here Mark talks about the practicality of following the fundamentals that contribute to price movements.
I am going to take a swing at you here, and assume at one stage in your trading career you pulled up the news calendar, frantically hit the refresh button, waiting for that economic data to be printed on your screen so you could place a trade in response.
When the data is printed, you sell if it’s worse than expected figures, or buy the news if the results are better than expected.
A buy on green, sell on red kind of arrangement.
The data comes out bad, it’s red, and you quickly move to open a sell position.
By the time you scurry over to your trading software and initiate a sell order, you find the market has moved significantly before you even had a chance to place an order.
Two problems with this …
- You can’t trade these economic releases from the calendar – the market reacts 10 times faster than your hand movements.
- It’s not really ‘fundamental analysis’, it’s just using the economic data calendar to be a cowboy.
True fundamental analysis is done on a much larger scale.
Real fundamental analysis is the study of economic situations of different countries and making an educated speculation whether that countries currency is undervalued or overvalued based all the economic and political data you have.
As Mark Douglas pointed out, fundamental analysis is only effective at making long term predictions on a given market.
Most traders wouldn’t have the discipline, or patience to ride out such moves. Trades like this would need to span over months, even a year.
Lucky for us, today’s markets are dominated by the technicals – at least in the short/medium term.
Using data from the charts themselves, you can anticipate future price movements without the hassle of sifting through mountains of economic data.
This is why price action trading is so popular – it’s a straight to the point technical trading methodology that is relatively stress free.
Most people are fixated on being right all the time
“Why do you think unsuccessful traders are obsessed with market analysis? They crave the sense of certainty that analysis appears to give them. Although few would admit it, the truth is that the typical trader wants to be right on every single trade. He is desperately trying to create certainty where it just doesn’t exist.” – Mark Douglas
Mark Douglas makes a very good point here. How many times have you seen the ‘perfect’ trade setup, and entered thinking “it’s a perfect setup, it’s definitely going to work out”.
You’ve done all your market analysis and everything is pointing in your favor, it’s a going to be a definite win!
What happens next?
The trade doesn’t work out and you’re absolutely gutted. You feel like you’ve been betrayed by the market and the ‘tragedy’ has eaten part of your soul away.
Next time you take a trade, think about it like this…
If you rolled a dice, and you ‘won’ whenever you’re rolled the number 4. Your chances of rolling a 4 on only one roll are very low, 1 out of 6 actually. You wouldn’t go ‘all in’ if you were only allowed to roll the dice once – the probabilities are too far stacked against you.
Your success rate of rolling a 4 increases each time you throw the dice. So each roll of the dice should be viewed as one attempt out of a series of dice rolls to score the number 4.
The point here is – you should not put so much emphasis onto one trade.
It’s better to look at each trade as a part of a ‘series of trades’. Don’t risk heavy on one position, you risk bite size amounts spread over a series of trades to increase your probabilities of success.
To compound on the increased probabilities, we teach traders to enter a Forex trade using positive geared money management to maximize profit potential on each trade.
Even if most of them are losers it doesn’t matter, you can still make good returns. In fact, you should expect most of your trades to fail. A win rate of 50% would be considered very good in Forex trading.
Before placing a trade, I already consider it a loss to condition myself mentally.
If you accept that the money is already gone, you won’t feel such shame if the trade get stopped out. If the trade turns around to become a winner, great!. I am not suggesting you disrespect your money, all we’re doing here is keeping emotions in check.
The ability to accept a loss without feeling guilty, anger, shame or feeling of lesser self-worth is a skill a trader must learn.
Trading requires skills that people aren’t used to learning
“Forex trading requires the learning the type of skills that people just aren’t simply used to learning – Mental Skills.” – Mark Douglas
Mark explains here that ‘learning to trade’ requires you need to learn skills you’ve never learned anywhere else in your life. Trading is about learning self-mastery.
Many Forex traders believe that all you need is a technical system that generates good buy and sell signals – the learning stops there, and the money starts rolling in.
Trust me, not even the holy grail trading system will work for you if you don’t commit yourself to learning the mental skills needed to trade.
A typical job might require physical skills like strength and stamina, something builders and laborers would need.
The typical office job, or engineer will require the use more of your intellect. These skills won’t get you anywhere in Forex trading, the skills you need to learn to be a successful trader are mental skills.
This is where the Forex psychology side of trading can be very challenging and may feel counter intuitive.
You need to refrain from getting emotionally involved with the market, or run the risk of suffering huge losses – financial and psychological.
It sounds easy, but keeping emotions under control is not easy and you will be constantly tested every time you look at a chart. Any display of emotional weakness could tear through your entire trading integrity.
Anything could happen
“You don’t need to know what’s going to happen next to make money. Anything can happen. Every moment is unique, meaning every edge and outcome is truly a unique experience. The trade either works or it doesn’t.” – Mark Douglas
Mark is reinforcing the point that there is no situation which has a ‘100% certainty rating’ in the markets.
Because of this ‘nothing is certain’ variable – you need to work with, and actually build your thought process around probabilities to maximize your chances of success.
Price movements are ‘people generated events’.
The charts and price movements are really just the collective beliefs of all the market participants on what’s going to happen in the future. No mathematical model can predict human behavior very well. This is one of the reasons I don’t like Forex Indicators.
Traders that put too much emphasis on one particular event playing out the way they predict, will learn a harsh lesson.
Mark Douglas tells us that “nothing is certain, anything can happen”, so we need to accommodate that uncertainty through a consistent money management plan.
Walk before you can run
“No man ever reached to excellence in any one art or profession without having passed through the slow and painful process of study and preparation.”
Our final quote from Mark Douglas states – even though Forex trading may look easy, it’s not.
Someone from the outside looking in might think it’s as simple as setting up a broker account and pressing buy and sell buttons all day long.
But we know that doesn’t even scratch the surface.
The complicated nature of learning to become a successful Forex trader needs to be respected.
Just like anything else you learn in life, learning to trade Forex is a process. It’s not something you can acquire overnight from reading an eBook you downloaded.
In the workforce, it’s silly to expect to climb the career ladder and become the manager in less than a week of being accepted into an entry level position.
Forex is the same – don’t push yourself to become an ‘expert overnight’. It takes a lot of mental conditioning and commitment from you as the trader before you will see any success.
An effective way of shortening your learning curve is to join a Forex community where you can learn how to trade, and get feedback/share ideas with other like-minded traders.
We’ve setup a private membership area for serious Forex traders like yourself, who want to learn the most effective trading strategy in the markets today “price action trading” with powerful money management techniques to maximize your return on investment.
If you’re interested in becoming one of our War Room Trader members, you can find all the information you need on the War Room Information & Sign Up Page.
Hopefully these points discussed in today’s review of Mark’s advice, is something that will help change your trading today. If you have any other good tips you think might fit well here, please feel free to drop them in the comments below – I would love to hear them.
All the best on the charts for this week