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Trading Psychology

 

Part 8 of ProSignal's

FREE Forex Trading Training Course

 

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Psychology of Trading

It is not an easy endeavor to make money in Forex. This truth is hard to communicate to anyone; it is only possible to experience yourself.  Only small number of beginning traders understand what psychological and financial burdens Forex trading might bring.  Many beginners after experiencing their first losses, decide to give up on trading; others that get some humble positive results continue to work with a hope to improve their trading results. 

The number of great traders is very limited. So what separates those traders from many others who sometimes can not even make two positive trades in a row? Many scientific researches indicate that there is only one sphere in trading that distinguishes highly professional outstanding traders from the regular ones and that is - individual psychology. The success of a trader lies in two qualities that supplement each other: ability to preserve emotional balance when you have to face some losses and ability to make decisions independently from other people opinions.  

The above conclusions are made on simple theory. This theory asserts that because the trading is a risky and intense occupation, losses and missed profits can evoke negative emotions. When this kind of emotions prevail for a long time, traders start to look for psychological protection and gather into groups and start to react the same way to each change in any situation in the market. If this change is unexpected then it can catch off guard most of them. 

Why does this happen? Well, the unconscious part of our mind very easily determines our behavior. Scientists have estimated that 97% of our mind work happens unconsciously. This, very important number tells us that the biggest part of our daily behavior consists of some memorized reaction to familiar irritants. Our experience in learning the world around us, especially in our childhood, is decisive in our behavior. To correct already gained stereotypes in later life stages is a very hard task. 

Imagination is used to create internal picture of an outside world. This picture is perceived by our mind as reality and it generates emotions that evoke automatic reactions. Individual behavior is not that common as we might think. From this, we can draw two conclusions: firstly, irrational behavior has more probability to originate within the crowd, rather than in situations where a human is acting alone.  Secondly, logical thinking processes are not enough to escape irrational behavior because logics can be based on very strong, originated within the crowd, feelings.  

Our mind has 3 separate components - instinct, feelings and reflexion. Each human psychology is based on these three components but there is a difference in how each of us uses them. Some of us are driven by instincts, other by emotions, and some are very reflexive. Our characters are determined by which of the three components is used more by our mind.  

How do we use the above theory in Forex market trading? Our automated reactions create vulnerability spots in our conscious. Forex market figures out those spots precisely and evokes automatic reactions that bring us to losses. To fight this, we need to find those vulnerability spots in ourselves and understand reciprocal reaction mechanism.  In each human character we can single out a protection center and probable model of reaction to some identified threat. This is similar to well coordinated search radar system and a reciprocal weapon: the radar searches for the threat and when finds it, triggers automatic reaction.  

Although the threat could have some physical form, in our case it is psychological. It is sensed when there is a disconnection between our subconscious expectations and real results. In Forex the threat is sensed when the profit expectations fail. As a result we have a stress that evokes one of possible automatic reactions. 

Let us look at some of possible reactions.  Each reaction forces us to avoid some particular situations. What do we have to do when there is a situation that provokes automatic reactions such as "avoid something" and what happens with a human when he/she senses certain type of threat? Each personality type has its own initial reaction to identifies threat.  

Of course, the reaction that we going to look at are only general and in each situation they will interact with other reactions creating "matrix" of reactions. Nevertheless, they will be a driving force for each individual at any identified threat. All of us have our own strategies to avoid situations that have caused us the most psychological damage in the past; and when we face similar situation, we always use deeply rooted physical, emotional and logical model for our behavior in such situations.  

Now let us examine how each behavioral group would be affected by certain market conditions and how they would react on that. To begin, we first need to identify main characteristics of any financial market, including Forex: permanent price movements, permanent fear of loosing money, influence of several factors on price movements.

Each individual is more vulnerable to one of the above mentioned market characteristics, so the security center will be activated by one of the mentioned characteristics. Here is a description of how each group would react. 

First group - instinct oriented group - most of the times individuals within this group have sharply developed feeling of self-esteem and a desire to protect personal space. They either try to control everything that happens around them or avoid everything that can penetrate their personal space, especially other human beings. To support their security feelings their world is divided in to two parts: one is permanent that is not threatening them, and another one active and potentially dangerous.  

Forex market is always on the move, there are millions invisible individuals involved in trading that make deals for reasons that are not known to anyone. People that are instinct oriented find themselves in a situation that they really do not like and afraid of - they are surrounded by people that they can not control and that can indirectly penetrate there personal space.  

They can react to losses in three different ways - with a desire to fight the market, with turning off their emotions and attention or by suppressing their anger. Non of the three ways contribute to successful trading. First way - fighting the market after it went against you - makes you think that you are right and the market is wrong. At the end you might be right but as John Keynes suggested: "At the end, all of us will die" Second way - turning off your attention to avoid the anger - usually makes you take up wrong market positions, which will become even worse with a time. At the end, inability of a person to orient in reality, makes hum turn for help to others. Third way to react - anger suppression - means that most of your energy will be dedicated just to doing that and will be taken away from the market; as a result, the level of stress will increase and your trading effectiveness will decrease. The trader will end up wit overwhelming feeling of self failure and guilt. 

Motives of the second group - those that are driven by emotions - are predetermined by the need to protect their image. That is why; these people are concentrated on gaining approval from those around them. When they fail to get that approval, the low self-appraisal feeling comes in. This feeling is most of the times caused by the fact that in our childhood we are taught not to make any mistakes. Most affected by this teaching people are very afraid of making any mistakes, which might make them feel bad about themselves. Many because of that fact even suppress their desire to explore the world around them.  

In Forex market there is always exists a possibility of loosing money. Individuals that belong to emotions-oriented group, will inevitably face something that they really do not want to face - losses. They have three most probable reactions - feeling of aggrieved pride, envy of more successful traders and an attempt to pretend that everything is actually going fine. All of these reaction do not lead to successful trading. Attention and time is taken away from real losses and concentrated on personal "the I" Damaged pride most of the times generates animosity towards the market and can lead to attempts of taking revenge by prolonging losing trades. Concentration on success of others and by this finding self-failure can lead to completely leaving the market and loosing any chances to correct the problem. Ignoring losses and an attempt to pretend that everything is going well and the situation will correct itself - makes a person to ask for help from others.  

Third group of people is driven by senses. They experience very sharply fear attacks that is why they are motivated only by one thing - reducing the possibility of such attacks. These people are focused on gaining as much information as possible, paying special attention to news that are connected to possible threats. Since main threat in Forex market is a loss of money, people that are eager to avoid losses are doomed to analyze endless amount of information.  

Forex market clashes people oriented on senses with a situation that they are afraid of - the situation of uncertainty. Three most probable automatic reactions to such uncertainty consist of either infinite deferment of making decisions, or total inactivity due to strong fear, or avoiding the problem in general and concentrating on making plans for future trades. Once again, non of the above automatic reactions can not contribute to successful trading. Delay in making decisions will lead to loosing certain possibilities to enter a trade or to growth of already running losses. Freezing because of fear when there is unfavorable situation, probably will make that situation even worse if no steps are taken. An attempt to pretend that there is nothing wrong is just a deferment of "paying your bills". If a trader is not solving the problem right a way he runs a risk of falling into obsessive desire of making everything in perfect way.  

If you see yourself belonging to one of this groups or maybe to even more than one then you certainly need to take some time and study yourself and read more literature on human behavior and psychology. Also below we will give you some tips of how you can train yourself using certain techniques.  

Fear and Greed

As individuals we have to realize and accept that we have no control and influence over the market nor the direction it is taking. And thus, there are two crucial emotions that come into play and that we have to be aware of. Fear and Greed!

Fear:

The problem is that we all want to succeed and when we do make a loss, it is easy to let those losses effect us emotionally out of fear to lose even more.

In this case, a trader exits a trade as soon as the market hits the slightest bump even though the broad market is very bullish and the fundamentals of the currency pair he's trading are good. So instead of being patient and waiting for the trade to go up again, he sells and accepts the initial loss out of fear of losing even more.

Fear of losses can also show up in the following way.

Irrespective of any rationality, a trader holds on to a losing position for too long hoping for it to go up again. Even when the news and fundamentals are hopeless he won't give up forgetting that this attitude can easily lead to a total loss.

In another case, fear can also manifest itself in not wanting to miss the boat and quickly jumping on. This can very often be observed by novices who listen to tips from friends and TV, where so called "experts" or shall we rather say, "opinion makers" speak up trying to sweet-talk you into a trade.

A trader sees the market go up rapidly and confirmation is all over the news. The excitement of a rising market is in full swing. Afraid of missing out, the trader makes a hasty decision and dives right into a trade.

Greed:

Becoming euphoric when you hit a winning trade is almost as detrimental as becoming depressed when you have a losing trade.

In this case a trader is actually afraid of losing a profit. He holds on to a winning position for too long. His trade is doing so well that he just can't get enough. He may have made a 100% profit and now expects to make another 100%.  And when his position goes down below this magic mark, he still holds on hoping for his trade to go back to 100% again before he sells instead of accepting say, 90%, which is darn good too!

But what was a 100% profit can easily become a total loss if you let greed take control!

There are traders that watch their profits erode without doing anything about it. They hold on to their positions right up to an almost total loss. Very often they then say: "Oh well. my trade has gone down so much now, what's the use of selling? I won't get much out of it now anyway, so I might as well keep my position".

In another case, fear of losing out on a profit may even cause a trader to sell a winning trade too soon. As soon as his position went up a few percent, he bails out.

So watch out for fear and greed. These two things are not good advisers and they are not the way to trade!   As traders we have to be rather impartial. We have to accept that there will be losses just as there will be wins in any one's trading career!

Reaching the stage where you can comfortably accept losses, and knowing that you have a good trading system that will also produce profits most times in the longer term is the state we all have to aspire to.

When you first hear the word fear, what comes into your mind? Don't think, just feel, what did you feel? Was it panic, irrational thoughts or responses? Running? Hiding? Or no feeling at all?

Did you feel any emotional energy attached to your feeling or thought? The energy is very important. This energy is what drives markets! It will make you do things that are not always rational or in your best interest.

Fear and even greed are nothing without the energy that makes them something! Markets are made up of energy, the energy of traders. Since fear and greed cause traders to trade, then what causes traders to win or lose consistently? The answer, how traders respond to fear and greed!

As traders we want to take advantage of other trader's emotions such as fear and greed which have been present in the markets from their beginning. Recognizing and exploiting these emotions will always be a factor in successful trading. In order to be a successful trader, you must not fall prey to the very emotions you are trying to exploit.

So how can we do this? By being able to see fear and greed for what they are and not falling victim to the emotional energy attached to these powerful emotions! If you can spot times in the market where fear or greed are creating irrational trades, then the key is to spot which emotion, fear or greed is at work and then make it work for you! Using "stops" helps traders exit trades based on a plan of action and thus eliminates exiting trades on emotions! Correct "Trade-Size" is also important in helping to keep proper perspective in the market and eliminating destructive emotional responses to market behavior. As is trading with risk capital, money you can afford to trade with and put at risk. Do whatever you can to keep your trading rational!

Now the next question is, how can we tell what is fear in the market place? And how can we tell what is greed in the market place? Isn't one person's fear another person's greed? In other words, when traders are panicking out of a position, isn't the trader on the other side of the trade greedily trying to profit from this situation? The answer is yes, but the key is to take the trade on the opposite side of the stronger of the irrational energy. So if fear is creating more irrational fear then traders who are looking for opportunity, then you want to take trades opposite to the fear based trades.

Finding the energy between greed and fear represents opportunity! These are pressure points in the market. Markets respond in the direction of the highest energy responses of fear and greed.
 

Psychology Training Tips 

As we already know there are two main issues that cause 99% of the problems - Fear and Greed. These two emotions are probably responsible for 99% of the world's problems as well but that is beyond the scope of this course.

So, now that we know what the big obstacles are, let's try and figure out how to overcome them. We can not eliminate fear and greed for good. They will still be there in your heart and mind, but we can make some rules so that they do not interfere with your trading success. We can come up with systems and procedures to follow, since we know ahead of time that fear and greed are major problems. sure You probably have heard already the statistic that 95% of all speculative leveraged traders fail. This is absolutely true. Here is another statistic that we believe is true - 100% of traders that do not know how to overcome fear and greed will fail. So does that mean that if we can teach you how to overcome these problems that your chance of success is 100%? Of course not. But we can tell you that you cannot be successful if you do not protect yourself from yourself.

The first thing you must do, whether you follow our signals, another system, or your own system is to follow the rules of the system without fail. If your system calls for a certain entry point, do not enter until there is a signal to enter.

Systems are designed for a reason. That is why it is called a system. What do we learn from this? Patience. Perhaps the worst thing you can do is enter a trade on a hunch.
This brings us to our first fact:

The odds are in your favor before you enter a trade. This is true for most trading systems. Void of fear and greed, if you follow each system exactly, we feel that you may soon become a competitive trader.

This brings us to the biggest secret. Other than omitting trading psychology, other systems also do not tell you that you are playing a game of odds. Let's say for example that we are playing "coin toss." Theoretically, for 100 flips of the coin, 50 will come up heads, and 50 will come up tails. Of course, the first 100 may be 55/45, but the more you play, the closer to 50/50 the numbers will get. Our system for "coin toss" is as follows: We play for 20 hours, and flip the coin exactly 5 times each hour, and for every heads that comes up, we get paid $2, and for every tails that comes up we pay $1. This should be a profitable system. After our game we see that heads came up 50 times and tails came up 50 times. So at the end of 100 tosses, we have paid $50 and received $100. A profit of $50.

So let's say that during our second game of coin toss, we decide that we are going to let the flipper (hint: the market is the flipper) keep flipping the coin for an hour while we take lunch but we are not going to pay or be paid for those flips. During our lunch hour, heads comes up 5 times in a row (which is theoretically possible, and not that unlikely). And now we are back from lunch, and we are down $10 for the hour. Now, theoretically the odds of 5 tails in a row coming up after 5 heads in a row are pretty good because for every ten tosses, you should have about 5 heads and five tails. So now we get 5 tails in a row and now we are down another $5, for a total of $15. So not counting the 5 tosses during lunch, this leaves 90 tosses that we still have to account for and let's say that they were 45 heads and 45 tails. Our profit for these tosses is $45 (45x2 minus 45x1), now if we take away the $15 for the tosses we did not take, and that string of losers, we are left with a profit if $30. So lunch and 5 lousy spins cost us 40% of our profits.

Now this is theory but it absolutely applies to this market. If you are picky about what trades you want to take and what trades you don't want to take, you are messing with the odds. Our point is this: If the conditions are met, take the trade without hesitation. The odds are in your favor, but only if you take all of the trades that meet the conditions. When we say all trades we know the market is open 24 hours a day and you can't possibly take every trade. You need to pick a time frame and stick to that same time frame everyday and take all trades during that time frame.

This brings us to:

FACT #2. You do not need to know what is going to happen to make money. If we know that we are going to make $2 fifty times and pay $1 fifty times as long as we flip the coin, are we going to play? Of course! Well, all trading systems have similar odds. From testing, we know that this system on average will produce 9 wins of 20 pips for every 1 loss of 40 pips (that number may vary but that is the maximum loss). So we know ahead of time that 9 wins at 20 pips is 180 pips, and minus the loss of 40 pips, leaves us with 140 pips profit. Now keep in mind that you may be 8 and 2 this week and 10 and 0 next week. We never know when a loss is going to come. We may even lose every trade for a week, but not lose a trade for the next 9 weeks. You do not need to know exactly what is going to happen, you just need to take every trade that meets the conditions and then count your profits or losses at the end of the month/week/year etc.

This section deals with money management as well as psychology. Back to coin toss for a minute. We know that each win brings us $2. And we know that for each win in this trading system we get 20 pips. We know that each tail that comes up costs us $1. And in our system we know that each loss is 40 pips. If we know what our loss is going to be ahead of time, we know what it is going to cost us to find out "what is going to happen." From this we can decide how much we want to risk based on our account size.

FACT 3: You know how much it will cost to find out. We have already suggested not to ever risk more than 5% of you account on any one trade. So knowing that, we can figure out how many lots to trade ahead of time based on our account size. It may cost $250 in margin for a 1 lot position but this is not what we are risking, we are actually risking ten dollars times the number of pips in our stop. If our stop is 40 pips, we are risking $400. Now we know that we better have at least $8000 in our account to take a position of this size. If this trade turns out to be a loser, and our balance falls to $7600, we know that we can't afford to take that trade again because a loss of $400 is more than 5% of our balance. We would need to adjust our number of lots down accordingly to keep our risk <5%. We also don't want to increase our lot size to try and make up for that loss. Always reduce your risk if your account balance falls. The next thing we do not want to do is immediately increase our lot size after a winning trade. It is better to trade at the same lot size for 15 or 30 days at a time before increasing lot size. This allows the account to build steadily without large swings in either direction.

FACT 4: There is a random distribution between wins and losses for any given set of variables that define an edge. Your trading system is your edge, but you never know in what order your wins and losses will come. Be prepared for this and accept the losses, knowing that the odds are still in your favor.

This brings us to our final two facts.

FACT 5: Every moment in the market is unique. Yes we use pattern recognition to define our edge but there are so many variables in this market that it is impossible to ever have the conditions exactly the same as any other moment. You could play 100 games of coin toss and no game will have the exact same order of wins and losses, even though they may have similar outcomes.

FACT 6: Because of fact #5 we know that anything can happen. This is why it is important to follow the trade rules exactly and play the odds.

Every broker & trading system has a disclaimer that says basically "do not trade with money you can't afford to lose." The best thing you can do when you open your real money account is to mentally consider that money gone. If you are not afraid to lose it, you will save a lot of stress and your trading will improve. Only you can determine what you can afford to lose, so just don't put more in there than you are willing to lose. If you start with less, it will just take a little longer but once again you will save a ton of stress.

Trading Without Fear And Greed:

1. I Objectively identify your edges. You have a system here that works, enough said.

2.  I Pre-define the risk of every trade. We covered that in fact #3.

3. I completely accept the risk. Consider the money gone.

4. I act on my edges without reservation or hesitation. Follow the rules and take every trade that meets the conditions.

5. I pay myself as the market makes money available. Take your 20 pips and be happy, or trail your stop. Even if you are compounding your account, pay yourself something out of your profits each month. It will make you feel better.

6. I continually monitor my susceptibility for making errors. I read Mark Douglas' book monthly, and make up sheets with my rules on them that I read daily. This helps me to see plain as day when I make a mistake.

7. I understand the absolute necessity of these principles, and therefore I never violate them. 

Four Worst Things to Do:

The first worst thing you can do is to close a position early because you think it is going to go against you. Just because you have an edge over the market does not mean that price will immediately shoot up or down to your target. Price will move up and down and will even probably move against you before it moves in your favor. If you let fear of loss get you, you will lose money. If the market is going to take you out, let the market take you out by taking out your stop. That is why it is there. The odds are still in your favor.

The second worst thing you can do is to close a position early because you do not think (or you are afraid) that it will not reach your target. If you don't play the odds properly, you will not realize the full profit potential. What if in our coin toss game we decided that we were going to take our profit for a "heads" at $1 instead of the $2 that we were supposed to get paid? If you remember, our profit was $50 for the first game. If we had only taken $1 for each win, we broke even. That is a lot of effort for nothing. Even worse, if we make some mistakes along the way (we all know that we are perfect traders right?) as we did in game number 2 where our profit was $30, we can lose money by not taking enough profit. Remember that we had a $15 loss for our mistake and 90 spins remaining. If we had taken only $1 for each of our 45 winning spins we would have broke even, minus the $15 puts us down $15 overall instead of being up $30. The system is designed for a 20 pip target, GO FOR IT.

The third worst thing you can do is to get greedy.  Just taking 5 or 10 pips can be considered greed as well as fear since you are so afraid of loss that you get greedy for those 5 or 10 pips compared to the potential loss of 20-40 pips. Do not let it get you, follow the rules and be happy with your 20 pips.

The fourth worst thing you can do is move your stop, believing that the market will eventually go in your favor. This is the fastest way to lose money. Yes the market may go in your favor but it may move 300 pips the other direction before it does, if it does. This could take weeks or months and you have a limited account balance. If 5% of your account is tied up waiting this position out, guess what. You are missing 20 other opportunities to make money instead of just sitting there waiting, down a hundred pips while you miss the opportunity to make 20 trades for 20 pips each. Maybe you break even, when you could be up 400 pips.

The Best Thing You Can Do:

Once you place your trade, and place your stop and limit, TURN YOUR COMPUTER OFF and go do something else. You are now in automatic mode, and the market will take you out, either for a profit or for a loss. This is the best way to eliminate the temptation to succumb to FEAR or GREED and do something stupid.

The rest is up to you. Only you can decide whether or not to follow the rules and believe in the facts. This lesson is the most important to your success and we hope you will not take it lightly. If you are trading and following the rules of your system, and not making money, you need to take a look in the mirror. It is not the system that is the problem, it is you. Do not give up, because you can be successful if you just work through and figure out the problem.

 

Psycho-Cybernetics: 

Psycho-cybernetics is a science that is dedicated to human development problems - it is a system of knowledge that allows a person to make accurate, predictable changes in how he/she thinks and feels, does in his/her life, and the amount of success and enjoyment he/she experience throughout the life. Psycho-cybernetics (PC) advanced human development out of the realm of hoping and wishing techniques into the realm of predictable, positive results.

There is no wishing or hoping in PC. Psycho-Cybernetics is based purely on science that give us the knowledge of how human brain and nervous system work together to produce thinking, attitude and behavior. The main principles of PC were tested many times in different laboratories by different scientists throughout the world. Psycho-Cybernetics showed extremely positive results and produced millions success examples. 

PC works at a fundamental level of our human nature and the changes it produces effect all areas of our life. PC has many uses for improving life beyond the trading. The more you learn how to master PC, the more you can expect to:

  1. Build a strong, positive self-image that expresses the real you in the best way.
  2. Set clear goals and achieve them predictably.
  3. Stop seeing your mistakes as failures and actually learn to use your mistakes as valuable feedback that takes you to achieving your goals.
  4. Be more productive and successful financially and in your career.
  5. Forgive others and yourself and wash away resentment that take the joy out of your life.
  6. Learn how to relax and stay relaxed.
  7. Learn how to deal with anger, even how to use it creatively
  8. Learn how to think more clearly
  9. Feel good about your life and yourself all the time.
  10. Learn how to improve your relationships with everyone in your life
  11. Feel a sense of overall satisfaction, fulfillment, and peace as you are bringing out the best of yourself each day.

Of course, these changes will not happen overnight. It will take some time to master the new ways of thinking and acting. When it will become automatic then you will see some results but for sure you will begin to experience positive results almost right a way. 

The term "cybernetics" comes from a Greek word, which means "helmsman, a person who steers a ship to port". The science of cybernetics studies automatic guidance system like those that enable a guided missile to find its target, a computer to solve complex problems, or robots to do complicated sequences of tasks automatically. 

The science of cybernetics gives us a very effective way to look at the human brain and nervous system. Our subconscious mind is actually a goal-seeking servo-mechanism, in other words an automatic human guidance system. PC is the science of this human guidance system. 

Now let us take a look at some of the main points of PC. 

Our Mistakes are Important 

All automatic guidance systems reach their goals by constantly correcting mistakes. The same is true for the human servo-mechanism. It is unfortunate that so many of us interpret mistakes as a failure and suffer feelings of frustration and discouragement when actually the mistakes we make are exactly the information that our servo-mechanism needs to make the necessary corrections to take us to our goal. What we call "mistakes" are actually valuable lessons for success. An important part of PC is learning to use mistakes creatively and to remove the negative feeling that mistakes cause.

Self-Image 

Our servo-mechanism is programmed by our self-image. Our self-image is our mental blueprint or mental picture of ourselves. This self-image is our concept of the kind of person we are. It is constructed of our beliefs about us; those beliefs were unconsciously formed by our past experiences. Once an idea or a belief about ourselves becomes part of this self-image, we accept it as being true. Our self-image determines our thinking, our feelings, our actions, even what we think we are capable of doing. It controls the amount of success, excitement and satisfaction we have.  

Self-image explains why positive thinking is so undependable. It explains why willpower is so ineffective and difficult to maintain. Because all the willpower and positive thinking in the world cannot produce changes and success if they do not match our self-image. 

Imagination - our most important tool for changes 

When we were building our self-image from the vivid and detailed mental pictures and feelings we experienced connections with the events of our life, especially childhood. We will be using the same powerful tool, our creative imagination, to construct the kind of self-image that expresses the best of us.  We will use imagination for creating images and feelings of success, satisfaction, accomplishments and strength and with these new positive images we will re-program our servo-mechanism so that it begins to produce results in accordance with our new self-image.

This process, of course, will take time, but soon the new programming will begin to take over. You will feel yourself beginning to think, to feel and to act in accordance with your new successful image of yourself. At the end, this new self-image will become your second nature, completely natural and spontaneous and it will bring you success, satisfaction and joy you were looking for.  

Basic Techniques of PC:

Mental Pictures  

Most of the successful people have, since the beginning of the time, used "mental pictures" and "rehearsal practice" to achieve success. Napoleon, for example, "practiced" soldering in his imagination, for many years, before he actually went on the battlefields. Conrad Hilton, the famous owner of the Hilton Hotel chain, saw himself owning and operating hotels in his imagination many years before he bought his first hotel.  

A famous basketball coach once said, "there is no way to put the ball in the basket when the pressure is on, if you cannot see the ball going in the hoop clearly in your imagination first". 

We think that the same applies to the trading in Forex. If you cannot clearly see yourself in your imagination as a successful trader, there is no way you can be one. Most successful traders have been picturing themselves as successful for many years.  

If we constantly give our servo-mechanism (remember, our goal-seeking machine) clear, vivid pictures of the goals we are trying to achieve, our subconscious will quite automatically do the necessary things to help us achieve those goals.  

You can imagine yourself any way you want in the future, success or failure. It is all up to you. But all too often, people are not willing to exercise this control. They allow their imagination to destroy their potential by picturing situations in the pas in which they have failed. We all carry mental scrapbooks, but instead of preserving the joyous occasions of life, the moments of accomplishments, some people save only their times of failure and frustration. But it is so easy to take control over their imagination. All you have to remember is that your brain has a hard time distinguishing between real and imagined experiences, if they are vividly enough imagined.  

If we picture ourselves functioning in specific situations clearly and vividly, it is the same as the actual performance. Mental practice can help you perform better in real life. The picture you have of yourself will also determine whether  or not you can be successful in trading. In other words, if you have a clear picture of yourself as a successful trader, that will go much farther than you can imagine in getting you to become and remain successful, profitable trader. You will need to learn how to see that clear picture in your mind. It is the only way to success.

Understanding the success mechanisms and the failure mechanism 

We now know that our servo-mechanism works like an electronic computer to help us reach our goals. But the servo-mechanism can either be a success mechanism or a failure mechanism. When it is working as a success mechanism, it is helping us to reach the goals we want. As you already know, we use our creative imagination to vividly picture these goals and our success mechanism helps us to accomplish these goals.  

On the other hand, if we vividly picture the things we are trying to escape, the troubles we are having and in general, our worries, then it only makes sense that we will receive more of the same negative things in our life. Our servo-mechanism is completely impartial. It takes what we vividly picture and works extremely hard to make those pictures come true. 

Here are basic principles by which your success mechanism operates: 

  1. Your built-in success mechanism must have a goal. This goal must be conceived of as "already in existence now" either in actual or potential form. It operates by either steering you to a goal already in existence or by discovering something already in existence.
  2. The automatic mechanism is teleological, that is, operates or must be oriented to "end results" goals. Do not be discouraged because the "means whereby" may not be apparent. It is the function of the automatic mechanism to supply the "means whereby" when you supply the goal. Think in terms of the end results and the means whereby will often take care of themselves.
  3. Do no be afraid of making mistakes or temporary failures. All servo-mechanisms achieve a goal by negative feedback or by going forward, making mistakes and immediately correcting course.
  4. Skill learning of any kind is accomplished by trial and error, mentally correcting aim after and error, until a "successful" motion, movement or performance has been achieved. After that, further learning and continues success is accomplished by forgetting the past errors and remembering the successful response so that is can be "imitates". 

You must learn to trust your creative mechanism to do its work and not "jam it" by becoming too concerned or too anxious as to where it will work or not, or by attempting to force it by too much conscious effort. You must let it work, rather than make it work.

Forgiveness 

One of the biggest problems with the traders is that they refuse to forgive themselves for trading mistakes. This causes a much bigger problem than most people think. When you make a trading mistake you need to learn to forgive yourself for making that mistake.  

Forgiveness is a key concept in Psycho-Cybernetics. We already know that if we continually picture in vivid detail something, it causes that picture to come true for us. Or it at least makes it much more likely for it to come true. So it only makes sense that if we make a mistake, we must forget that mistake and forgive ourselves completely. If, on the other hand, we do not forgive ourselves and relive the mistake in our minds again and again, what do you think will happen?  

It is obvious that we will repeat that mistake again. This happens because our subconscious does not care whether we give it good or bad information, it simply sees the clear pictures we give it and tries to act it our in our lives. Obviously, it can only act this picture out if it is within our capabilities. And we all know that making trading mistakes is within our capabilities.  

This is the reason it is so important to forgive ourselves when we make a mistake. If we do not, we are likely to relive the mistake in our minds and then most likely project it onto our trading. This will cause huge problems. Not forgiving yourself, no matter what the mistake is, will bring out the worst emotions. Remorse, regret, self-doubt, and guilt all come with not forgiving ourselves for a past mistake.  

One of the biggest reasons people get into losing streaks while trading is because they confuse their losing trades with themselves. In other words, we conclude that because we has a losing trade or a series of losing trade, we are a losing traders.  But we have to understand and remember that we are not our losing trades. Losing trades are part of trading. There is not a single trader in the world that has not lost any trades. The only way to avoid them is not to trade at all. You cannot be a successful trader until you take mistakes and losing trades for what they really are. They are simply by-products in the trading game and need to be used to gain learning and understanding but in no way do they define us as a person. 

Forgiving yourself completely is the only way to avoid this trouble. You are not your mistakes and losing trades. You must put the past behind you and go forward. Holding a grudge against yourself only hurts yourself. Forgive yourself; it is the only way to be successful. 

Using Visualization Technique to Improve Yourself

Some of you might think that PC and visualization techniques are some kind of voodoo magic or witchcraft. When doing these exercises for the first time, you may feel a little awkward. Do not let that deter you. Anything new usually feels a little awkward at first, but with time and practice, obviously it will get much easier.  

The mind's eye - is a key term in using visualization techniques. This is where you do your visualizing. It is very much like when you read a book or someone tells you a story. You do not just listen to the words; you see the pictures in your mind's eye using your imagination.  

As adults, most of us let our imagination skills deteriorate. Thus it takes time to re-learn these skills and get benefits from them. Most peoples, when they see things in their mind's eye, they do not see them as clearly as they probably could. Remember, we said before that the mind cannot tell the difference between an imagined experience and an actual one as long as the images are vividly imagined? Well, the problem is most people do not see the pictures clearly enough. Through time, their imagination have not been used enough to stay sharp and focused. So you will have to strengthen your imagination so what you can see mental pictures extremely clearly in your mind's eye.  

The key to using your mind's eye is to change your self-image. As we talked about earlier, the self-image is the picture you have of yourself. The self-image is also the product of your past experience, failure, success, humiliations and other programming. From these experiences, you create a picture of yourself.  

So, for example, if you had bad experience in trading and after a while you lost confidence to pull the trigger when you see a trading opportunity. Most likely your self-image is that of a person who cannot pull the trigger.  

Important thing to remember here is using visualization techniques on a daily basis can change your self-image to the kind of person you want to be. It does not matter how others see you, what is most important is how you see yourself. If you image is that of a failure, you will act as if you are a failure.  

Children as young as 8 years old, as well as senior citizens, have all benefited from the use of PC and the visualization techniques. Professional athletes, salesmen, traders and people from many other backgrounds have successfully used it to improve their concentration and performance. There is no reason for your to think you cannot do the same thing. We have a choice of either using our success mechanism (by seeing positive, helpful pictures) or using our failure mechanism (by seeing negative images of the past). The choice is yours. If we start to trade with negative feelings, we will fail before we even start. On the other hand, if we start to trade with positive feeling, that will go a long way to us succeeding.  

Here are some rules to remember when using visualization techniques to improve your self-image: 

  1. You must be in a relaxed state when going into the theater of your mind (mind's eye).
  2. You must pay close attention to the detail of you mental pictures.
  3. You must act as if you are already the kind of person you want to be.
  4. You should go into the theater of your mind at least once a day, and preferably it should be the same time each day.

Relaxation technique Calm Body - Calm Mind 

It is very beneficial to be physically and mentally relaxed before doing the visualization exercise. Here is a simple technique to use in the theater of your mind (mind's eye) to bring relaxation. 

  1. Sit down in a comfortable chair or lie on a bed. There should be no other distractions. Go into the theater of your mind. See yourself in a comfortable theater getting ready to watch a movie about you.
  2. Again remember to pay attention to details. What is you theater like? How does the seat feel? Is the screen big or small? Are you sitting in the middle row on at the aisle? Are there arm rests on the chair? How do you will on your arms? The details are very important.
  3. Lie down and imagine your body's a series or rubber balloons. There are two valves in your feet. They open and air escapes from your legs. Your legs collapse until they are empty and lie flat against the bed. Do the same for the rest of your body parts. You do not have to do this in bed. If you are in the office, try to fix a picture of yourself in your mind' eye of yourself lying in bed doing the exercise. You will actually feel the relief from being relaxed. Physical relaxation leads to mental relaxation. When practiced daily, it gives us that relaxed attitude which allows us to better control our actions.

Each time you practice this technique, when your body and mind feeling completely relaxed, be sure to say yourself mentally - calm body, calm mind. This deepens the programming of your servo-mechanism.  As you practice this technique and master it with a time, then all you would need to relax is say to yourself - calm body, calm mind.  

Goal Setting Exercise  

Goal setting is very important to being successful in your trading. If you do not have daily, weekly, monthly goals for your trading, it will be very difficult for you to visualize your success. This exercise will teach your how to visualize you reaching set goal of making certain amount of money each day.  

Get in relaxed state with the relaxation technique "Calm Body, Calm Mind" 

  1. Go into the theater in your mind. Remember to make the theater as comfortable as possible and picture as many details as possible.
  2. With this exercise, we are going to visualize ourselves at the end of the trading day having reached our goal. Remember, it is very important for our goal to be realistic and measurable.
  3. The first thing we want to visualize are day what we have been successful in our trading. We want to remember those days where we have been able to make our goal. Recall everything in details.
  4. If you never had a successful trade that is fine. You can simply make up an experience in your mind's eye when you were successful. See yourself getting out of your winning trades successfully.
  5. Now we want to move to the next scene in our theater of the mind. We want to see ourselves reaching our goal, for example of $150 each day. One of the keys of successful visualization is to see the end results and let the success mechanism do the work for your.
  6. After you have seen in your mind's eye, reaching your goal each day for a week, then go back and see your successful trades again, or at least successful experiences from the past. This will build confidence and help you get used to the visualization process.
  7. This goal setting exercise is very important. First, without having clear-cut goal, it is impossible to succeed in trading. There is not a successful trader who does not have set clear goals for himself. Second, having these goals will help you program your success mechanism for the other visualization exercises.
  8. Remember to do these exercises for at least 30 minutes a day. It is also helpful to try and do them at the same time each day. And finally, you must be relaxed for those exercises to be effective.

Statement Equity Increase 

This is a visualization exercise that is extremely effective. The idea here is to visualize the equity in your account continually rising. This is very simple exercise and should be done on daily basis. 

  1. Get in relaxed state with relaxation technique "Calm Body, Calm Mind"
  2. You will want to visualize how your trading statement looks in your mind's eye. The best way to do this is to actually look at your trading statement and then be able to see it in your mind's eye.
  3. If you receive an actual hard copy statement, notice how the paper feels in your hand. See your name and account number. See the brokerage company's name, etc. Do the same details visualization for your electronic copy.
  4. Now take your daily goal, let's say of $250. We want to visualize our daily goal being added to the previous day's statement. Make sure your calculations are real and correct.
  5. But it is not enough just to see the increase in equity. We must see more details for it to feel real to us. We need to see the trades that made $250 in profits. So, while your looking at your statement in your mind's eye, you must also see the trades that made you the $250.
  6. These trades can be made up or can be trades that you have had in the past. In fact, what will work best is if you have had actual days where you have made your goals and use those days as your mental practice.
  7. If you have not had any winning days that is fine. Just use a time in your life when you were successful at something and clearly remember that right before your change the scene to your trading statement. Then just make up the trades. 

This psychology exercise is best in morning when market opens. You need to see yourself reaching your goals as clearly as possible. After doing this for a while, it will help your powerful subconscious to reach your goals. Believe it or now, doing this exercise will help you avoid making trading mistakes because your mind will be clearly focused on your goals. Thus, if you are about to make a trading mistake, you subconscious will override your thought process and help you avoid the mistake in the first place. It will only work if you practice it enough and can clearly see the pictures in your minds' eye. It will not happen overnight but it will happen with daily practice.  

Pulling the Trigger  

There is only one reason why some people cannot pull the trigger when they see an opportunity it is because they are afraid. But is not a fear of the market, it is a fear of themselves. They are afraid because they do not have complete trust in themselves to act in their own best interest. 

Being afraid causes us to freeze up and makes us unable to pull the trigger (to place a trade). This causes missed opportunities. But the end result of these missed opportunities is the real problem of not being able to pull the trigger.  

After we miss another opportunity because of our fear, we play the scenario in our minds in a very unrealistic way. Let's say we want to take a short position in the market. The right opportunity comes up for us to get in to the market but our fear prevents us from pulling the trigger, so we do nothing. Then the worst possible thing happens. The market does go with our trade and we start to count the money we could have made if we actually did pull the trigger.  

This kid of thinking is very damaging to our trading future. We mentally beat ourselves up for missing the trade and we feel like we lost money that would have made otherwise. We get upset with ourselves. We play the trade over and over again in our minds thinking about the things we did wrong. This is just like the visualizing techniques we have been talking about. The only difference here is you are visualizing yourself doing wrong things. By continually thinking of yourself as a person who cannot pull the trigger, you are reinforcing that idea in your subconscious.  

Here is an exercise that will help you to correct this bad habit and teach you how to pull the trigger when you see a trading opportunity. We need to get past the fear that is causing us to freeze up and not to pull the trigger. And we definitely want to avoid visualizing or continually thinking about the mistakes we have made and the opportunities we have missed.  

  1. Get in relaxed state with the relaxation technique "Calm Body, Calm Mind"
  2. In this exercise, we want to visualize ourselves being able to pull the trigger without hesitation when we see an opportunity or when it is time to get out of a trade.
  3. Enter your mind's theater and first playback times when you have pulled the trigger as soon as you saw a trading opportunity. Remember to see the details. See yourself watching the charts and seeing the opportunity. You see the green light go off in your head and you do not hesitate. You take your mouse and place your trades.
  4. See the trade going your way. Feel the feelings you have had when you have seen an opportunity and jumped on it. Feel how you felt when you did not hesitate and were able to pull the trigger without hesitation.
  5. If you never had trades when you were comfortable pulling the trigger than try following: Recall a time when did something and you were comfortable with it when it is hard for others. Remember that time vividly and feel those confident feelings. It is fine to make up a situation as long as you have the confident feeling and you are seeing the pictures in your mind vividly with details. You must get those confident feelings first.
  6. Also, see yourself closing that trade when you feel the time is right. See the details clearly. Feel the confident feelings you get from having a successful trade.
  7.  Again, it is important you do exercise on daily basis. They will not work after just one day. You did not become afraid to pull the trigger overnight, so you cannot expect to fix that problem un just one day either. Also, these exercise works better if you it at the same time each day.
  8. This mental practice will reprogram your self-image. After several weeks of practice, if you feel confident, your inability to pull the trigger will be in the past.

Please, keep in mind that attempting to do this exercise right after a losing trade or a bad day will not work. It is very unlikely that you will be able to get relaxed enough for the visualization process to work if you are upset or mad at yourself. We suggest you to do this exercise when you are in a relaxed state. Trying to do it when you are aggravated will not get you anywhere and will simply turn you off from continuing to do this in the future.  

We have presented you with a number of visualization exercises that will help you to improve your trading. You have seen how visualization works and how using either real or imagined experience can benefit you tremendously. Now you can even try to create you own exercises to improve some other areas of your trading.  

You simply need to find out what parts of your trading you are having trouble with or in other words, what are some of your bad trading habits.  Once you have done that, simply build some visualization techniques to break those bad habits. Here are some things to remember when creating your own exercises: 

  1. You must be relaxed when doing the visualization techniques. Trying to do these exercises with a stressed or tense attitude will simply not work
  2. Use as much details as possible. Always use your senses to help you visualize. Remember, as adults, we have most likely stopped using our imagination like when we were kids. We need to strengthen our imagination as if we were trying to get physically fit. It takes practice, exercise, and time to get good at it.
  3. When you first start with visualization exercises, try to do them at the same time each day. This will reinforce the habit.
  4. Remember to build a theater of your mind in which you will watch the visualization process.
  5. Remember your past success to give yourself that winning feeling before and after visualizing. This will help give you the confidence it takes to succeed in the future as you make that winning feeling a habit.
  6. See yourself with kind eyes. In other words, do not beat yourself up for your mistakes. Instead you should forgive yourself completely and move on. By continually reliving your mistakes, you are actually practicing the mistake so that it can happen again in the future. Forgive and forget your mistakes.

Psycho-cybernetics techniques can help you do much more than simply being a better trader. They can help you with relationships, athletic competition, confidence in sale, social activities, etc. Please, devote some time to developing these special skills every day and improve your trading. 

 

Topics Related to Trading Psychology:

  

Home: Fully Automated Forex Trading Systems with Automated Trade Execution on 300+ Forex Trading Strategies

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Part 10: Money Management

Part 11: Trading Psychology

 

 

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