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Barry Burns
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TRADING PSYCHOLOGY:
SUCCESSFUL TRADER.
REAL-WORLD
STRATEGY
FOR
BECOMING
TABLE OF CONTENTS
Trading Psychology
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POSTERS
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TRADING PSYCHOLOGY
If youve had any education in trading at all, youve heard that self-discipline is the key to
successful trading and I just want to take a few moments to reinforce that. A book, video,
course or mentor cannot give you self-discipline. That has to come from you. Thats why they
call it SELF-discipline!
In Market Wizards, Jack Schwager interviews some of the worlds most successful traders in
search of a commonality that can lead to success for others. His conclusion after the
interviews:
What set these traders apart? Most people think that winning in the markets has
something to do with finding the secret formula. The truth is that any common
denominator among the traders I interviewed had more to do with ATTITUDE than
APPROACH.
In his follow-up book, The New Market Wizards, Jack Schwager wrote:
We has met the enemy, and it is us. The famous quote from Walt Kellys cartoon strip,
Pogo, would provide as fitting a one-line summation of the art of trading as any. Time
and time again, those whom I interviewed for this book and its predecessor stressed the
absolutely critical role of psychological elements in trading success. When asked what
was important to success, the Market Wizards never talked about indicators or
techniques, but rather about such things as discipline, emotional control, patience, and
mental attitude toward losing. The message is clear: The key to winning in the markets is
internal, not external.
By the way, these are EXCELLENT books you should read if you havent already. They give
you great insight into the reality of what it takes to be a successful trader.
There are 2 aspects to trading psychology:
1. You must trust your trading methodology.
2. You must trust yourself.
Its obvious that to be a successful trader, you need a viable trading method with setups,
rules and a plan that works. Without that, no amount of psychology is going to help you.
Unfortunately there are many traders who have a viable trading method, who never know it,
because they have never tested the method divorced from their emotions.
For this reason I highly recommend that you PAPER trade my method for at least 3-6 months
before you put a single real-money trade on the line. This paper trading must be done in realtime, not after the fact.
If youre a day trader, you should not actually do it on paper. Rather, get a good electronic
simulator (such as the one offered by NinjaTrader for free) and actually enter your orders in
real time so you cant cheat by later saying you would have taken this trade or that trade.
If youre a swing trader, you can use real paper, but record your trades in black and white on
the day you would enter them. Dont allow yourself the benefit of hindsight. You must practice
trading just as you would with real money. Swing traders dont get as much practice as day
traders, so I recommend you paper trade for at least a year before using real money.
This gives the additional benefit of helping you learn the timing of the entries. Learning to
enter your orders without hesitation is a critical trading behavior for your success. It will also
help you learn whether the methodology fits your personality.
By paper trading for 3-6 months, and keeping track of every trade (using the trading logs in
the back of this manual), you will find that the method works as long as you trade it without
emotion.
Before you can trade successfully, you need to have confidence in your method. Without the
utmost confidence in your method, you will second-guess the rules, get discouraged during
draw downs, and pass on good setups. The ONLY thing that will create that confidence is
success. And the best way to achieve a winning track record is to trade without emotion
and at the beginning, that means trading without money.
Once youve successfully paper traded for an extended amount of time, then you know your
method works and its time to start trading with a SMALL AMOUNT of real money. Now if you
start losing, then you know the variable is the emotion of trading with money.
Once we solve the problem of finding a successful trading method, then we have to deal with
the problem of YOU!
Another one of my favorite books is Alan Farleys The Master Swing Trader. In that book he
writes:
The markets require a level of discipline that most fail to achieve in the rest of their
lives. So why should it be any different with trading? Stock positions offer endless
opportunities to break rules and ignore danger. Wise participants recognize NONMARKET LIMITATIONS and deal with those before proceeding on the path to profit.
Losing weight, quitting smoking, and exercising regularly all improve the odds for trading
longevity. Add stress reduction and watch performance improve faster than taking a
weekend stock course.
SWING TRADING FRUSTRATES THOSE WHO FIND GREAT ACHIEVEMENT IN
OTHER WALKS OF LIFE. Few other disciplines require constant loss to reach their
goals. The pain of losing money stands beside profit throughout the road to success.
Accept this unpleasant fact and prepare for the emotional rollercoaster. Both winning
streaks and drawdowns test rational behavior and trading strategies. Stay focused and
stick to the plan. Participants who lose concentration face a gamblers paradise. And just
like all games of chance, expect to leave the bright lights with very empty pockets.
Greed and fear bring out the extremes in human behavior. But swing traders can control
the impact of emotion with solid rules and strict self-discipline.
Read those paragraphs a couple of times. Theres a lot of wisdom there. The Master Swing
Trader is also a great book I highly recommend by the way!
The sad truth is that most traders who eventually succeed only find that elusive discipline
after the market has taken their money one too many times and the issue becomes so
painful for them that they either have to change their behavior or quit the markets. Most
people quit the markets at this point.
Discipline has everything to do with patience. It means waiting for everything to line up
according to your rules and not taking a trade that violates your rules because its close or
looks good anyway.
That means letting some trades go that made money, but didnt meet your criteria and not
feeling bad about missing a winner.
Overtrading is one of the biggest challenges to new traders. But one of the hallmarks of
successful traders is that they actually trade very little. They wait for the PERFECT setups
because they know that is the ONLY time that the odds are really with them, and that makes
the difference between trading and gambling.
Even in the gambling world, however, the professionals know this. Profitable poker players
fold on more hands than they play. If they dont have a strong opening hand with a high
probability of winning, they simply fold and wait for a better one.
People who are way better educated than me rip my theories from here to Hades and
back. They claim gambling is all math and statistical analysis. They will never grasp the
true meaning of gambling because they have never been there.
People who think that a math equation is gonna give them a leg up on winning
ought have that leg whack them in the area where they sit on their brains.
you absolutely must have money management Topped off with a healthy
dose of discipline.
[The pros] dont make MISTAKES, and they dont have tells. Patience is a
virtue, stupidity is a one-way street to disaster, talk is minimal, and mercy is absent.
Make a MISTAKE and seven vultures circle the wagons, waiting to divide the spoils.
When the night is done and you are fortunate enough to escape with a small profit, the
ride home gives you only a short time to count your blessings and your money.
John Patrick in MONEY MANAGEMENT FOR GAMBLERS
If youre trading every day of the week and youre not trading well according to this
methodology, its most likely because you are making mistakes.
So is there a way to eliminate mistakes? No one ever becomes a perfect trader, but the first
step to reducing your mistakes is to identify them.
First, lets look at 10 Commandments which are general rules. Then well translate them into
specific mistakes as they would relate to the rules of our trading methodology.
Now lets translate those into how they intersect with our trading method in what I call the 7
Deadly Sins.
Although I cant give you self-discipline, I will give you an exercise that can help you
tremendously with the issue. You still have to actually stick to it, but if nothing else it can
serve as a mirror as to how out of control your trading may actually be.
When most people think of getting help with the issue of trading psychology, they think of
being hypnotized or getting counseling. Those things can be useful, but what Im about to
share with you has helped me with my own trading MORE THAN ANYTHING Ive ever done.
Are you ready for it?
Here it is Use a trading log, such as the one I include in this manual and keep track of every trade you
make.
Many trading courses encourage you to do this, but heres the twist On your trading logs
you will have a place to enter the mistakes you made (if any) and a place to write what you
were thinking and feeling when you entered the trade.
This gives does 2 things:
FIRST:
It gives you a record of your mistakes. which you will then transfer to your Weekly Log.
After several weeks, you will be able to look at the Weekly Log and see patterns of your
behavior. This is the key.
The trading log is like a mirror, reveling your bad habits! On the trading logs you will also
keep track of how much money you would have made if you DIDNT make any mistakes.
Thats the killer!
When you see how much money you could have made by avoiding mistakes, compared
with how much money you did make with the mistakes it makes a real impression on
your mind! Especially when you do this week after week, month after month. The
repetition really works on your mind.
For example, if you make an average of $500/week, but your trading log shows that if you
didnt make any mistakes you would have made $5,000/week it has a way of getting
your attention! Thats a powerful motivator to change your behavior because it ties
together 2 things: The fact that your method works, and the fact that big profits are right
at your fingertips if you just change your behavior.
SECOND:
By entering your thoughts and feelings on each trade, you have an instant bio-feedback
mechanism. As you review how trades worked (or didnt work) that you felt good about,
that you just knew were going to be winners it will most likely reveal to you that you
cant trust your own opinions and feelings!
This is a good thing. Most people arent aware of the extent to which they continue to do
the exact same (wrong) things. By keeping a disciplined record of your thoughts and
feelings when you take trades, over time it will prove to you that your own thoughts and
opinions are not to be trusted when it comes to trading.
Why is this so important? To reduce, and eventually eliminate impulsive trading and the
bending and breaking of your trading rules because of how you feel about any given
trade.
To help avoid overtrading, only print out enough sheets each day to log 6 trades. This is a
way of telling yourself that you will only allow yourself to take 6 trades the entire day so you
better wait for the best setups, otherwise youll waste your trades on sub-par setups and not
be able to take the good ones should they come along later in the day.
Another practical technique for avoiding overtrading is to get a timer (I like to have it on a
wristwatch so it will be with me wherever I go) and the alarm to go off every 27 minutes. Go
and pay bills, watch TV, play video games, or do whatever you need to do. When the alarm
goes off, then go back to your computer and look at the charts. This will get you in front of
your charts every 3 bars on a 9 minute chart (obviously this works better if youre using
minute charts than if youre using tick or volume charts).
If you see a good setup beginning to develop, then stay and watch to see if it triggers.
Otherwise, just leave and return to your other tasks until the alarm goes off again in hour
(3 bars later).
The idea is the same one used in dieting where you remove all the junk food from the house.
Its the same in trading: If you have a serious overtrading problem, it is best to remove the
temptation. You only need to check in with the charts every 27 minutes to see if anything is
developing. If the long-term and short-term charts are in complete conflict, the markets are
badly bifurcated, the 50 SMA is totally flat, or there is nothing close to a good setup
developing, then remove yourself from the temptation! There is nothing useful for you to do in
front of the charts, so go do something else that IS useful.
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The exact way to use these trading logs is explained in the videos that accompany this
manual.
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POSTERS
The following pages contain some posters that I personally have hanging by my monitors.
They remind me of the most important psychological trading principles.
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