Lesson 6

Psychology of Winning Traders

By Adam Khoo
adam@akltg.com

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017
What Makes A Successful Trader?

SYSTEM

10%

PSYCHOLOGY
30%
60%
POSITION
SIZING
 Psychology is More Important Than Strategy

•Winning traders are different NOT because of the indicators or
technical knowledge they have. What makes them different is the
mindset they have towards trading.

•The best strategies and indicators will not help you succeed if you
have the wrong mindset towards trading.

The Holy Grail of Trading

•Many traders constantly search for the ‘holy grail of trading’. A special
secret strategy/indicator that can predict the market and win all the
time. Does it exist? No!

•The secret to successful trading does NOT lie in an amazing theory or

indicator. The secret lies in the traders’ MIND..

“ The answers to the question of successful trading are to be found in the

trader’s own mind. Those who seek answers from the latest invention of
trading systems or tips will not find the answers, because they have not
understood the question’- Jesse Livermore, Legendary Trader.
 Psychology of Winning Traders


1. Discipline
•Trade according to your trading entry/exit rules. Never on rumours, opinions and
emotions
•Have the discipline to stick to your strategy through the wins and losses
• Avoid listening to the opinions of ‘experts’ who can ‘predict’ the market based on
insight or news

2. Think Statistically
• A winning strategy will have wins as well as losses
• The losses can come in a row (5-10 losses together)
• Do not be greedy when you win or fearful when you lose
• Every trade outcome is statistically insignificant
• A good trade can end up as a ‘loss’. Focus on following the rules and not on the
outcome of each trade.
• As long as you have an edge (> 50% win) and average win is more than your
average loss, you will be profitable over many trades
 Psychology of Winning Traders


3. Patience
• Only trade when there is a high probability opportunity
• When the rules tell you it is not the time to enter, do NOTHING
• Knowing what NOT to do is as important as knowing what to do

4. Focus on ‘What’ is happening and not ‘Why’ it is happening

•It is a waste of time trying to figure out why the market is moving a certain way
•Price movements are not caused by public news (e.g. Yen increased because of
North Korea firing a missile)
• Avoid associating market trends with news events
• “What has happened in the market to cause this move?” is irrelevant to trading
success
 Psychology of Winning Traders

5. Do Not Predict the Future
•It is impossible to predict the future-> driven by crowd psychology
•Avoid listening to experts who give predictions of the future or to predict yourself
•Trade based on the current trend or reversal in trend
•Predicting the future clouds our judgement and makes us less willing to take losses
(ego)

6. Risk Management
•There is no trade that is guaranteed a win. Always risk a small percentage of
your capital (e.g. 1-3%) and enter high probability trades where your profit
target and stop loss is pre-set.

7. High Level of Confidence

• Confidence to follow your trading strategy through the wins and losses
• Confidence does not come from the outcome of any particular trade
• Confidence comes from knowing that your trading plan/strategy has a positive
expectancy (edge)
 What is the Difference?

Good Trades Bad Trades

Winning Losing
Trades Trades

A good trade- followed the rules of your pre-defined trading strategy.

A bad trade is a trade - ‘broke’ your own rules.

A good trade can be a wining trade or a losing trade.

Executing good trades assures long term success and repeatable long term profitability.

A bad trade can turn out to be a winning trade. While it may ‘feel good’ in the short
term, it reinforces bad trading habits in the long term and may lead to poor performance
in the long term.
 Managing Your Emotions

•When trading, you will be facing a whole host of emotions that is tied to
money at stake in your account- greed, fear, doubt, hope, excitement etc...

•To be a winning trader, learn to think and act contrary to

our natural
instincts. Many of our emotional patterns make us lose money. When we are
conscious of these patterns, we can overcome them.

• It is advisable to trade at a level of capital & risk where a few losing trades
does not ‘hurt’ you emotionally. This level depends on your individual ‘pain
threshold’.
 Managing Your Emotions

1. Greed
Greed may cause you to raise profit targets too high and stay in a trade too
long. This can cause future winning trades to become a losing ones.

New Profit Target

Regret
Price 4R
continues
rising

Profit Target:Sell
1.5R Buy win becomes
Buy
a loss
 Managing Your Emotions

2. Fear

Target 1.5R Target 1.5R

+1.3R
+0.7R
Buy Sell to
Buy take
profits too
quickly
Stop loss Stop loss
 Managing Your Emotions

2. Fear
Fear may cause you to take quick profits

By taking small profits (e.g. 0.5R) and not allowing winning trades to
achieve their fullest profit potential (i.e. >1R), your system may no longer
have a positive expectancy. Your profits on wins make not be able to cover
your losses on losing trades.

Win 0.5R
Win 0.2R
Win 0.8R
Win 0.3R
Win 0.4R
Loss -1R
Loss -1R
Loss -1R

Even with more wins than losses, you still end up with a negative
expectancy.
 Managing Your Emotions

3. Hope

Buy
Hope
Stop loss

New
Stop loss
Buy
New
Big Loss Stop loss
Stop loss
 Winning & Losing Streaks
ü The overall outcome of a trading journey will not unfold linearly
ü Do not look at the trading outcomes in a certain period and then extrapolate
results forward into the future
ü We should neither be discouraged by losing streaks nor be carried away by winning
streaks
ü In the long run, losing and winning streaks will "even out" each other
ü Long-run distribution of wins and losses will make us profitable
ü Long-run performance has very little to do with the "luck" factor
 Common Emotional Mistakes in Trading
Losing Traders….
1.Rush into new trades after experiencing a few losses in order to win the
money back quickly
2.Fear taking the next valid trade after a series of losses
3.Stay in a losing trade ‘hoping’ that things will turn around
4.Focus on short term results & lose their perspective
5.Fail to stick to a consistent percentage risk per trade (R%)
6.Constantly changing trading systems/ strategies after experiencing short
term losses
7. Focusing on the account balance instead of following the system
8. Get emotionally affected by losses- fear, stress & loss in confidence
9. Blame and find external reasons for their losses
10. Desire to ‘take revenge’ on a stock or the market after experiencing a loss
11. Trade with methods that do not suit their personality. Too often, people
will hear about another’s success and, whether out of envy or a lack of self-
confidence, they feel compelled to copy that person.
 Habits of Successful Traders

1.Always take action when there is a valid, high probability signal. They don’t
let their fear control their decisions and interfere with their trading.
2.Take responsibility, learn from mistakes and move on. They don’t dwell on
setbacks.
3.Expect and accept losses as part of the trading game
4.Focus on following the trading system and not the immediate account equity
5. Think statistically and keep a long term perspective
6. Focus on being consistent. Consistently follow pre-determined entry and
exit rules
7. Be patient. Wait only for high probability opportunities

The biggest enemy to your trading success is NOT the market

… it is YOU
A good trade is one where you followed the rules of the
system and not one that led to a profit
 Drawdowns- The Cost of a Trading Business
• Drawdowns are a reduction in account equity from a losing trade/series of losing
trades
• Inevitable in trading! Winning/losing trades may often come in a row
• Main cause of psychological damage to traders and their success

$22,000 $23,000

$18,000
$17,000
$15,000
$14,000

$10,000 $12,000
Condition Your Mind to Accept Drawdowns

• Normal ‘cost’ of doing business

• Don’t focus on the monetary value. Focus on accumulating R-Multiples
• Treat a smaller number of trade outcomes as statistically insignificant

Sales Cost Profit

$150 $100 $50
Sales Cost Profit
+1.5R -1R 0.5R
 Lesson 6
Psychology of Winning Traders

By Adam Khoo
adam@akltg.com

Copyright ©
Adam Khoo Learning Technologies Group Pte Ltd 2017