Advanced Trading Psychology


In this chapter of the book, I want to move back into trading psychology. Whenever you hit a roadblock in your trading career it is very likely that this is the knowledge you will need to get back on track. It isn’t that your trading system isn’t important, or that when you trade isn’t; it’s simply that more that 95% of the problems you ever have will come directly back to one thing – you!

By taking your knowledge of psychology a little further you’ll be enabled to analyze what it going on, and if need be to correct it. Too many of us have the tendency to place the blame when things go wrong. “It’s my trading system that’s not working, etc.” Of course, there is that chance, but in many cases, it’s the way you are trading that is affecting your ability to profit and enjoy your career.

With that said, let’s get started. Here is trading Psychology 201 – the section of the book that will help you to further understand and analyze yourself. Call it a study in self-improvement if you will.

Trading Psychology 201 – Analyzing Yourself

Way back in chapter one we talked about three areas of trading psychology.

  1. Decision Making
  2. Success
  3. Learning

We also have discussed other common ideas in trading psychology as we worked through the section on money management. Now it’s time to go a little deeper. The simple truth is that the basic understanding I have given you already likely is enough to get you started. With this additional information though, you’ll gain a deeper understanding of trading psychology and in turn, you’ll be enabled to take a closer look at yourself.

Sometimes when things go wrong, simply having the right information is the most important step to seeing the problem and correcting it. Once again, I’m not going to bog you down in Freudian terminology. Instead, I will just share some ideas that will help you throughout your trading career.

The Psychology of Beliefs and Knowledge

To get us started, I wanted to talk about beliefs and knowledge. This is one area that actually causes big problems for many traders. Simply understanding how believing something is different than knowing it is important. For the trader seeing how that applies to their career is also important.

Let’s start by defining three key terms.

  1. Assume – to take it for granted that something is true (without proof)
  2. Belief – a state or habit of mind in which trust or confidence is placed in something ( again without proof )
  3. Know – to directly perceive: to be aware of the truth or factuality of

When you look at the terms belief or assume, they are quite similar. In fact, the terms can be used quite interchangeably. The difference is that usually a belief is formed around a number of assumptions. When we believe something, sometimes quite strongly, we are quite certain that that belief is true.

The term knows on the other hand is quite different. When we know something, we know it to be true. We don’t have to rely on a belief that is based upon assumptions. We know it, it simply is.

Where the problem comes in is when someone isn’t able to differentiate between the believing and the knowing. They think they know something to be certain, but in fact, it is just something that they believe to be true.

To clarify this idea in regards to trading let’s use an example.

You’ve done some research and technical analysis and it looks like the USD is going to rally against the CAD. The charts all point to it, your technical indicators are giving you a buy signal, and you even got advice from a master trader that confirms your belief.


You go long on the USD/CAD and wait for the rally to happen.


Instead of rallying though, the price begins to drop. This is the point where the problems usually come in.


Many people marry their beliefs with what (they think) they know. Depending on the degree to which someone has this problem, it can have quite a devastating effect. If you’re using money management principles (and sticking to them) then you have set a stop and you needn’t worry. If the pair continues to go the wrong way the price will hit your stop, you’ll exit the trade, and you’ll move on.

What sometimes ends up happening though is that we take our belief that the dollar was going to rally and treat it as something we know. If you know that it is going to rally, then you’re more likely to move your stop, and if you continue to hold onto that belief you could lose big time.

The simple fact is – it doesn’t matter what you think the market should do, and in trading, there is no belief that is worth holding onto beyond your own rules. When you allow your beliefs to get in the way of your trading, as something you know to be true, what happens is that you are suddenly less likely to discover your own ignorance.

Important Rule #1 – Making assumptions and having beliefs about what the market “should do” cannot be a part of your trading repertoire. Thinking correctly means understanding the difference between what you know, and what you believe, and being able to differentiate between the two.

The Psychology of Emotions and Attitudes

The next idea I wanted to cover is emotions and attitudes. These are closely related so once again let’s start by defining the key terms:

  1. Attitude – the way we relate to something
  2. Emotion – the way we express what we feel inwardly (feelings)

Our attitudes are greatly affected by our emotions, and in some ways, the two terms are quite interchangeable. As it applies to trading there are many areas where your attitude and emotions can negatively affect what you are trying to accomplish.

When we trade we do so with an expectant attitude. A trade may be positive, negative, or neutral, but there is an attitude of expectation with trading. Where problems begin is when we allow our emotions to get involved, it changes our attitude (the way we relate to the market) and in turn, can greatly reduce our capacity to trade well.

There are a couple of things that need to be understood about our attitudes and our emotions. First, we are in control of our emotions. Remember from chapter 1 and the psychology of decision making:

there isn’t anything you do without making a decision; absolutely everything you do requires the effort of deciding to do it first

From that we get – we cannot have an emotional response or attitude without deciding to do so first. In other words when you get frustrated, angry, upset or any host of other emotions, and you allow that to change your attitude, you’ve done so by choosing to (whether the decision was a conscious decision or not doesn’t matter).

To apply this to trading let’s talk about what using our emotions to trade can do. Obviously in this case I am referring mostly to negative emotions (fear, anger, etc) since they are the ones that will cause you problems:

  1. Destroy our confidence in our own system
  2. Lead to bad decisions in trading
  3. Lead to poor money management decisions
  4. Lead you to trade randomly
  5. Lead you to take revenge on the market (this won’t work I promise)

I’m really just getting started here. The list could go on and on. Suffice it to say that many huge trading mistakes have been the result of a trader getting their emotions involved. From that, and the fact that we are in control of our emotions, let’s create another important rule.

Important Rule #2: I will realize that I am the only one in control of my own attitudes. When I trade I will remain neutral, and trust in the systems I have in place to keep me successful. I won’t use my emotions in trading.

The Psychology of Control and Success

Next, I want to talk about the psychology of control. I’m bringing this one into the picture now because it directly relates to the previous two areas we discussed. Many of our beliefs, our assumptions, and our emotions – as they pertain to trading – come back to one main problem area.

Most of us (and especially men) have a built-in need to be in control. When we aren’t in control we suddenly struggle to regain it. Now obviously, when dealing with something as big and complex as the Forex market, you cannot gain control. The simple idea for most is that if we are in control, then we are controlling our own success. This idea usually leads back to making bad assumptions, allowing our emotions into the mix, and in turn making a host of bad trading decisions.

When it comes to Forex here is the simple truth: you can never control the market! On the other hand, there are things you can do that will put you in control and in turn help you find success.

  1. You can control the system you trade with
  2. You can employ proper money management and follow it religiously
  3. You can understand the difference between what you believe and what you know so that you don’t use assumptions to make bad trading decisions
  4. You can decide not to get emotional about trading, and you can maintain a neutral attitude even when things aren’t going the way you like.

Once you put those four elements into play, something happens: Suddenly you have control of how you trade, and in turn things continually move forward. Ultimately you have success.

Important Rule #3: I will not try to gain control over the things I cannot – mainly the market. On the other hand I will work towards my own success by controlling the things I can control.

The Psychology of Right and Wrong

The next area we should talk about is right and wrong. Now I’m not getting all philosophical and running off on a good vs. evil rampage (where I teach you the difference between right and wrong). Instead what I am going to talk about is what happens when a trader gets it right or wrong and how those two can affect their trading.

Before we get into the trading aspects of it, let’s first talk a little about what it means to “be right” or to “be wrong”. The psychology behind these two concepts actually goes right back to your childhood, and the way you were affirmed for right action, or wrong action, so I’m not going to get to deeply into this. Instead, I will just share the following ideas.

  • When we are wrong – we tend to feel inferior since we didn’t meet our own standards.
  • When we are right – we tend to feel superior since we met or exceeded the standard we set for ourselves.

Of course, these two statements tie in closely to our own self-image and the way we see ourselves, which also tends to affect the way we act. If we feel inferior, we are more likely to do whatever it takes to compensate. On the other hand, if we are feeling superior we tend to deal with things with that attitude.

Now let’s apply this to our trading. There are two common problems that come from being right or being wrong in trading. Both of them lead traders back to trading with their emotions, and in turn making bad decisions.

  1. When we’re right: When you win at a trade or any string of trades, there is a tendency to begin to feel superior. For many traders, this leads them to go rampant trading, without following their own rules (most of the time their superior feeling won’t last long, nor will their equity from those winning trades).
  2. When we’re wrong: When we are feeling inferior, it can actually lead to two problems. An aggressive trader may become emotional, and decide to try to take revenge on the market. The less aggressive trader may actually withdraw and trade less. In either case, the trader hurts him/herself. The aggressive trader allows his emotions into the mix and loses money. The other one misses out on trading opportunities (and profit).

An experienced trader will see a win or a loss for what it is: just another trade. Remember we cannot control the market. There is no such thing as being right or wrong in trading. There are winning trades and losing trades, but if you’re following your own rules then you don’t factor into the equation, so there is no possible way for you to “get it right” or “get it wrong”!

Important Rule #4: I will realize that any won or lost trade is just another trade. I won’t allow my or attitude (towards myself or the market) to change because of a trade or any number of trades.

The Psychology of Giving to be Successful

The next concept I am going to share with you is probably the most obscure. But, for many it also holds the most truth on their road to success. The concept is deeply based on the psychology of our subconscious minds (which I’m not going to get into), and it is one that you will have to choose to believe for yourself.

If you ask yourself right now why you aren’t rich, what would your answer be?

In this case I am going to answer the question for you: The only thing holding you back is you.

Now let me share the concept with you: It is likely that you are holding yourself back because you aren’t generous enough. If you’d only give more money away you would receive more!

The concept is based on a number of ideas. Whether you choose to believe this concept or not there really is a correlation between giving and generosity and our ability to receive (and yes I did say ability to receive). One of the biggest things that hold people back is internal conflict, and the easiest way to overcome that conflict is to simply become more generous.

To expand upon this idea let’s look at the way that someone who is wealthy tends to think in comparison to someone who isn’t.

  • A wealthy person thinks of resources as a way to create and find value
  • A poor person things about how to get resources
  • Someone who is wealthy see’s that they have control over their own situation
  • A poor person feels that they are the victim of circumstance
  • A wealthy person sees a situation over which they have no control as an opportunity to solve a problem.
  • A poor person sees situations which they cannot control as a problem.

The difference in the way of thinking is very important here. Someone who is wealthy see’s their wealth as a tool to create resources, to create happiness, and they realize that they control their own situation. The poverty minded think in terms of being a victim.

Poverty minded thinking hinders your own success in a number of ways. Most importantly if you see yourself as a victim and tend to live under a sense of lacking then it is very likely that you will also lead to self-centeredness and greed. It also tends to lead to the feelings that you are undeserving and end up feeling guilty when you receive things.

The easiest way to change this thinking is to start thinking as though you were wealthy. Since it is very hard to change your thinking (your mind will fight you), the easiest way to make the change is to become more generous.

Start giving, with the intent of simply being generous and helping others and you are suddenly acting wealthy, thinking wealthy, and it will easier to gain the belief that you are wealthy. You will reinforce the idea that you have an abundance of resources, and you will no longer live under that sense that you are lacking.

By giving you are also enabling yourself to receive without guilt or greed. Greed can lead to other problem areas. If you aren’t actively seeking huge profits (being greedy) then you will be much less likely to push the envelope and trade 10 lots extra to try and pull extra profit from the market. When you’re thinking wealthy there is no need to be greedy (you already have abundance).

Whether you choose to start giving to overcome your own internal conflicts or not, there is one other important rule I wanted to create from this look at giving and receiving.

Important Rule #5: I will happily accept the profits as the market gives them to me. I will not allow greed to drive me to break my own trading rules.

The Psychology of Goals

Have you ever heard the term goal oriented? The idea isn’t really that difficult to understand. We set a goal (that is an objective we want to complete) and then work towards it. To reach our goals usually requires us to overcome one or more problems.

The problem with this idea is that people tend to focus on the problem instead of the goal. When we do this we tend lose sight of what we were trying to accomplish in the first place. Many times we don’t reach the goal, and by focusing on the problem (as far as trading is concerned) we create more problems.

Let me expand upon this idea to clarify:

In trading your ultimate goal should be to profit from a trade, right?

Actually it shouldn’t be, and if it is you’ll never find success as a trader. You’ll find yourself having emotional responses to every lost trade and in turn reacting badly. For many traders their reaction is to immediately enter another trade and in turn they lose even more.

Successful trading is really about not looking at each trade individually. Instead we look at all of our trades over a given period of time, and our goal should be to grow our account over time. The problem to overcome is the individual trades, but our focus should always be on our goal.

When you focus on the end result, instead of the problem at hand, you are much more likely to achieve that result. You’ll find the tools you need to reach your goal. In this case we have the tools we need. We have a trading system that gives us systematic rules to enter and exit trades, and we have a money management system to ensure we don’t blow our whole account on one bad trade.

Important Rule #6: My ultimate goal in trading is to profit over time. I will focus on honing my trading and money management system, and trust them to help me reach that goal.

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