In Trading Routine and Psychology

A good friend of mine called me over the weekend and explained that he wanted to start trading, and was looking for some basic advice. In our relatively brief conversation, I covered several major topics, so I thought I would share them here. I could have talked to him for days about the thousands of ideas and issues we cover here on a regular basis, but I instinctively selected the below items, I assume, because I view them as the most relevant. I’ve either appropriately or inappropriately entitled this article “My Top 5” because these are the items which flowed most naturally when asked for advice. In the order in which I spoke, here they are:

1. Learn to be a Position Trader

The first thing I told him was to learn to be a position trader (leaving positions open for several days to weeks/months). I told him that by doing this, he learns two absolutely essential things: to control his risk, and focus on the information that really matters in the currency market. If you learn those things, I said, trading on an intraday basis becomes much, much easier. If you have a good handle of the macroeconomic environment, and what’s truly driving investor sentiment, intraday scalps will cause you very little worry. Nothing gives you more confidence than your ability to score 500 pips on a single trade.

Counter to this, I told him that one of the biggest makes people make when they first start out trading is that they focus on miniscule moves of several ticks at a time which usually develop into massive losses. They become ‘hard-wired’ to this particular way of trading, and it usually ends up devastating them in the end. I said “They don’t understand what’s really moving the market or the value in basic fundamental analysis. It trains them to use ridiculous leverage when what they should really be doing is first learning to trade profitably then raising more capital to trade with profitably, instead of trying to turn 10k into 10mm. People, you will find, are very willing to give you their money if you’re making 20% a year after fees. Trust me. It comes. Billionaires don’t become billionaires because they ‘organically’ took 10k and turned it into a billion. Other people’s money always comes along the way.”

2. The Plan

The second thing I told him was to make a list of rules and stick to them. This is basic, and you hear it all the time, but I have a slightly different interpretation of the relevance of this, I believe. If things don’t line up, simply don’t trade. Your planned trades are the ones that always bring in the bigger money. Patience, and waiting for the right ones, are key, as we’ve discussed many times. And when that magical moment arrives where all conditions line up and the perfect entry is staring you in the face, by all means take it. Eventually, they come. Eventually being the key word, here. Staring at a chart and saying “I should have taken that one” or “I can’t believe I missed that” will get you nowhere. You didn’t get in for a reason. There are just as many times I could have stared at a chart and seen winners I should have taken versus trades that would have turned into losers. Not to mention any of the money management disasters which could have occurred along the path.

Most traders, especially in the retail environment, don’t have a written plan. I’ve found the most valuable thing that has come out of my writing a trading plan is not just the plan itself but the realization of all of the things that go into making a trade. Trading is a complex process. There are just as many short term implications which need to be taken into account as there are longer term. Risk management, selection of the right pivot levels, investor sentiment, capital flows, profit management, etc., are just the beginning of a long list of topics that go into hitting “buy” or “sell”. Writing a plan usually opens up the eyes of any trader and makes him or her realize all of the implications of what it is they’re really doing. Sitting down at the computer and executing an order doesn’t make you a trader. My one year old nephew could do that. It’s everything else that really matters.

3. Keep an Open Mind

“Anything can happen, at any point in time”, I told my friend. Particularly in volatile environments, things can turn dramatically in the blink of an eye, so it’s important to visualize all possible outcomes of what could happen next. Becoming too rigid, or stuck to an idea which is clearly fading away tends to paralyze a trader and force a lack of reality on their actual trading.

Charts are merely a visual output of all of the thousands of factors combined in a given instrument. Visualizing different variations of price action is important for any trade, as it removes any of the “shock value” when things don’t play out in the exact manner you visualized. It keeps you flexible, nimble, and able to react to a variety of different conditions.

Most traders “see” price doing once certain thing when they take a trade, and block out all of the other possibilities. I’m a very visual person in general, which could be a reason I find it easy to identify key areas sometimes. But most importantly, I force myself to visualize all possible scenarios of what future price could look like. And I’m not just referring to price moving higher or lower. It can move sideways, a little higher, then lower, than higher again, consolidate for a little bit, then spike up, and then spike down, etc. The list is endless, but at the end of the day I’m simply keeping an open mind of major possibilities which could result due to any number of different factors.

4. The Most Obvious Thing To Do

This week I signed up to CNBC’s Million Dollar Portfolio Challenge; I figured it wouldn’t hurt to try it out. The worst that could happen is that I don’t actually make a half a million dollars and get 10 free hours on a private jet. So I immediately bought 4 ETFs and allocated 100% of my available cash to them: SH (Short S&P 500), DOG (Short Dow 30), PSQ (Short QQQ) and DRR (double short EUR). This isn’t a lesson is horrendous disregard for portfolio diversification (needless to say I was was swinging for the fence here on fake money) or to pat me on the back for calling the right shots here (though I’ll admit my portfolio is on steroids right now) as much as it is a blatant realization of what’s going on out there, and how important it is to always remain on the right side of the most obvious conditions.

In my daily overview of the market and planning process, I keep in mind one thing that seems to keep me alive: “What’s the easiest thing to do here, what makes the most sense, and don’t forget, Steve, if you go against it you’re at a much greater risk of taking a loss”. Simple. Keeping with this trend has been the easiest shot throughout, and as the bad news pours on day over day, its no wonder the stock market is tanking and bringing everything along with it. Always keep the big picture in mind, and never forget it.

Also, on an intraday basis, some trades are so obvious, so clear, it seems you would be foolish not to take them. But you don’t, whether it be a fear of drawdown due to overleveraged or any other number of different factors. Be smart, control yourself and take the obvious ones when they’re there. The agony of not taking a trade you plainly should have can be a lot more painful than taking an actual loss.

5. Losing and Winning Streaks

The final thing I told him was that, if you, by any chance, get on a losing streak, stop trading altogether, take some time off so you can go back in and think clearly. Losers tend to lead to more losers, and I like to think of it as a virus. It just keeps on growing unless you give yourself some rest and medicine to knock it out. A winning streak can do the same to you. There have been many times in my career where I have simply stopped trading for a few days or weeks just to get my head cleared out of any emotional nonsense which is blocking my way to success. It happens to all traders at one point or another, and many, I know, usually end up calling it quits for at least a few days.

A big mistake many traders make is that they keep on plugging away, causing them to force trades, or take those that they wouldn’t normally take if they were in the right frame of mind. The best trades I have ever taken have come when I am calm, cool, and have a clear head. The worst trades I have taken have always followed previous losers that just didn’t work out as planned. This pattern is more predictable than anything I know of. I’m very cautious to get caught up in it.

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Showing 26 comments
  • Anonymous
    Reply

    Thanks Steve – GREAT STUFF DUDE!!! Hey, I would like to contact you directly – may I? steve@mydu.org

  • Anonymous
    Reply

    Wonderful article! thank you!

    It is soooo easy to get caught up in the micro action.

    Also, oftentimes I have a hard time on a psychological level, like…. markets can hardly go down any deeper, can they??!! They already have tanked to an almost unbearable degree. So the turning point just has to be around the corner… It feels like a barrier of hurt that doesn´t allow to imagine that it realy can get worse.

    You ever come to an emotional place like this?

    Thanks, Steve!

  • Nick
    Reply

    Thank you Steve for the great post. It's exactly what a novice like myself needed to read this morning. I have one question though.

    I plan on starting with position trading, but I don't know whether I should learn anything besides S&R, Fib Retracements & Expansions, and diagonal trend lines.

    My gut tells me I need to be able to recognize different chart patterns, but I don't want to go overboard studying Candlesticks, Elliott Waves, etc, etc if that is just going to overcomplicate things..

    So here's the question. When someone is just starting out, should they ONLY focus on S&R, Fib Retracements & Expansions, and diagonal trend lines if they want to follow your strategy?

    Thank you so much – please keep the posts coming! They give much more than knowledge, they give hope…

  • Nick
    Reply

    Thank you Steve for the great post. It's exactly what a novice like myself needed to read this morning. I have one question though.

    I plan on starting with position trading, but I don't know whether I should learn anything besides S&R, Fib Retracements & Expansions, and diagonal trend lines.

    My gut tells me I need to be able to recognize different chart patterns, but I don't want to go overboard studying Candlesticks, Elliott Waves, etc, etc if that is just going to overcomplicate things..

    So here's the question. When someone is just starting out, should they ONLY focus on S&R, Fib Retracements & Expansions, and diagonal trend lines if they want to follow your strategy?

    Thank you so much – please keep the posts coming! They give much more than knowledge, they give hope…

  • TheRumpledOne
    Reply

    http://tinypic.com/view.php?pic=2ueppoy&s=4

    I agree with what you said for the most part.

    I've incorporated your NO BRAINER analysis into my trade selection process.

    Thanks for sharing

  • Anonymous
    Reply

    By far, the best advice I have read for beginners…thank you Steve.

  • Alex
    Reply

    I like BRV’s style and approach, but cannot agree with “Nothing gives you more confidence than your ability to score 500 pips on a single trade”. To me, it all boils down to RR ration. If one scored 500 pips with a 4-week-long trade, and that was a R5 trade, that doesn’t compare well to a R5 trade on M5 (say SL 20, TP 100) – M5 trade will be over in a couple of hrs.

    As any trade can go wrong, with a position trade you may learn that the trade was a looser after 4 weeks of waiting. That means 1/12 of the trading year is gone. With M5 you learn where you stand in less than half a day.

    Not to say that M5 is (the only) way to go, though… 😉

  • Anonymous
    Reply

    what is M5?

  • Steve W.
    Reply

    5 minute timeframe.

  • TheRumpledOne
    Reply

    The 25 Point Mantra Discipline for Day-Trading by Doug Zalesky

    http://www.earnforex.com/forex_e-books/trading_psychology/25_Rules_Of_Forex_Trading_Discipline.pdf

    THE MARKET PAYS YOU TO BE DISCIPLINED.

    BE DISCIPLINED EVERY DAY, IN EVERY TRADE, AND THE MARKET WILL REWARD YOU.
    BUT DO NOT CLAIM TO BE DISCIPLINED IF YOU ARE NOT 100 PERCENT OF THE TIME.

    ALWAYS LOWER YOUR TRADE SIZE WHEN YOU ARE TRADING POORLY.

    NEVER TURN A WINNER INTO A LOSER.

    YOUR BIGGEST LOSER CAN NOT EXCEED YOUR BIGGEST WINNER.

    DEVELOP A METHODOLOGY AND STICK WITH IT. DO NOT CHANGE METHODOLOGIES FROM DAY TO DAY.

    BE YOURSELF. DO NOT TRY TO BE SOMEONE ELSE.

    YOU ALWAYS WANT TO BE ABLE TO COME BACK AND PLAY THE NEXT DAY.

    EARN THE RIGHT TO TRADE BIGGER.

    GET OUT OF YOUR LOSERS. THE FIRST LOSS IS THE BEST LOSS.

    DO NOT HOPE AND PRAY. IF YOU DO, YOU WILL LOSE.

    DO NOT WORRY ABOUT NEWS. IT IS HISTORY.

    DO NOT SPECULATE. IF YOU DO,YOU WILL LOSE.

    LOVE TO LOSE MONEY.

    IF YOUR TRADE IS NOT GOING ANYWHERE IN A GIVEN TIMEFRAME, IT IS TIME TO EXIT.

    NEVER TAKE A BIG LOSS. ONLY A BIG LOSS CAN HURT YOU.

    MAKE A LITTLE BIT EVERYDAY.

    DIG YOUR DITCHES. DO NOT FILL THEM IN.

    HIT SINGLES NOT HOME RUNS.

    CONSISTENCY BUILDS CONFIDENCE AND CONTROL.

    LEARN TO SWEAT OUT (SCALE OUT) YOUR WINNERS.

    MAKE THE SAME TYPE OF TRADES OVER AND OVER AGAIN. BE A BRICKLAYER.

    DO NOT OVER-ANALYZE. DO NOT PROCRASTINATE. DO NOT HESITATE. IF YOU DO,YOU WILL LOSE.

    ALL TRADERS ARE CREATED EQUAL IN THE EYES OF THE MARKET.

    IT IS THE MARKET ITSELF THAT WIELDS THE ULTIMATE SCALE OF JUSTICE.

  • Marian
    Reply

    Hi, Steve,

    I have a very tough time understanding when to fade or when to play a breakout. It would be great if we could see a video of how a professional does this. What hints do you look for on a chart, exactly?

    Thank you!

  • Interceptor
    Reply

    5 minute nightmare, more like!

  • lilinman
    Reply

    it’s been quite sometime you posted new articles.i really treasure your insight.do post more articles.great stuff man.

  • barley
    Reply

    What a great blog, interesting topics! I love reading this material.

    Trade Barter

  • Victor
    Reply

    Man, you rock! I just read your book carefuly and just made 59 pips in a couple of minutes using that info. Plus, I forecasted the 1.5000 bounce on GBPUSD today and 135.50 bounce on GBPJPY. These support and resistance levels are awesome.

    Good luck and hope you’ll write more soon.

    Cheers,
    Victor

  • Anonymous
    Reply

    BRV.. u still around? miss ur posts alot!

  • Anonymous
    Reply

    Position trading ……
    Alway try to turn a scalp into a swing into a position trade

    I have capital to invest and no safe place to put it. Only safe place seems to be on the correct side of a decent trend .

  • bgin2end
    Reply

    Wow – first time reading your stuff and I must say I’m having a hard time stopping. I need to get to work, but I’ll pick up more tonight… Thanks.

  • Anonymous
    Reply

    HI BRV,

    Any chance You’re still here or just call it quits?

  • Anonymous
    Reply

    Nice system. Any updates on how you have been doing since the last post?

  • LaMothe
    Reply

    Binary trading forex i did really well at first then i got on a bad loosing streak. do you do any binary trading and do you have any advice?
    Tony

  • Anonymous
    Reply

    Thanks but I'll stick with the no brainer lists.

    re: The 25 Point Mantra Discipline for Day-Trading by Doug Zalesky

  • Steve
    Reply

    Great advice at the end. I have had some bad trades lately after a winning streak, and I feel I just need to take some time off to get re-focused.
    Steve
    The4xJournal

  • leigh
    Reply

    Hi Steve
    Getting back to you on streaks, I need some advice. I can trade solid for 3 months or 6 months and trade in a placid manner, making steady gains. But over the past year and a half I have had 2 awful drawdowns. One bad trade after another, using more and more risk and complete lack on self control and discipline. Every thing goes out of control and I do things that I normally wound’t do. I know what I am doing wrong but I can’t stop myself. It’s like i am on a diet and I’m stuffing myself with meat pies and KFC chicken at once. I know you say walk away and take a day or week off, to realise what you are doing before it all goes haywire which is fine. But I struggle walking away. Are there any alternative methods that you have seen in the past? I would like to trade with someone so this doesn’t happen and I am more accountable with myself, but I am struggling to find traders to trade with. Would like some advice if there is anything different from above.

    Leigh

    • Steve W.
      Reply

      You are definitely not the first person that has told me something like this – last person I spoke to with this issue really just needed to step away for more than a few months. When things get so bad you really just need to cool off, a lot, and take it easy. Are you generally an anxious person? If so, then you are probably right and might need someone to basically put you on a leash. Either that, or find some basic charting tools and stick to one strategy, and it absolutely must have good risk reward with no exceptions. I think people worry far too much about reaching goals that are unsustainable in the short term. This of course tends to have the opposite effect and our brains need rest from activities just as much as the rest of our body does sometimes.

      • leighdmcmillanLeigh
        Reply

        Thanks for the reply, Am I an anxious person? no far from it. I am a relaxed person generally, and nothing really bothers me if you get my drift. But in this instance I was a anxious person on steroids over this trading period. I have since put a chain around my neck and got someone to hold the leash to make sure so this doesn’t happen again. It is not an ideal scenario, but at the end of the day it’s going to help me from these bad drawdowns so I cant complain. Unfortunately trading is going to keep throwing hurdles at me, this one has definitely been the biggest slap in the face, or maybe I should say I was throwing the hurdles at myself.
        Reaching unsustainable goals? well to be honest this in some form was part of the problem. Instead of being content of where I was before this whole collapse, I kept striving for better gains maybe with a fatigued brain. But I believe tall poppy syndrome may have been part of the problem along side this. I have had it a few times now where i get this feeling inside like I am just don’t deserve the money I am making. Then I find myself in a hole that I cant get out of.

        Anyway enough of my problems, keep up the good work Steve.

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