Hello Traders

Many traders are at a loss when it comes to trading. Literally and metaphorically speaking. They know how to trade, they are even experienced enough to be awarded a PHD in trading, yet they still don’t manage to keep their profits. 

I mean, it’s so simple, let your profits run and cut your losses short. Which trader in their right mind wouldn’t want to do that? Yet it seems to be one the hardest things to do. Isn’t it that your mind wants one thing but your emotions ‘make’ you do another? Seriously, is that crazy or what? 

What I keep seeing again and again is that one major influencing factor is definitely the trader’s relationship with money. Think about it, what is at the core of trading? What is the essence? Money, right? 

Are you truly aware of your own money mindset and it’s effects on your ability to reach your trading goals? What did your family and wider circle of influence say about money? What was their experience with money? 

You see, our adult self is in trading in order to be rewarded better than it would be possible  any conventional way. We strive for a sizable income to provide a better lifestyle for our kids, families and of course enjoy financial freedom and leave that place of financial pain. 

Most traders try so hard and even giving it their all, they still never make it. So sad and so unnecessary. 

In my opinion the very first topic to explore for every newbie trader should be their relationship with money. 

What Is Your Relationship With Money?

All of us have a relationship with money.. good and bad. This is called ‘money mindset’. Your money mindset determines how much profits you are able to keep without sabotaging your efforts with stupid losing trades. (not talking about the ones where you faithfully followed your system).

Many traders have blockages when dealing with money. You might fall into the camp that shies away from even wanting to think about finances, with the mere thought of sitting down to properly assess your financial position sending you running for the hills.

Or you are one of those who get itchy the moment they have money. You can’t spend it and get away from it quickly enough, like someone who has bad breath.

Or maybe you see money as something positive and like to be around it, yet your priority is to treat your loved ones to gifts or holidays, and once again you aren’t able to keep money in your bank account for very long.

Or you might be in another camp. You are aware of where every single penny is going, spend wisely, and you’ve made meticulous plans for your and your family’s financial future.

No matter how much money you have, there is always a sum saved somewhere ‘just in case’. You have a positive mindset, choosing to keep hold of as much as you can for as long as possible whilst meeting your responsibilities on time every time. Your relationship with money is a good one.

So, what separates the two?

Your Money Mindset!

 If you for example grew up with a ‘us and them’ experience of wealth, those early experiences will affect how you view your personal wealth as your adult self.

If you grew up hearing phrases such as ‘we can’t afford it’ or ‘look at him in his flash car… (he things he is better than us)’ anything that creates a sense of something that seems out of reach or a feeling of contempt, you may have been left with a sense that rich = bad.

I am sure you are aware of how cartoons or modern children shows such as the enormously successful Saddle Club show rich people as heartless, mean and often cunning and therefore are being separate and not excepted by the girls who are having close friendships and fun, so they are essentially expelled from the herd whilst the poor people are the nice ones who have lots of friends and fun.

Unfortunately I can’t make a general statement that ‘rich’ people are all nice and considerate, there are a lot of people who display their riches with an obnoxious attitude.

And whilst there are mean, heartless rich people out there  there are also mean and heartless poor people just like there are many kind hearted and generous rich and poor ones. Money is kind of like the gun, it is not the gun that kills it is the person who uses the gun.

The question is how will your attitude be once you are extremely wealthy?

Most people never investigate their beliefs about money, so, all the time you are struggling financially, you feel good about yourself. Your financial challenges fuel your self-image.

But as soon as you start getting paid what you’re worth, and accumulating wealth, the guilt kicks in, you feel unworthy of the increased income, and your child self worries people will think you are not a nice person anymore and will lose all your friends.

So, your child self gets rid of that wealth, putting you right back into your comfort zone of financial struggle.

If you are wondering why you are making good profits in your trading but still battle off those mindless losing trades that destroy your trading account, ask yourself if it could be your negative money mindset that is behind this behaviour?

But like any self-limiting belief, you have the choice whether to allow your negative money mindset to carry on hurting your trading bank or not. You can choose to leave it in the past where it belongs.

If you are striving for financial freedom but finding it difficult to get to where you want to be, you may need to work on your money mindset. Only then will you be able to grant yourself permission to attract the financial stability you desire.

Working on your Money Mindset

 Therefore the best place to start cleaning up your trading house is to start investigating your relationship with money. If you want to create consistent profits and a nice uptrending income curve, you must understand the quality of your emotional attachment to money.

The first step is to go back in time and remember an instant when you made a lot of money and when you lost a lot of money. How did you react to making or losing money? How did you feel? What did you say to yourself? What did you do?

How do you feel about money in general? What are your believes around money? How do you react to losing money and making money?

Ask yourself some simple questions, and answer with the first word that comes to mind (no matter how weird it seems to be):

1. What does money mean to me?

2. How do I feel when I lose or make money?

3. How and where did I learn the value of money? Who were my role models and what do they believe about money?

4. How and where will I get the money I am trading with? And what does it mean to me?

I hope this was interesting and useful for you. With a toast to your trading profits

Mandi.

P.S. If you need some help discovering your money mindset and what causes you to self-sabotage your trading success, why not book a coaching session?

Hello Traders,

I have recorded a little video with three strategies that I like to use to trade FX News Events with relative safety (well if you are disciplined of course). Please remember this is not trading advice, simply sharing some of my own proprietary trading strategies…

Mandi

https://pepperstone.com?a_aid=hpt

Trading is not just about finding good entries and good exits, the best methodology is not worth a cent if you don’t know when to accelerate and how to use the breaks just like when driving a Maserati if you don’t accelerate this powerful machine wisely and know how to use the breaks, you will crash and burn.

You see, after working with hundreds of traders and reviewing their trading performance it is apparent to me that when traders talk about lack of discipline what they are really talking about is their inability to apply prudent risk and money management rules. That’s why in our next live trading night on Friday August 30 we will delve further into this topic and go through the practical application of money and risk management parameters, and how to easily calculate the correct position sizing.  

Certainly in my experience of trading and coaching this is one of the severe gaps that traders face: the theory seems simple and straight forward but the practical application is far more complex.

Risk Management really needs to address two potential sources of risk: Market risk, meaning that price is not behaving as expected and the risk of self, meaning that you as a trader don’t behave as required, i.e. not being disciplined in taking losses quick enough or taking profits too early. In my opinion the lack of discipline is due to irrational thought processes of ‘not wanting to lose money’, the Nick Leeson effect as I like to call it, meaning that we don’t want our spouse to know that we ‘stuffed up’ and also we want to be successful and have a better life enriched with freedom and choice and this dream seems to be threatened when taking a loss. All these unproductive thought processes are taking place in the part of the brain called the ventral striatum (as explained in last month’s newsletter).

Many traders consequently believe that they have emotional or trading psychology related challenges with their trading when in reality they just don’t have proper risk and money management strategies in place that are suited to their trading style and size of trading bank. This is what I call the ‘competence gap’.

The solution to move the thinking processes from the ventral striatum to the origin of logical thinking, the frontal cortex. This can be achieved simply by turning the focus back on the processes and numbers of your risk and money management strategies.

To give you an example, the traders of my high performance group have to fill in a business trading plan. Without fail every trader so far has used a 1 – 2% risk rule. But when I review their trading performance over the weekend, at the beginning 98% of traders let their losses run beyond the 2% with the exception of a few, and guess what, they are the ones who are consistently profitable.

When I ask for the reasons why the don’t follow their own rules as per their trading business plan, the common excuses are:

–      I use a technical stop loss and that’s why I can’t keep the risk %.

–      My account is too small, so if I only use 1 – 2 % I couldn’t trade

–      If I only use 1-2% risk then I will never make enough profits to live of it.

–      I wanted to take my loss but it looked like it would turn around any minute so I was hoping to get out at a better price

–      Price had a massive spike (mostly my gold traders suffer from that!) and that’s why the loss is bigger than anticipated.

The response I give in such cases is: “So, if 1 – 2 % is not working for your trading system, account size, market of choice, why do you put it into your business plan in the first place?” and interestingly enough the reason is because they have read somewhere that this is what risk management is supposed to be so they adapt it without even investigating if it is suitable for their own style of trading.

It seems that most traders actually don’t have clarity around what those numbers mean.

There are several ways on how to calculate how much money to risk per trade. One is a fixed percentage of the original account size. To illustrate I used a $1000 trading bank, so it is easy for you to mulitply this figure to your trading bank accordingly: 

This illustrates perfectly that it is still possible to eliminate a trading account simply by using the wrong ‘Trade Size’ (or position size), and how crucial it is to always focus on capital preservation to ensure a future in trading.

Another way is to calculate a variable percentage of the total account size at any point in time which is also called ‘capital adjusted risk’.

Now that we know how much money it would be prudent to risk, let’s have a look at the concept of risk reward ration.

The RR ratio is calculated simply by dividing the expected profit (=reward) by the amount of money you believe is prudent to lose according to your calculations based on the tables above (= risk).

Reward / Risk = Reward to Risk Ratio

$200 / $100 = 2:1

$300 / $100 = 3:1

The reason why the Risk and Money Management can be confusing is because the calculations vary depending on your strategy, if you are a scalper, a swing trader or hold positions longer term, the market volatility, the time frame you are trading, the size of your trading bank, the size of your average win, the size of your average loss, your win loss ratio etc. So for example, if you have a lower win loss ratio, such as 60/40 then your Reward to Risk ratio must of course be higher in order to make up for the quantity of losses.

So, you can see there is a lot to consider when it comes to risk and money management.

I hope that was interesting and useful for you too and maybe I see you on Friday for the Live Trading Night.

With a toast to your trading profits

Mandi Pour Rafsendjani

How To Develop More Self-Control And Make More Profits

Self-control is more accurate than IQ at predicting trading success and there is a perfectly logical explanation for it: Research has shown that certain areas of the brain are responsible for high vs poor self-control individuals, there are two brain systems competing to control your behaviour! The pre-frontal cortex is more active for high self-control whilst the ventral striatum is more active in people who show low self-control.

The prefrontal cortex appears to play a major role in cognitive reasoning and planning – highly active in people with good self-control. In contrast, the ventral striatum is part of the brain’s reward system and its over-activity has been found in people who suffer from addiction.  I am not an expert but I think a lot of traders show unhealthy addictive behaviour when it comes to their trading. High striatal activity is generally seen in those with low self-control.

Self-control means that you are inhibiting an automatic response driven by urges and temptation with an intentional controlled response driven by logically assessing probability of future outcomes based on current behaviour. So this is a classical case where emotions override logical thinking.

There are many terms that are used to describe self-control: will-power, inhibitory control, self-regulation, self-discipline, ego strength, executive control etc. They all describe the fundamental control process of the brain: you have a predisposed or default tendency to carry out a certain behaviour that at first is rewarding, but you are able to prevent that behaviour from happening and instead do something else in a more controlled manner because you know the reward would be short lived.

What is Self-Control and why is it so challenging?

Self-control is often described as being a conflict between instant potentially damaging urges and temptations and healthier long-term goals. This conflict is caused because the automatic response is triggered by the promise of short term instantaneous rewards but usually has unwanted long term consequences.

Eating lots of fatty and sugary foods is an obvious example – it tastes good now, but the cholestorol can kill later. Another example would be shouting at someone who annoyed you; it might make you feel better in the moment, but probably will threaten the quality of your relationship in the long term.

And self-control or rather the lack thereof is also to be found when letting losing trades run into the ouch spot rather than cutting them sharply and swiftly and then moving on to the next trade. When things get tough the default tendency is to give into the urge (easier to give up, harder to persevere), whilst the controlled response should have been to push through the temporary discomfort of pressing that mouse button – in the knowledge of the benefits of a more pleasant future outcome.

So in the context of our losing trade paradoxically it seems to feel better to let the losing trade run. There is always an element of uncertainty about what will happen and that uncertainty is a breeding ground for hope that it will turn around in your favour. Hope is also very short sighted, seeing the bigger picture would mean doing what ‘feels’ uncomfortable, setting an end to hope and actually pressing that mouse button to close out the trade, collecting your thoughts, re-building your focus and your energy to then freshly move on to the next opportunity. But it feels worse after the account has been blown up and the goose that lays golden eggs (aka your capital) is now road kill.

We all have a ‘moral’ compass to guide the more useful behaviour. We all have a sense of what behaviour is more beneficial in the long term yet there is a conflict between the short term reward system in the brain and the long term cognitive control system. So the trick is to learn to distinguish between both and to then learn how to apply either one with volition.

The Really Good News

Now that we know the causes of high versus poor self-control, it means that you are in control of which one will drive your choices in life. You can train and develop self-control and become increasingly better at it through practice. Or to say it in more scientific terms: You can improve the cognitive control abilities of your prefrontal cortex and in so doing enhance your ability to manage your self-destructive urges and temptations.

So, the good news is it can be learnt. But you have to keep working at it. Aim for small wins over time. Every time you are successful at controlling an impulse then you become stronger for the next time. And as you become better at self-control, then you are developing a better future for yourself and those around you.

Taking Control: Will Power versus Brain Training

So how do you go about developing your self-control?

Most traders try to do it the hard way: They try to gain control, by trying to defy their default tendencies of ‘wanting to do what feels good in the moment (=urge)’ with willpower. They keep telling themselves that they must try harder to be disciplined.

You don’t know how often I hear traders say, “I just have to be more disciplined” but discipline is simply an outcome of logical thinking that override those emotionally based urges and temptations. We all know that discipline is a fickle beast it cannot be tamed with willpower. That is why most traders often stay stuck in unprofitable trading behaviour for many years.

Also, the ability to control ourselves with willpower fluctuates tremendously during the day. Will-power is like a muscle: it needs developing through practice, and it requires energy to function. It also gets tired and fails. And it is a lot of hard work

There Is An Easy Way.. 

There is a much easier way: work on your brain’s executive control by controlling the way you are thinking. This is a more sustainable surefire and proven way to consistent profits.

So what usually happens you have set up a ‘pre-commitment’ strategy (for example putting in your stop loss order) that allows the executive system to make the decisions ahead of time, so that the lazy temptation system in your ventral striatum can’t hijack your good intentions later. But then the urge from your ventral striatum  hijacks your pre-commitment strategy. You either take your orders out of the system just shortly before your trade would have reached that price or you re-enter straight away after your trade has been taken out overriding any logical and technical approach.

So, in a nutshell the trick is to create new ‘healthy’ habits and thought processes, simple techniques that help to develop new defaults and override the old automatic almost paralysing behaviour.

You can prepare a way of directive self-talk called affirmations. Interestingly enough whenever I start working with a trader on their affirmations the majority would word it as:

“I never take my losses even though my trade set up has clearly failed. I am going to be more    disciplined and try to close out losing trades quicker from now on”

However, this is not the language the brain speaks. If you want your brain to understand what you want from it, then, whenever you feel the urge to try and recover a losing trade that clearly should clearly have been closed out, then:

a) first become aware of your thought processes and overriding emotions (best to write them down, you will be surprised what you to see what you are thinking!)

and b) tell yourself what you will be doing instead in a positive constructive and explicit way that will help to manage those unhelpful behaviours. You essentially write a new script for your brain and make that the new automatic thought process. 

So, for example, replace the thought: “Oh no, I don’t want to give all those profits back. A loss is only a loss when it is realised. Maybe I can recover it or at least get out at a better price when it retraces.” with “I want to conserve my capital which is my golden goose and enables me to continue trading. I will simply wait for the next great trade setup”.

Be more aware of when you get self-control system failure. Analyse what happens in the moment (thoughts, feelings, behaviours), actually become aware of the stories you are telling yourself and be honest enough with yourself to admit that it is counterproductive and uncomfortable but also know that once you learned how to use your brain differently you can actually create long lasting change and with that consistent profits.

I hope that was interesting and useful for you too and maybe I see you on Friday for the Live Trading Night.

With a toast to your trading profits

Mandi Pour Rafsendjani