Working With Your Directional Bias

Keeping an open mind and staying available for valid trading opportunities.

It is common to hear traders say they are “bearish” or “bullish” on a certain currency pair. This is often warranted due to the current fundamentals but it is important to keep an open mind with regards to what can happen next. Great buying opportunities can often present themselves when everybody is screaming sell and vice versa.

You may be interested in this free course that covers trading psychology. 

- Always do your own analysis.

It is important that traders do not “curve fit” the current market conditions to fit in with their analysis. When glancing over the charts it is common for people to see what they want rather than what is actually happening in the here and now.

It is always worthwhile spending some time before the trading week begins examining the price action to tune-in with current market conditions.  The last thing we should be doing as traders is taking someone else’s opinion as a fact and allowing it to give us a bias without, ultimately, running through our own top down analysis process.

Going into a trading session with your own plan based on detailed technical/fundamental analysis or market sentiment is a different proposition though – as long as you have a flexible approach and recognise when you have got it wrong.

- How do I keep a flexible mindset when trading?

A solid understanding of price action analysis can be of great help with regards to this particular challenge. It is important to be able to quantify exactly why you think the market is going to do something at a given time rather than putting it down to a “hunch” or “a feeling”.  Feelings are not the most reliable indicators of future price direction when we are dealing with fear and greed during trading. If we can identify why we have formed an opinion we can subsequently identify when this opinion is no longer valid.

If you have a feeling that something is going to drive price in a certain direction there is usually a solid underlying reason for this. If there is any doubt in your mind as to why you have this bias conduct your top down analysis again.  Let’s look at how this can be broken down.

Ask yourself probing questions at the start of each trading session and document your findings.

Here’s an example:

Q. Do I have a bias going into this trading session?

A. Yes the market looks bullish and set to break out of the weekly range.

Q. Document the conditions[s] that have given you this bias.

A. Break of a trend line and subsequent rejection candle (price action).

Q.What timeframe is this bias applicable to?

A.Daily time frame.

Q. What would it take to invalidate this belief?

A. A close below the rejection candle.

This is a very simple example for the purpose of illustrating the point.  A more complex scenario could have multiple dependencies which, when aggregated, make the trader bullish or bearish.

The process of identifying and then crossing out any negated elements gives a common sense method for justifying a bias and understanding when it is no longer valid.

Constantly question your bias.

As the session progresses it can be worthwhile repeating the exercise as new information comes to light.  Ask yourself is the market trending up, down or in a consolidation period and why you have a bias leaning towards any of the aforementioned market phases. 

Make sure you have identified the correct time frame for your bias as it is no use being bullish on the weekly timeframe and becoming frustrated when a 1 hour timeframe trade doesn’t move in your desired direction.

Exercises like these are particularly valid for impulsive traders and help reinforce discipline.

If you are not already doing this you may benefit from giving it a try yourself.

Good trading to you!

Trading Discipline – 5 Things To Focus On Now

Trading discipline – the basic elements

This post is to remind us of the trading discipline basics and can be used as a quick checklist.  Forget about your preference for MACD versus RSI for 5 minutes and ask yourself if you are taking care of these vital areas.

1. Respect your stop loss.  Have you moved a stop loss recently after entering a trade?  Stop losses should always take us out of the market when the trade signal has been invalidated. The fact is, each and every trade will go wherever the market wishes to go, irrespective of our expectations and desires. It is not unusual for ideal trade setups to be unsuccessful with no particular explanation. Traders should only ever be trading an edge and not be overly concerned with an individual trade.
2. Get a trading plan together and make sure you adhere to it. What is your trade plan?  How do you deal with event risk, money management etc?  You might be in serious danger of blowing your forex trading account should you not fully understand this prior to taking the trade. Describe your trading strategy in advance and don’t veer from it.  See this post on writing a trading plan.
3. Do not over leverage on a trade. Trading with too much risk can impair our judgment. Its much easier to kill a bad trade when its only a small position.  We run the risk of becoming married to a trade idea when too much money is at stake.
4. Make sure your trading suits your lifestyle – not the lifestyle you were living a month ago.   Are you dabbling in the market when you don’t really have the time?  Successful traders specialize in a limited amount of setups and master them.  If you can fully master a modest amount of trading setups versus entering a trade when something resembling a trigger presents itself you may see your trading performance improve. 
5. Focus on yourself; don’t just focus on your trading performance. Work on resolving bad habits and the benefits can spill over into your trading.  Make sure you get a good nights sleep. You might end up being surprised just how it will help the bottom line and benefit your trading account.

Trading psychology is predicated on first having a profitable methodology

A mountain of literature has been written about trading psychology, and that oft-heard ‘d-word’: discipline.

Contrariwise, I’ve always been impressed by Gil Blake’s succinct, no-nonsense summation of the art of trading (as quoted in his interview in Jack Schwager’s New Market Wizards):

“[i]There are five basic steps to becoming a successful trader. First, focus on trading vehicles, strategies, and time horizons that suit your personality. Second, identify nonrandom price behavior, while recognizing that markets are random most of the time. Third, absolutely convince yourself that what you have found is statistically valid. Fourth, set up trading rules. Fifth, follow the rules.”1

Given this elegant, step-by-step formula, the entire literature of trading psychology ultimately resolves itself in those three final words, namely following the rules. But this is unconditionally predicated by the previous steps: establishing definitive rules — for entries, exits and trade size — that are based around non-random price behavior; and absolute statistical confidence that these rules deliver a winning ‘edge’. Anything less is mere guesswork.

It’s my view that there’s no ready substitute for this. Without total confidence in our method, maintaining any kind of discipline over the long term is going to be near impossible; we have no logical platform for dealing with the occasional sequences of losses that will inevitably occur. And how can we otherwise know whether these losses are a most likely a temporary aberration, or whether shifting market conditions necessitate that our method is in need of review, and possible overhaul?

The order of the steps is also significant: until we have our methodology in place, discipline is effectively irrelevant, as we have no rules to remain disciplined to.

Assuming that we’re willing to take demo (or ‘paper’) trading seriously, it can be helpful in allowing us to test our method objectively, providing us with confidence that our edge continues to operate successfully in real time, and under current (even if simulated) market conditions. It’s my view that folk who denigrate the value of demo trading — on the grounds that it doesn’t test emotional mettle — underrate the importance of first building a sound trading methodology.

Over the years I’ve had the privilege of communicating with a few successful veteran traders. And despite differences in their approach (one was clearly a ‘discretionary’ trader, for example), all described trading as a mundane, rote exercise: following the same well-worn steps routinely to deliver the same average result. A recipe of pragmatism and simplicity.

According to trading psychologist and author Dr Brett Steenbarger, “trading affects psychology as much as psychology affects trading”2. The lack of a proven profitable method can cause aspiring traders to make emotionally-based trading decisions. Consequently, they attribute their failure to their obvious lapses in discipline, when, unbeknown to them, this is actually masking their lack of trading knowledge and experience. That highlights another good reason why it’s important to have an unambiguous trading methodology: it makes it easier to pinpoint whether any shortcoming lies with the implementation, or in the methodology itself.

It’s my view that many folk attempt to circumvent psychological problems by seeking measured, textbook answers, when emotions are ultimately existential in their nature, and hence the only real solution is (as Dr Susan Jeffers might say) to “feel the fear and do it anyway”3. The only way to overcome fear of water is not to study swimming, but to take the plunge oneself.

Many trading-related problems can be alleviated, or even defeated, by applying a little self-honesty and common sense: if, for example, exits are our Achilles heel, then we can simply use automation (TP, trailing stop, and/or an EA) to manage our trades, and walk away from the computer. (And moreover, the only possible justification for micromanaging a trade is statistical proof that newly acquired information has invalidated the original trade parameters). As another example, demo trading can also help to demonstrate that a problem is rooted in a fear of being wrong, as distinct from a fear of losing money. Again, simple common sense.

As a final point, we can sabotage our trading by overleveraging ourselves not only mathematically, but also emotionally. If trading full lots makes us sweat bullets, then we must step down to mini-lots; it’s a case of knowing our personal pain threshold (which is generally lower than most folk think!), and staying well within it. We must know the worst-case risk before entering a trade; if we feel remotely uncomfortable, then we either downsize accordingly, or don’t take the trade. As the maxim says: “scared money never wins”.

We can make trading psychology as simple or as complex as we want to. But we must not fool ourselves: only after proving that we have a real methodological edge should we ever start to look at emotions as the primary cause of any trading failure. If we don’t know how to trade profitably, then no amount of discipline, positive thinking or psychotherapy is going to suddenly make us a winner.

Trading Quotes

Well thought out quotes can inspire and educate.  These short inspirational quotes are some of our favourites.   Quotations like these can provide inspiration through words of wisdom from others who may have experience in areas we don’t.  You may want to spend some time compiling a list of trading quotes for yourself, or simply bookmark this page to read again as required, if it strikes a chord with you.  Keep checking back for other similar posts in the future.

We hope you like the following well known trading quotes (with a few not so well known one’s thrown in for good measure).  

Trading Quote 1

 When you really believe that trading is simply a probability game, concepts like right and wrong or win or lose no longer have the same significance.
Michael Covel

Trading Quote 2

 Traders are paid for doing the right thing, not paid an hourly rate. 
Unknown

Trading Quote 3

 Amateurs traders want to be right. Pro traders want to make money. 
Unknown

Trading Quote 4

 If you want better results than the crowd, don’t trade like they do. 
Unknown

Trading Quote 5

 Time is your friend; impulse is your enemy. 
Jack Bogle

Trading Quote 6

 Trade with an edge, manage risk, be consistent, and keep it simple. 
Curtis Faith

Trading Quote 7

 Human emotion is both the source of opportunity in trading and the greatest challenge.
Master it and you will succeed.
Ignore it at your peril.
Curtis Faith

Trading Quote 8

 The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading.
Trader Vic

Trading Quote 9

 Don’t cry over spilt milk (trading losses), go find another cow (trade). 
Unknown

Trading Quote 10

 Successful traders need to know when to be in a trade;
They need to know when to not be in a trade;
Most of all traders need to know when to get out once they are already in a trade.
Unknown

Enhancing Trading Performance Through Meditation

Stress and mental pressures are an every day reality of trading the markets.  Our ability to deal with these emotions can have an impact on our bottom line.  How do you deal with losing trades?  How do you feel after closing out a winner only to see it run another 200 pips minutes later? Do you revenge trade after a losing trade in an attempt to win your money back? 

It is my opinion that there aren’t many traders out there who can honestly say they have not succumbed to the above. Realistically, these kind of scenarios can be very stressful, especially when the trader in question is experiencing a bad run of losers.  What separates the winners from the losers is how they deal with the inevitable adverse situations which often occur when trading the financial markets.

What Is Stress?

The natural stress we experience is designed to help us escape from physical threats. One of the easiest ways to envision how stress affects us is by imagining your ancestors being chased by wild animals.  The correct way for your body to respond to this life threatening situation is to give you a scare and alert you to the impending danger. This comes initially as your brains HPA system (Hypothalamic-Pituitary-Hdrenal) activates.
A release of Hormones follows including Cortisol which is designed to help you deal with this threat quickly. There is also a release of Neuropeptide S which modulates stress and makes us more alert (this also has the affect of decreasing sleep). All us this happens in order to help us get the heck out of a danger situation, as our blood is flooded with cortisol and adrenaline.  The problem comes when we allow ourselves to get into a stressed state of mind when the situation does not warrant this kind of reaction.

Can Trading Performance Be Enhanced Through Meditation?

If a trader allows themselves to get too stressed the negative affects include suppressed activity in the frontal brain area, this is associated with important things like shorter-term memory and rational thought. Needless to say that a rational mindset is a prerequisite of trading well in the long term.  The “fight or flight” reaction also interferes with our capability to deal with various intellectual tasks and behaviours as the stressed state manifests itself.  Energy is taken away from important functions, including the immune system, which can obviously have a detrimental affect on our wellbeing and trading performance.
There is a way to counteract this though.  Meditation and mindfulness helps with stress management and evokes a relaxation response as our heart slows down. This helps the body recover and the digestive system once again functions while the body repairs itself.
Aside from the aforementioned benefits, learning how to focus our mind is essential as traders; the ability to resist distraction through focusing our mind is associated with impulse behaviour (think impulsive trades versus well thought out trade ideas) and emotions (think revenge trading).
A study from 2010 looked at the WMC (Working Memory Capacity) of Marines who were taught mindfulness meditation prior to deployment in Iraq. The study concluded that the marines who were not taught how to meditate experienced a diminished WMC, the study established that the Marines who were practising meditation, for an average time of 10 minutes per day (over a 2-month duration), maintained a healthy WMC and experienced additional positive benefits (1). With this in mind it seems reasonable to assume that mindfulness and meditation can be of benefit for traders who encounter stressful situations on a daily basis.

Self Control And Trading

Self control is another area that many market participants are lacking in.  Ultimately traders are doomed to fail over the long term if they can’t exercise self control when trading the markets. Traders need to stay involved in the process of trading, stay in the moment and be mindful.  Let’s once again look at meditation and think about how it could be of benefit to traders.
The process of meditating has the practitioner concentrating on the breath.  As thoughts come in to our mind that may be more attractive than the breathing we are focusing on, we are training ourselves to re-engage with our mindful thoughts and return to thoughts of the breath.  A parallel can be drawn with having a trading plan, and resisting the temptation to veer from this plan if situations arise which appear to be attractive at the time (in the heat of the moment).
Yale researchers established that a 1-month mindfulness training routine brought better results than the ALA (American Lung Association’s) recommended treatment path for quitting smoking. This study was conducted over an average period of 4-weeks and participants managed to cut down their smoking intake significantly with many quitting completely.
Researchers have found that people who practice this kind of meditation increase the flow of blood to part of our brain which is essential for self-control, this is called the anterior cingulate cortex.  This benefit is said to come after having just five 20-minute sessions.  Once again it seems reasonable to draw a parallel with breaking negative patterns like smoking and negative trading habits including over trading, impulsive trading etc.
Ultimately trading success is heavily dependent on your psychological state of mind after a winning strategy has been discovered.  With this in mind it is surely in our best interest to investigate any edge that sets us apart from other market participants, including mindfulness and meditation.