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Mental Analysis (Trading Psychology)
Adopting a trader’s mindset
There could be a huge gap between what a trader understands about the market and his ability to transform the knowledge to make consistent profits in the market.
What’s taught in school cannot be applied to trading. Data has shown that the largest group of consistent losers are doctors, lawyers, scientist,engineers, C level executives and entrepreneurs. So why is the brightest mind the consistent losers? Because they did not adopt a probability mindset and it is also due to their excellent ability to manipulate and control the environment to a certain extent according to what they want. However, none of these techniques work with the market and they failed miserably
Successful traders are made and not born. It is important to adopt the trader’s mindset. Trading is always about probability and not certainty. As traders we need to think in terms of probability and adopt a trader’s mindset which is thinking about potential losses first before thinking about potential gain.
The consistent winners always think differently.
The successful investors and traders are often greedy when others are fearful. They do not fear the erratic behaviour of the market. The successful traders set a stop loss for every trade and focus on making profits rather than on the information that reinforces their fears.
Better market analysis is not the solutions to becoming a more consistently profitable trader. It’s a trader’s attitude that determines the results.
Almost all traders use some form of technical and fundamental analysis to execute their trades.
Fundamental analysis is analysis of all possible variable factors that could cause an imbalance in supply and demand for a stock, commodity, currencies or any other financial products. Using Mathematical models to weigh factors such as interest rates, balance sheet, the analyst projects what the price should be at some point in the future.
Technical analysis is the observation of the collective behaviour patterns of traders and investors and such behaviours repeat itself and gives indication to based on the patterns of past behaviours.
Technical analysis focus on what the traders are doing now while fundamental analysis focus on what the market should be doing based on what is reasonable and logical backed by mathematical models.
When good traders take on a trade, they accept that the trade is not guaranteed and fully accepted the possible consequences of a lose. They are able to put on a trade without hesitation and get out of a losing trade without being emotionally sad or uncomfortable.
A good trader is confident when facing uncertainty and recognise the cold reality that every trade has an uncertain outcome.
When a trader thinks that the only way to become a profitable trader is to improve his analysis, he will try to gather many variables and tools but end up disappointed and feeling betrayed by the market.
Trading vs Casino Games
Casinos games have built in structures that actually make it less dangerous than trading. Take for example, we decide to play a game of roulette, the first thing we do is to decide the bet which is our risk. The end of each game causes the start of a new game. But In trading or investing, it has no formal ending until you decide to end a trade.
In conclusion, it is important for traders to adopt a probability mindset and think of any potential losses before any potential gain and put a stop loss not exceeding 1% of their capital for every trade. Good Traders believe that they can achieve an edge over a large number of trades by applying good risk management, money management and technical skills.
Take for example, in the screenshot above, if I think that Gbp/Usd is coming down because it is near resistance area , how do I to adopt a probability mindset?
I will sell Gbp/Usd at 1.24223 and put a stop loss at 1.2461 if resistance is broken and target a profit of 1.2330 at the next support level. In this case, I know that in the event if I am wrong, I will lose
1.2461-1.24223= 38.7 pips. This means that if I am wrong I will lose $3.87. In the event if I am right, I will make 1.2461-1.2330 = 131 pips which is $13.10
My risk will be $3.87 and my reward will be $13.10
My risk to reward ratio will be 3.87/13.10 = 1: 3.38
This is known as adopting a trader’s mindset and think in terms of probability
Traders should always think of potential losses before any potential gains.