The Right Approach and Mindset to Trading the Financial Markets
Hello traders. Welcome to the Pro Trading course, and the first module introduction to trading like a pro. In this lesson we are going to look at the right approach and mindset to trade in the financial markets. Now, this course is based entirely to teach you how to become a professional forex, futurist or options trader. The bases are the same and the first step you need to take into this path is look at the right mindset or look at the trading psychology behind trading like a professional. So if you are looking make in trading in the market your livelihood, first you need to have the right mindset when it comes to trading, when you are sitting in front of your charts. Having the right mindset means not to let your emotions get the better of you. A trader is a cool-headed person that calculates risk, alright? A trader or a professional trader does not take positions based on their emotions. That’s the first rule. So if you are letting your emotions get the better of you, then you are going to lose money in this game. So you need to stay disciplined, cool-headed and in control all the time, because a series of bad trades can seriously hurt your account, and a series of bad trades are based on decisions made under the influence of your emotions can seriously, seriously, well, it can even take you out of the game completely and wipe out your account. So you have to be very careful when it comes to the trading psychology and the right mindset that you need to have in front of your charts. Now, the emotions that can influence your trading are fear, greed, and anger, right? We are going to go through every single one of them in the next slides.
Losing control over these negatives emotions can influence you on not making a calculated and objective decision, and this means that when you are not in control of your emotions and trade in the markets, these can lead to a series of very bad trades and an awful performance, because you are, well your trading decisions are going to be based on emotions and you are not going to be making calculated and objective decisions vis-à-vis your charts and vis-à-vis the market. And this is what the game is, alright? Making calculated decisions, not to let your emotions influence you. Now let’s start by looking at fear. When a trader experiences fear, he or she will close their trades too early in profit, leaving the rest of the money on the table, or too early in a small lose and just to the see the trade run on his or her favor. Now this is terrible, and the reason this is terrible is because when you close you trade, let’s say that, let’s take the example that you close your trade too early in profit. Well this is absolutely terrible because first of all you are going to leave a lot of money in the table. And secondly and most importantly you are not following your money management rules, which means that you are taking…which means that by taking profits too early your risk to reward ratio changes completely. And you might not be accounting for a greater risk than your total profit on the trade.
So let’s look at an example, and let’s say that this is the market that you are looking at right now. And you see that price is going down and that by all means this is not a trade example, this is an example of how fear can influence your trading. So you see that the price is stuck in this range, and then you see the spike above the previous high, for example. You decide to enter the market right here. So this is your entry and you have to choose a stop-loss, and of course you also to have to choose a target for the trade. Now what happens next? What happens next is that the price does move up, but it gets stuck in this little range right here. So you, out of fear, close your position too early because you are afraid that the market is actually going to go against you and hit your stop-loss. But, because your trade idea and your set-up was excellent the market actually hits your target and you leave all this money on the table, and when are talking about money management this is what we are talking about actually. When you enter the market, you have a 1 to 3 risk to reward ratio, this means that you are risking for example 50 pips to make 150 pips, alright? When you close your trade out of fear, you’re, well your risk to reward ratio decreases to a 1 to 1, or maybe to a 1.5 to 1, a 1 to a 1.5, alright?
Means that if you take too many loses the future profits are not going to be enough to get you back on the green. And this why it’s important to always follow your money management technique, alright? But I am getting ahead of myself, right now. And I just wanted to show you why you don’t want to let fear influence your trading decisions, alright? You had a plan, well, you act on it. You don’t close your position early because you are afraid. Now let’s say that you were afraid of this scandal and you closed your position too early here at a small lose because you saw this scandal, well moving down very quickly and abruptly. Well, the same was going to happen, you would have lost let’s say 10 pips and missed a rally of 150.
Now let’s go to greed. When a trader experiences greed he or she thinks that they can squeeze more money out of the market or out of the trade, not closing it at their calculated targets and the market might turn around and erase all their profits. Now let’s take the same example as before and let’s say that you took this entry with this stop-loss and this was your calculated target. You already know what happens, alright? The market hits the calculate target but now the trader gets greedy, alright? He or she thinks that market can go up and that is hopeful thinking, which is not a profitable way to look at the markets in the long run, alright? You are never going to take a position because you hope that the market is going to go up, alright? You are going to calculate your entry, I am sorry, you stop-loss, your target, and you are going to close your trades once they are hit. In this example, the targets were hits for a 150 pips, let’s say. And now the trader thinks that the market is going to go up, so he leaves the trade open, alright? He closes the target and leaves the trade open, and what happens next? Boom, the market does go up a little bit but then it erases all of the profits that he or she could have taken on the trade and now the price is at the entry point, alright? And this is what can happen when you are too greedy. And not only that, price can even go lower and hit your stop-loss, making an extremely profitable trade and turning it into a loss, alright?
Now let’s say, let’s see what anger can do to your trading. Traders can experience anger when a series of trades go against them. This is called a losing streak and don’t kid yourselves, you are going to get into some losing streaks. But in this course we are going to teach you how to correctly manage your risk, and how to correctly manage your money so that the losing streaks don’t affect your overall performance, and here is where they start to chase the market and not follow the rules in place for their setups. This is called revenge trading. Now let’s take a look at this example. Let’s say that on the previous setup you see the spike so you enter the market and you put your stop-loss right here, alright? But what happens here is that the market turns against you and hits your stop-loss, alright? This should be the end of it, alright? The setup was a good setup but sadly the market turned and hit your stop-loss. You have to come back and see if your stop-loss was tight, too tight or if it was correctly placed.
But in this case the trader gets angry, so because he was on a long trade and his stop-loss got hit he gets on an angry short, this means that because his stop-loss was hit on a long trade he thinks that the market is going to drop and he wants his money back so he gets on an angry short and he puts and angry stop-loss right here. What can happen is that the market can reverse on him and hit his stop-loss again. That’s two losses in a row when the trader should have been cool-headed and discontinue trading activities on this chart when the first stop-loss was hit. Now the trader is completely angry, alright? And because he was on a short position, on an angry short and his stop-loss got hit he now thinks that his first idea was the correct one, alright? This black entry right here, so he goes long again, on an angry long and he puts an angry stop-loss incoherently right here because there is absolutely no reason to put your stop-loss at this level. What happens next is that the market does go up but then comes back and hits his angry stop-loss for a third trade, or a third losing trade in a row. So you see if you revenge trade or if you chase your losses because you are angry that you first stop-loss got hit you can very quickly erase your account. So a trader must maintain a cool head, be disciplined and in control all the time.