Blog_MasterTraderMindset-(1)

Traditional trader training goes something like this:

  • learn a setup
  • play the setup everywhere you see it
  • make sure your returns are at least twice your risk

There are countless outlets that attempt to “educate” aspiring traders, showing them “how easy” trading can be if you simply follow a precise set of rules. But this also goes for aspiring traders that know better, that avoid the sales pitches and that understand there’s nothing easy about trading. They also fall victim to the notion that consistency is achieved by following a mecchanical set of rules.

I should know…during my own learning curve I have probably hit more dead ends than most other aspiring traders. But also, while coaching other traders I see this same temptation to “hide behind a process”. And where all this leads is to focus on the rules and not on the person executing the rules. You can’t learn to trust yourself by simply following rules that someone else gave you.

If you’ve been constantly trying to perfect a decision making process…if you believe that successful speculation is about creating a mecchanical set of rules to follow…or if you simply can’t find the courage to follow your rules, then read on.

Let’s discover how to align our “gut” with our mind.

Where Courage is Born

Do not “hide” behind a process, otherwise you will never learn to trust yourself. It is entirely possible to manage uncertainty and risk in a successful manner. It is entirely possible to be consistent without listening to “experts”. It is also entirely possible to be consistent with a very “simple” process. Especially on the retail side of things, less is more.

We need to devise simple yet elegant solutions for complex situations. And the financial market is a complex situation. Robust decision making, in such complex situations, doesn’t come from additional detail. Let’s take the “old” trader training as an example:

  • we learn a setup
  • we replicate the setup time after time
  • our results seem random and we lack consistency
  • we therefore lack courage in our own decision making because we’re trusting the process

What’s wrong with this picture? The underlying conditions that generate that setup are different than the underlying conditions that make the setup successful. Just that we have no real appreciation of what these factors may be, because we were “trusting the system” and there’s no “personal input”.

Courage means taking responsibility and using your own intelligence. The concept goes as far back as time allows, but was very much influential during the Age of Enlightenment, a philosophical movement which dominated the world of ideas in Europe in the 18th century which gave birth to the scientific method. Knowledge was gained and assessed through experiments and observation.

So the first main concept, in order to align your “gut” with your mind and gain courage in yourself is: observe and experiment (on a demo). When adopting methods of interacting with the market ask yourself:

  • what is the reasoning behind what I’m doing? –> write it down, see if it looks & sounds logical
  • why should it work? –> observe, test, experiment, discover if it’s robust or not
  • why may it not work? –> observe, test, experiment, discover if it’s robust or not

Abandon Certainty

The quest for certainty, in inherently uncertain situations like Life, Love, Earthquakes, Health, the Markets, is probably the greatest obstacle on our path to Courage and solid risk management.

Uncertain situations require a logical and quantative thought process, a sprinkle of intuition and heuristics (rules of thumb). What we need to reach is a “responsible use of heuristics”. This is what we can define as “gut feeling”.

It’s a feeling that we cannot fully explain…it just “feels right” or “feels wrong”. Surely there are some logical reasons for it’s existence but we cannot really put our finger on all the reasons behind it.  And we need to learn how to “train & trust” that feeling.

So yes, this might conflict with the current trend of “making decision making systematic”, “algo-trading” and permutations of these. But the most successful traders I’ve met, that have algos working for them, have made it very clear that they are not “married” to the algos. They know when to use them, and when to ignore them. They know when to turn them off. Why? Because of those “feeling”. Algos cannot “size-up” situtions like the human brain can. Through experience, we can filter good and bad situations in a more efficient way.

If we can learn to “train & trust” our gut feeling, then we will have an “internal filter” through which we can evalaute any given condition in any uncertain situation. In brief, we learn to trust ourselves.

The question remains: HOW?

The Power of Checklists

Recently I have coached a trader that has a good understanding of market dynamics, who doesn’t overtrade, who doesn’t push on his risk limits…and yet this student was in constant search of “approval” from me. The student wouldn’t trade unless, after a brief consultation with me, I gave “approval” by saying things like “yes, that looks like a good idea” or “yes, I’m watching the same thing”.

When I finally latched onto this issue, I started responding in a different way. To the question “I’d like to short Euro because of XYZ…what do you think?” I would respond with:

  • how does the background look?
  • is sentiment on your side?
  • what could go wrong?
  • what happens if you get stopped?
  • what happens if you don’t take the trade?

In brief, I started to adopt a “Socratic” method,  guiding my student towards using his own grey matter to recieve the approval he needed. At first, this was a difficult process because without my direct approval, the student would always say “what if I mess up?”.

“Messing up” or in other words “fear of making mistakes” is what blocks us from really exploring our full potential. If we cannot align our “gut” with our mind, we will never be able to “feel” the decision. And if we cannot “feel” whether the decision feels good or feels wrong, we’ll never be able to trust ourselves. It is as simple as that.

So with my student, I explored “good mistakes” and “bad mistakes”.

  • Good Mistake: the trade ends out in a loss that we could not have foreseen. We made a good call, just that it was one of those occurrances. The only thing to do is cut the loss, make sure we didn’t move our stop, make sure we continued to observe the market through an objective viewpoint.
  • Bad Mistake: the trade ends out in a loss that was avoidable. We didn’t follow our pre-trade checklist (for example, taking a setup without judging the background conditions). We didn’t use our common sense (for example, trading before NFP). We didn’t use logic (for example, looking short when the market is in fact long).

Checklists help train our gut. By following good habits, based on experience, logic, lessons from peers, and common sense, we can guide our mind & body towards good decision making. The “process” is in fact a checklist.

The checklist helps us confront the markets from the same angle, time after time.

The checklist helps us gain relevant, specific experience.

The checklist helps us memorize situations that are always very similar in nature, but that differ for one reason or another.

Our “gut” picks up on these sublte differences and “alerts us” once we have trained it sufficiently.

Over to You

Try it on for size. Use a solid, short checklist. Demo trade the same conditions time after time. Then start listening to your internal sensor…your gut.

Have the courage to believe in your own feelings.

Align your mind with your body.

I promise you, your decision making will never be the same for the better.

About the Author

Justin Paolini is a Forex trader and member of the team at  www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.