Strategy Guide
Table of Contents
- Introduction
- Trading Plan
- Understanding Deriv Bots
- Trading Psychology
- Risk Management
- Common Trading Mistakes
- Recency Effect Mental Trap
1. INTRODUCTION
Hello traders, today we will be showing you how to use the [DTNexus] strategy to trade the markets using our binary bots.
The DTNexus strategy heavily relies on having a trading plan and enforcing Risk Management while trading. The reason why people tend to lose a lot of money or even end up blowing their accounts is because of various factors like:
- Trading without a plan or strategy.
- Greed and fear (trading psychology)
- Emotional trading.
- Ignorance of risk management.
TRADING ON DEMO ACCOUNT
Paper trading is something that most traders don't like doing before they first start to trade on real accounts because they want to get out there in the markets pulling in money. But it's important to test your trading methods first by paper trading as this will help you 'pull the trigger' and commit more easily to trades when the time comes to trade on your real account.
The main problem with paper trading though is that you don't get as exposed to the emotions of trading as you do when trading for real. Therefore, it can only prepare you to a limited extent.
2. TRADING PLAN
What is a trading plan?
A trading plan is an organized approach to executing a trading system that you've developed based on outlook while factoring in risk management and trading psychology. No matter how good your trading plan is, it won't work if you don't follow it.
What is the benefit of using a trading plan?
The key benefit of a trading plan is that it will help to CONTROL the emotions of fear and greed from your decision making. The other major benefit of a trading plan is that it provides you with an ability to monitor your performance, reflect on outcomes and refine your approach.
HOW TO CREATE A TRADING PLAN
HAVE A TRADING JOURNAL
Get yourself a trading journal and analyze it. Make sure you keep a record of your transactions in a trading journal.
The purpose of a trading journal is to build confidence in your trading system. When you trade with confidence you are able to trade objectively. Whenever you see your notes about the trade setup, exit, your emotions, you can analyze the strategy and your own state of mind. Besides, it helps you to manage your emotions and actions taken on the market.
TRADING PLAN
Trading Plan Blue print
- How much are you starting with = 200$
- Target per session = 20$ 1:1 40$ 1:2
- Stop loss per session = -20$
- Trading time = According you
| Day () | Runs | Time | Starting Capital | Profit | Equity |
|---|---|---|---|---|---|
| 1 | |||||
| 2 | |||||
| 3 | |||||
| 4 | |||||
| 5 | |||||
| 6 |
WHAT IS RISK TO REWARD RATIO
The risk/reward ratio marks the prospective reward you can earn for every dollar you risk on a trade. We use risk/reward ratios to compare the expected returns of an investment with the amount of risk you must undertake to earn these returns.
Consider the following example: a trade with a risk-reward ratio of 1:1 suggests that an investor is willing to risk $1, for the prospect of earning $1. Alternatively, a risk/reward ratio of 1:2 signals that a trader should expect to invest $1, for the prospect of earning $2 on the trade.
Consider the following example: a trade with a risk-reward ratio of 1:1 suggests that an investor is willing to risk $1, for the prospect of earning $1. Alternatively, a risk/reward ratio of 1:2 signals that a trader should expect to invest $1, for the prospect of earning $2 on the trade.
-20$ : +20$ -20$: 40$
1:1
Example:
- I want to make 20$, in return, I am willing to risk losing 20$.
- Thus my risk is 20$.
- Expected Profit is 20$.
- Risk To Reward Ratio: 20$ : 20$ , 1:1
SAMPLE OF TABLE CONTENTS
| Day () | Runs | Time | Starting Capital | Profit | Equity |
|---|---|---|---|---|---|
| 1 | |||||
| 2 | |||||
| 3 | |||||
| 4 | |||||
| 5 |
| Day () | Runs | Time | Starting Capital | Profit | Equity |
|---|---|---|---|---|---|
| 13/07/22 | 1 | 5.32 | 70 | 20 | 90 |
| 2 | 90 | 20 | 110 | ||
| 3 | 110 | -20 | 90 | ||
| 4 | 90 | 20 | 110 | ||
| 5 | 110 | 20 | 130 |
| Day () | Runs | Time | Starting Capital | Profit | Equity |
|---|---|---|---|---|---|
| 01/07/22 | 1 | 4.05PM | 130 | -20 | 110 |
| 2 | 4.25PM | 110 | -20 | 90 | |
| 3 | 4.50PM | 90 | -20 | 70 | |
| 4 | 5.15PM | 70 | 20 | 90 | |
| 5 | 5.35PM | 90 | 20 | 110 | |
| TOTAL | -20 |
| Day () | Runs | Time | Starting Capital | Profit | Equity |
|---|---|---|---|---|---|
| 01/07/22 | 1 | 4.05PM | 130 | -20 | 110 |
| 2 | 4.25PM | 110 | -20 | 90 | |
| 3 | 4.50PM | 90 | -20 | 70 | |
| 4 | 5.15PM | 70 | 20 | 90 | |
| 5 | 5.35PM | 90 | 20 | 110 | |
| TOTAL | -20 |
| Day () | Runs | Time | Starting Capital | Profit | Equity |
|---|---|---|---|---|---|
| 01/07/22 | 1 | 4.05PM | 110 | -20 | 90 |
| 2 | 4.25PM | 90 | 20 | 110 | |
| 3 | 4.50PM | 110 | 20 | 130 | |
| 4 | 5.15PM | 130 | 20 | 150 | |
| 5 | 5.35PM | 150 | 20 | 170 | |
| TOTAL | 60 |
| Day () | Runs | Time | Starting Capital | Profit | Equity |
|---|---|---|---|---|---|
| 01/07/22 | 1 | 4.05PM | 170 | 20 | 190 |
| 2 | 4.25PM | 190 | -20 | 170 | |
| 3 | 4.50PM | 170 | -20 | 150 | |
| 4 | 5.15PM | 150 | -20 | 130 | |
| 5 | 5.35PM | 130 | -20 | 110 | |
| TOTAL | -60 |
| Day () | Runs | Time | Starting Capital | Profit | Equity |
|---|---|---|---|---|---|
| 01/07/22 | 1 | 4.05PM | 110 | 20 | 130 |
| 2 | 4.25PM | 130 | 20 | 150 | |
| 3 | 4.50PM | 150 | 20 | 170 | |
| 4 | 5.15PM | 170 | 20 | 190 | |
| 5 | 5.35PM | 190 | 20 | 210 | |
| TOTAL | 100 |
A SAMPLE FROM MY TRADING JOURNAL
| Day () | Runs | Time | Starting Capital | Profit | Equity |
|---|---|---|---|---|---|
| 01/07/22 | 1 | 4.05PM | $200.34 | $20.10 | $223.82 |
| 2 | 4.25PM | $223.82 | $20.18 | $244.00 | |
| 3 | 4.50PM | $244.00 | $20.18 | $264.18 | |
| 4 | 5.15PM | $264.18 | $20.27 | $284.45 | |
| 5 | 5.35PM | $284.45 | $20.17 | $304.62 | |
| TOTAL | $100.90 |
| Day () | Runs | Time | Starting Capital | Profit | Equity |
|---|---|---|---|---|---|
| 02/07/22 | 1 | 12.40PM | $304.21 | $20.00 | $324.21 |
| 2 | 1.20PM | $324.21 | $20.25 | $344.46 | |
| 3 | 2.03PM | $344.46 | $20.02 | $364.48 | |
| 4 | 2.56PM | $364.48 | $20.02 | $384.49 | |
| 5 | 5.35PM | $384.49 | $20.16 | $404.60 | |
| TOTAL | $100.45 |
| Day () | Runs | Time | Starting Capital | Profit | Equity |
|---|---|---|---|---|---|
| 03/07/22 | 1 | 9.10AM | $404.60 | $20.05 | $423.54 |
| 2 | 9.50AM | $423.54 | -$28.03 | $395.51 | |
| 3 | 10.15AM | $395.51 | $20.10 | $416.61 | |
| 4 | 12.30PM | $416.61 | $20.16 | $436.85 | |
| 5 | 1.00PM | $436.85 | $20.10 | $456.95 | |
| TOTAL | $52.38 |
| Day () | Runs | Time | Starting Capital | Profit | Equity |
|---|---|---|---|---|---|
| 04/07/22 | 1 | 6.01PM | $456.95 | -$11.32 | $445.63 |
| 2 | 6.38PM | $445.63 | $20.01 | $476.13 | |
| 3 | 7.50PM | $476.13 | -$23.62 | $452.51 | |
| 4 | 11.20PM | $452.51 | $20.01 | $472.52 | |
| 5 | 11.51PM | $472.52 | -$14.31 | $458.21 | |
| TOTAL | -$9.23 |
| Day () | Runs | Time | Starting Capital | Profit | Equity |
|---|---|---|---|---|---|
| 05/07/22 | 1 | 7.20AM | $458.21 | -$41.92 | $416.57 |
| 2 | 7.50AM | $416.57 | $20.32 | $432.89 | |
| 3 | 8.14AM | $432.89 | $20.11 | $457.00 | |
| 4 | 8.30AM | $457.00 | $20.18 | $477.18 | |
| 5 | 8.54AM | $477.18 | $20.45 | $497.63 | |
| TOTAL | $39.14 |
KNOW YOUR RISK TOLERANCE
Each step in the trading plan is important, however, if risk management is missing, the whole plan will fall apart. In this step, traders will need to discover their personal risk tolerance which corresponds with how far a trader is willing to set stop losses when limiting downside risk.
Data researched, shows that in over 30 million live trades, it was discovered that traders with a minimum risk to reward ratio of 1:1 were three times more likely to turn a profit than traders without any defined risk to reward.
PLAN HOW TO HANDLE ADVERSITY AND SUCCESS
All traders will eventually experience the dreaded draw-down (continuous losses), so it is important for traders to set a few rules to follow once this happens in order to manage emotions.
An effective way to do this is to quantify an amount, or percentage loss, that would force you as the trader to take a step back. Do not fall into the trap of setting this figure along the way, rather quantify this upfront.
Now the good news – what to do when trades are successful. Confidence is good, but overconfidence can quickly turn winning trades into losing trades.
ROUTINE FOR STAYING ON TRACK.
Traders should set aside time to reflect on the week’s trades. It’s a good idea to regularly review the trading plan and make tweaks if necessary. Periodical trade review and journaling are excellent ways to ensure you are following the process outlined in the trading plan.
Trading plans should be rigid to begin with but should become a little more malleable as the trader becomes more familiar with the markets. The purpose of a trading plan is to give you a strong foundation and boundaries to operate within.
TRADING PLANS: A SUMMARY.
- Traders should implement a trading plan in order to establish a clear framework when navigating financial markets.
- Be disciplined and find out what works best for you.
- Regularly track your progress in a trading journal and review the current trading plan. Make alterations if needed.
3. UNDERSTANDING DERIV BOTS
Many people just use bots without even knowing how exactly it works, they just trade for the sake of trading. Most of the people don’t even know what strategy the bot is using to open trades and if it is viable to open good positions.Take time and understand what conditions have to be fulfilled in order for the bot to enter a trade so that you can be able to make informed decisions when creating your personal trading plan.
4. TRADING PSYCHOLOGY
GREED
What is greed?
The Merriam-Webster definition describes greed as “a selfish and excessive desire for more of something (in our case money) than is needed.” Sound familiar?
Let’s face it, it’s our desire to acquire handsome returns from small investments is what drove you to start trading. This desire becomes unhealthy–even dangerous–when it is EXCESSIVE, greed PUSHES you to act, in ways and at times when you shouldn’t; that’s why it is dangerous.
HOW DOES GREED AFFECT TRADING?
Greed is coded into human DNA and thus, you must learn to control it. Without having strong control over your emotions, it won’t be possible to trade the markets with rational logic. In fact, you will be placing most of the trades out of greed to earn more money.
This is one of the biggest obstacle every trader faces. If you find yourself trading out of greed and want to make money fast, then you are very close begin the process of blowing your account.
But get this, becoming greedy is very common as all the traders go through this stage. You might be having loads of money,but you will find yourself looking to earn more money at the initial starting trading days.
Traders who learn how to control greed become successful but those who fail to do so, and end up blowing their account. If you want to become a successful trader in the long run, set aside the concept of making money fast.
In hindsight,
- Greed makes you want to earn more than your initial set target.
- Greed diverts you from following your trading plan. Not following your plan is just planning to fail.
- Greed is accompanied by fear especially when the trade starts to go against you.
- Greed makes you stay longer in a losing trade that you should have exited long ago in the hope of martingale recovering the loss and thus can end up blowing your account.
- Greed prompts you to act irrationally. This usually comes in the form of over-leveraging and over-trading
How to overcome Greed.
As discussed earlier on, having a trading plan is very vital when it comes to trading. Your trading plan will clearly indicate your entry and exit strategy. Once you are aware of your exit strategy, you should end your trade at the target profit. If it was a losing trade then you have an exit strategy.
If you stick to your trading plan, you will then learn how to control the aspect of greed.
FEAR
Ever since our days in the cave, we’ve been hard-wired to experience fear as a mechanism for survival.
We know that fear is related to the fight-or-flight instinct that exists in each and every one of us. It is what we feel when we recognize a threat.
Traders experience fear when positions move against them as this poses a threat to the trading account.
Watching a position move against you invokes the fear of realizing loss and so traders tend to hold on to losing positions for much longer than they should. In fact, this was discovered as the number one mistake traders make.
THE TYPES OF FEAR
1. THE FEAR OF THE UNKNOWN
When you don’t know how much you can lose, you are gambling. You are subjected to the unknown forces of the market when price goes against you, leaving you paralyzed and helpless.
You don’t know if martingale will recover in your favor, the only thing you can do is hope. This is the fear of the unknown and is due to the lack of a proper trading plan and psychology.
No surprise that new traders will likely encounter the fear of the unknown because the picture about trading is painted bright and rosy and people only see the large amounts of money to be made, until reality sinks in.
Many people are attracted to trading because of the freedom it can bring and the near-zero physical work involved, just a click of the mouse. However, what goes behind the scene is seldom talked about and much less publicized.
So, how do you overcome it?
The best way to overcome the fear of the unknown is to understand what trading is all about. You can expand your knowledge by reading good trading psychology books.
It is also very important to have a trading plan and stick to it. It’s like a cardinal rule when it comes to trading.
2. THE FEAR OF BEING WRONG
Our educational system is rooted in the construct of right and wrong. We are rewarded for what are deemed to be correct answers and getting higher grades, which generally lead to more successful lives.
Being right affirms and inflates our sense of self-worth. As students we learn to avoid as best as we can the embarrassment of being wrong.
Getting the right answer becomes the primary purpose of our education. Isn’t it regrettable that this may be inconsistent with actually learning? – Mel Schwartz
Not Being Right
Everyone fears not being right. Some people can’t handle being wrong. Don’t place too much emphasis on always being right or proving you are always right.
Instead, stick to your trading plan and learn to create positive results over time. Rather than focusing on being right at this exact moment, look at the long-term game. In order to be successful in the long-term, you will have to sacrifice a bit of your ego; you won’t always be right.
The quicker you accept that in trading, you wont always get it right, the easier things will be, and the more you’ll learn.
Don’t let fear or greed rule you, but do be cautious.
3. THE FEAR OF LOSS
No one likes losing. That’s a solid fact. Moreover, no one likes losing money. But unfortunately, losses are part of the Trading world.Since we already know that we can’t completely prevent it from happening, we can instead learn how to manage making losses.
Losing money often the biggest fear for traders. In reality, human beings are afraid of generally losing money and would do whatever it takes to avoid losses.Many traders will end up in Loss aversion. This refers to the tendency for people to prefer avoiding losses at all costs.
You should understand that trading is about risking money to make more money. It is unfortunate that a huge percentage of traders are not mature enough to able to cap losses in a way that they can live with.
[Studies by Amos Tversky and Daniel Kahneman suggest that losses are twice as psychologically powerful as gains.]However, by avoiding losses, you will end up making decisions that may cause the downfall to your trading days.
By not having the right trading plan and tolerance towards losing money, a trader can develop a fear of losing money, which will then create a fear of giving back profits.
When traders are Captured by the fear of losing money,they often turn to third-party solutions for their problems rather than looking inward for solutions. This can be in the form of looking for a better binary bot, a better strategy, etc.
The fact is that have to understand that no trading systems are 100% winner-proof. You, therefore, have to work on your tolerance for losing because it’s going to happen. It’s simply a matter of how you respond and adjust to reduce your losses and risk, which will determine if you will win in the long run or not.
When you are afraid to take a loss, you hesitate to cut your trades because you would rather let martingale recover the loss than for you than to actually take a loss. This eventually results in blowing up your trading account. (one of the reasons why human beings are not cut out for trading)
HOW TO REMEDY THE FEAR OF LOSSES
- ONLY trade with money that you can afford to lose.
- Have a trading plan and stick to it no matter what.
- Build your tolerance of making losses by paper trading. (test your trading plan on your demo account)
4. THE FEAR OF MISSING OUT.
Take for instance, you were trying out a strategy or a bot on your demo account. You find the bot trading so well and having a higher percentage of wins than losses. You then feel compelled to use your real account because the market is favoring your current trading strategy.
Since you really believe that the bot works perfectly and the results of the demo account should reflect on your real account.
Psychologically, your brain is not ready to register any losses. In doing so, you are Trading without a plan, You will probably let martingale try and recover for the loss, It will probably end up with you blowing your account or losing a huge sum of money. The fear of missing out on an opportunity is another main catalyst for bad trading decisions.
So, what is the remedy to FOMO?
Stick to your trading plan.
5. FEAR OF LEAVING MONEY ON THE TABLE.
The final big fear traders face is seeing their profitable trades retrace on them and having the entire profit eaten up by martingale. The result is that you end up taking short and low profits on a trade.
Another side of this is that you may see that the bot has been making consistent profits and you tell yourself to only collect a few more dollars not to miss out on the profitable trend.
This makes you not to take profits at the set target profit of the trading session and instead tell themselves that the cash will continue to accumulate and once the few dollars have rolled in, they would stop the bot. In this scenario, martingale can work against you, resulting in breaking even or even taking a loss.
The way to deal with this fear is to have a solid exit strategy (live by your set Target Profit) and to stick to it. You should practice and know what you want to take from the market and not look at what you could have or should have done.
5. RISK MANAGEMENT
Many people begin to trade because they want to make a large amount of money with a small initial investment. This is often one of the primary drivers to bring new traders into the market.
What is not always immediately prominent to these traders is that they also face the very real risk of losing money.
New traders can become blinded by greed; although greed, in and of itself - isn’t necessarily a bad thing. After all, anyone that wanted to improve their financial situation in the past needed the same type of pragmatic foresight to want more, right?
The negative aspect of this ‘new trader greed’ isn’t so much the greed itself, but rather what it can cause new traders to do; actions that can cause catastrophic impact to their accounts, their goals, and if left unchecked - a few trades can even ruin their accounts.
Let us start by focusing on the the more common pitfalls of risk.
COMMON PITFALLS OF RISK
Pit-fall A: Trading without a Stop Loss
Some traders, after brief time in the markets, come to the conclusion that price oscillates so wildly - that if they are patient enough with a losing trade, martingale will recover the loss, or perhaps even allow them to make a small profit.
Any trader employing the mantra of ‘price will come back’ is sitting in a pretty rough situation right now
The Number One Mistake that Traders Make is that they often lose so much more when they are in a losing trade than they make when they are in a winning trade.
How to Prevent Pit-fall A: Place a stop on every trade that is taken, so that when you are incorrect in a trade the damage can be mitigated
Pit-fall B: Employing too much leverage
As mentioned above, the reason why many people start trading is to look to make a lot of money with a small investment. This is made possible by the large amounts of leverage that are made available.( increasing stake size and or using martingale to recover losses.)
What may not be immediately prominent to traders is that excessive leverage will often bring disastrous consequences over the long-term.
And just because leverage is available(using martingale to recover losses and or increasing stake size) - it doesn’t mean that it all has to be used. As a matter of fact, many traders will trade with far less than the available leverage amounts in an effort to get the best overall return.(small stake of 0.35)
Say you have a small account of 50$ and you are using a stake of 1$ to maybe trade Even/Odd contract type with a martingale of 2.1.
With just 4 consecutive losses, you would have lost 16.77$ compared to when you use a small stake of 0.35, you will only have lost 5.86$
6. MOST COMMON TRADING MISTAKES
There are two things that traders think they suffer from the most – over-trading and over-leverage. But these are just the edges of a much larger problem, these are just actions, they’re like the symptom of the illness that we need to identify.
There’s something behind this conduct causing traders to eventually get into over trading or over leveraging and that’s what we want you to understand. Here are some examples of charts, every chart tells a story-
a) Over leverage
This is an $80k account, we can see very small profits for a while, and suddenly a huge loss that ends up, stopping out the account. So this is clear over-leverage or revenge trading or over-trading that caused this. It could be a result of a lack of patience, the trader was feeling impatient and wanted to profit quickly but ended up taking big losses by using very big stake sizes.
b) Lack of patience
Something similar here, a $10k account, the dotted line is the equity line and the blue line is the balance line so you can see over the little gains there was a huge drawdown on the equity, and even if after closing the trade the balance was positive, this trader was taking a lot of drawdown in order to get small profits. Getting disciplined enough in order to maintain a strategy that is taking so long in order to give you results might be frustrating and trigger some emotions that cause the trader to wish for bigger returns, then open up a trade that eventually was a big loss and wishing to recover fast with big stake sizes, the trader blows the account.
c) Overconfidence
Same here – we can see a nice balance but also the equity that is in draw-down a lot of time and see how close was this trader to get to the target, it was just a few hundred dollars away, at this point he or she felt overconfident, wanted to get to the target as quickly as possible, followed by a big loss they wanted to recover from quickly and you can see the rest on the chart.
d) Over-size
Something similar here, a trader who’s in drawdown and recovers from the drawdown, he’s doing fine and wants to get quickly to the target so he increases the lot size which leads to a big loss.
e) Negative risk-reward
Same here this looks to me like a martingale system, there are many small profits and then a big loss, and again – many small profits and then big loss. Then there’s a big win which leads to overconfidence, the trader wants to get quickly to the target – makes a bigger trade, gets a big loss, and then comes the stop out.
Every chart has a story behind it and we can see different causes or different triggers. It might be an emotion, might be an expectation, might be lack of discipline, lack of consistency, lack of trust in the system, greed maybe, overconfidence that eventually causes or triggers either over-leverage or over-trading that leads to losing the account.
F) Unrealistic Expectations
Let’s talk about possible causes for common trading mistakes of over-trading and over-leverage which are unrealistic expectations. If we explore that a little bit further, I see unrealistic expectations in three aspects: unrealistic expectations about success, unrealistic expectations about results, and unrealistic expectations about time.
Unrealistic expectations about success
As humans, we might enter the trading world thinking of success in a linear way when we just always improve, and eventually, we will get to the top of our skill or our trading career.
When in trading success really looks like this
It’s a very hard long way, partially because we, as humans, are used to doing some action and getting some result of that action. In mathematics 2+2 is always 4. If I play an instrument, every time I play a certain note will always sound the same. But here in trading sometimes we think we’re doing the same action, we’re following our system or strategy, we have a signal in our strategy and we don’t get the same results, sometimes those trades result in a win, sometimes in a loss and it’s very hard to measure success or progress when we don’t have that positive feedback from the market.
Our expectations about what success should be in the market are very different from what we experience in life. We feel that we’re not progressing. That’s why I like to speak about shades of success. When we talk about success we really think success is constant progress towards better trading every time.
Be your own benchmark.
How can we define what success is for every one of us? We need to be aware that we improve every time and constantly. The fact that we all have different backgrounds, different account sizes, different skills, different time availability, it’s a very different path that every trader has to go through and you need to start measuring yourself against yourself, you need to start comparing yourself to your past-self and then to see if you have made any progress or not.
Be your own benchmark, stop comparing yourself to others and start comparing yourself to your results from 100 trades ago or one month ago, or one year ago. Are you a better trader or a worse trader? Acknowledge that progress. Success is very relative in trading. If you were a losing trader and now you are a break-even trader that’s a kind of success. If you’re a break-even trader and then you become a consistent trader, that’s better, and from consistency to profitability that’s even better, but that will take time.
Now when we think of results of course there’s the money and there are the returns, we need to think about what’s realistic, what’s our account size, and what we can get from that. We cannot expect from a very small account to get a lot of money, that’s something that is just not realistic. You already know that so we need to think about our outcome results in a realistic way, and not think of trading as a profession that can give you millions of dollars very quickly or with a small account because that’s just not realistic.
The same applies to time. Think about a university degree, we invest years of our lives in order to get professional at something, and for some reason, we want to get immediate returns and immediate success and we need to remember that trading will require years of preparation so you need to commit time.
You might have heard of the 10,000 hours to master some skill so maybe you need to get 10,000 trades in the market to get professional at it and you need to take into account your available time. You might have another job so you have to trade off the free time and fewer opportunities and if you have time available to practice you will have more available time for practicing and maybe your path will be shorter, but again we need to understand what’s our reality and what’s our available time for practicing and we cannot expect to get success in trading in instantly.
Wrong focus
Another thing that we see many times with traders – they have the wrong focus. They focus a lot on the outcome instead of focusing on the process. They cannot distinguish between lucky strikes they had and consistency. So they give a lot of weight to good trades or profitable trades that they had here and there instead of trying to get consistent over time.
What we need to really focus on is our process instead of focusing on the outcome. Because if we focus on the outcome of trading, on the money, we will focus on over-leverage, we want to take the one single trade that makes a lot of money instead of trying to focus on the process, on developing the consistency that eventually will give us the outcome.
REMEDIES FOR COMMON TRADING MISTAKES
Controlling Your Emotions
All along the way we have emotions involved, we feel frustration – so we might revenge trade; we feel greed – so we might over-leverage, we might feel fear, we might feel fearless so we go and over-leverage and over-trade. Our emotions are involved during the whole process and we need to acknowledge that as well. What we need is basically to get to an integral solution, We need to break this vicious cycle and start developing good habits when we want to change bad habits.
Let’s start with some ideas- there are no more important or less important ideas here, the most important thing is to take one of these ideas and start today with one of those, come back later and read this again and once you have one of those checked, then you can take another one of these good habits and start developing.
The most important thing is to choose one of the ideas I will give you now and start with that.
Reduce lot size
A good idea to improve your trading is to reduce your lot size, this idea is that if you were risking just one single dollar in every one of your trades and you would lose the trade, that one dollar loss won’t make you feel the need to revenge trade in order to make back that dollar, one dollar would not be a painful loss for you, so that wouldn’t trigger you with the need to over-trade or to over-leverage in order to make that one dollar back.
The best way in order to develop consistency, to not focus on the outcome but on the process, is to reduce your lot size, to start to focus on improving your statistics – your ratios, your win ratio, your risk-reward ratio, and once those are positive then you can start increasing your lot size in order to get an outcome and get money off your good process. You need to reduce your lot size so you don’t get emotionally attached to any one of your single trades. That would be a good exercise to do if you feel that many times you are over-leveraging or over-trading, that might help with that.
Develop a trading plan
Unrealistic expectations? why not develop a trading plan? A training plan is not only writing down your strategy. Yes, writing down your strategy is super important, it is your map to follow but a trading plan has to include your expectations based on your own situation: what’s the time you have available, what are your own life objectives, and the lifestyle that you want to live, what income you need, so for that income what account size do you need in order to make that in a consistent way? so you really need to have a real and complete trading plan in place and you have to have the discipline in order to follow it so you don’t go thinking of trading in an unrealistic way.
It is very very important, traders really think they can just get into the market and out of the market and they don’t follow a plan, they don’t follow something written down.
PAPER TRADING
You need to be able to trust your strategy and in order to do that you first need to backtest it to see if there’s some potential in it, then adapt it, tune it to yourself, and then forward test it.
A real test of that strategy is not to make money but to gain trust in your strategy and to know that in the long run, your strategy makes money. If your strategy is working, it has the potential, it’s a profitable strategy then you only have to work on the other side of the system which is the trader, which is you.
In a system we have a trader and the strategy, so by backtesting and forward testing we can have no emotions in order to make sure our strategy works for us, and once we know that, we can trust it and the trader part of the equation can feel more confident taking those trades and those signals and it will be easier.
So backtest, demo-trade, and forward test and build confidence in your strategy.
Find a mentor or a community to be accountable to
The most valuable thing here is to externalize your thoughts. Once you hear yourself thinking or saying what you think is your problem you become accountable to someone. It’s similar to going to the gym or going to a nutritionist, you know you will meet your coach or your mentor or your group or whatever the next week or in two weeks, you have a commitment, so you need to find a mentor or a community to stay accountable to.
Meditate
I don’t know if you connect with that, you don’t have to go to mindfulness or any specific thing but just breathe. Relax your mind, breathe before your trading session, breathe during your trading session, and breathe after the training session. Keep your mind relaxed, that will help you with the emotions.
Ray Dalio said that he started meditating and so did Warren Buffett and many other big traders. You can try just a few minutes of breathing exercises before you start trading, it can really help you out.
Beware of social media
I know it’s hard, but you need to beware of social media, especially when you see fancy cars and traders showing profit months of $100,000, that’s unrealistic. Most of those are fake, they’re just looking for traffic into their channels to get revenues from youtube or tick-tok and those posts really cause you to think you can get those same results, and we don’t know if they’re even real, their strategy or their system might not be the one you need. So you really need to stop comparing yourself to what you see on social media, which only causes a lot of stress. Compare yourself to yourself, you are your own benchmark.
7. RECENCY EFFECT MENTAL TRAP
Here’s a little thought exercise for you – think of the last book you read. Got it? Now try to remember the specifics of the book. Chances are that as you try to recall the specific events, you might remember the beginning but then the middle turns to mush, opening up to a much clearer ending. This is because, for tasks that take our brains a long time to process, we generally come out best remembering the ending. In psychology, this is referred to as the recency effect.
When we apply this concept to trading, the recency effect is a mental state in which traders give more weight and power to their recent trading patterns. This weighted view of recent history leads traders to expect similar outcomes to reoccur.
For example, if you put a trade right after a recent trade was a winner, you will be loaded with more confidence towards your next trade. This confidence will propel you to more easily enter the market.
On the contrary, after a recent loss or sequence of losses, your confidence will be weighted to the negative. There’s a good chance you’ll dwell too long on your next trade, worrying it will be a loss because your most recent trade was a dud.
Awareness
Being aware of the recency effect is extremely important in order to build the self-awareness to know what’s going on in your brain as you approach each trade. Imagine you’re a robot and you have no emotions towards your trading. Each trade you come to will be based on analysis, free from emotions, regardless of what has happened in your past. You would not be overconfident and jump into the market too quickly, and you would not be less confident and rethinking your entry or past mistakes.
But you’re not a robot and therefore you’re going to be subjected to emotional whims. Like we said before, if your recent trading history shows success, you might be more confident. Maybe you’ll add more to your position and risk more because you’re riding high on a confidence wave.
But if you’ve recently had a string of losses, you might cut your trading size down to a fraction of what it used to be. This emotional rollercoaster will undoubtedly affect whatever potential profit there is to be had.
Being affected by the recency effect is going to affect your potential profit and your stable trading habits in a way that your growth or a decrease in your account equity will not be well controlled. If you come into the market after a sequence of losses and you reduce your position size but you happen to win, your profit will be less than it would have been before your negative confidence convinced you to make the drastic reduction.
Your overall experience is still going to be that you haven’t recovered enough from your losses. Your experience will still be stuck on negative emotions. If you had a winner and you were putting more in and risking more and it ended up being a loser, you’ve suddenly lost all of your good efforts from the past. Your experience will be negative because you lost all of your hard labor.
Excessive Confidence in Either Direction is Trouble
As we just explained, every time you’re affected by the recency effect, and you take action combining the confidence that you’ve built up, in both cases, it may cause you to have a negative experience. At the end of the day, you won’t be satisfied.
Overconfidence from recent success leads to neglecting planning and strategy, and low confidence from recent losses causes hesitation which might mean missing good opportunities. In both cases, you don’t follow your trading plan because emotions have poisoned the process.
Being aware of the effect is one step towards resolving the problem. Once you know you’re affected by it, you can force yourself to be more loyal to your analysis and to be more faithful to acting on what you actually see in the market, not what you feel. It’s very easy to say this but it’s very hard to practice. When you’re flooded with emotions, your mind is not free to self-analyze.
Overcoming The Recency Effect
One great tool to help you overcome the recency effect is to ask yourself one basic question right before you enter your next trade. Before you jump into the trade, ask yourself “what am I feeling regarding my prior experience?” Do I feel confident, negative, positive, etc? The answer to these basic questions will guide you to your current mental state. Write the answer down and place it in front of you. Stare at it and become fully aware of the feelings you are currently experiencing. Once the note is unavoidably staring back at you, you should know where things stand, and therefore how to handle it. For each emotion, map out what actions those feelings lead to.
For example, confidence might lead to rushing and discarding analysis, while shame and self-doubt lead to possibly missing the next great opportunity. If you know the consequences of your emotions, you’ll know how to adjust in order to avoid them. Emphasize to yourself what you need to work on in order to confront your emotions.
Recency Effect in Trading Summary
1. It’s important to note, however, that in the solution we suggest, it’s not advised to try to avoid your emotions and disregard them entirely in your decision making. The solution laid out here is based on understanding that you’re loaded with emotions and the only thing that matters is knowing how the emotions will affect your decision making.
2. Learn how to tweak your brain in order for it to be able to work with these emotions. As much as we’d like to be robots while we trade, no matter how hard we try, we’ll never be able to totally separate our emotions and feelings from our thoughts and actions.
KEY TAKE AWAYS
Treat Trading Like A Business
Traders often fail because they do not take trading seriously enough. Most inexperienced traders seek get-rich-quick methods and do not adequately prepare how they would approach the market. In reality, some inexperienced traders are gambling without even realizing it
If you treat your trading like a hobby and have no real goals, then it will be an uphill battle to make sustainable progress.
In order to get past the hobby mentality and quantify your goals, you should treat your trading like your personal business. Write a business plan, list specific and achievable goals, and outline daily activities to keep emotions out of the way.
These systems will help remove emotions from the traditional Fear and Greed cycle.
How Can You Add To This?
While you can never control the market or how any given trade will turn out, you can learn to control your actions and emotions with a solid trading plan and by keeping yourself productive and consistent.
You may want to enjoy a couple of non-market-related tricks to get yourself back in the game.
Take a Walk
Watching the market all day and staring at your monitors can be quite fatiguing. Allow yourself to take a break and get some fresh air.
A brisk walk will get your blood flowing and put you in a great position to absorb your surroundings and clear your mind.
You don't need to take a 10-mile hike to reap the benefits of a nice walk.
Do Something Creative
If your mind is fixated on trading, then you may want to spark your imagination with a creative activity such as cooking, listening to music, or playing a game. Sometimes it's easy to psych yourself out, and the solution may be to simply exercise a different part of your brain.
Change Your Scenery
Rearrange your trading area, clean your kitchen, or take a weekend trip. Your environment can help or hinder your productivity, so change it up to allow your mind to refresh.
Remember, human beings are emotional by nature. If you follow the steps outlined above, you should feel more confident and relaxed in your trades.
Key Takeaway
Emotions can get the best of all of us, but if you want to get to the next level in your trading career, then mastering your emotional response to the market is imperative.
If you follow the steps outlined above, then you will have an excellent chance of keeping your emotions at bay and executing better trades.
Anger and disappointment are two additional emotions that powerfully influence trading decisions. Both emotions concern expectations about our performance and how we expect the market to behave. We become angry when things don’t go our way. Because we want to win, we hope that the market will behave in a manner consistent with our trading plan. When we feel that fate, or some unidentified external forces (such as other traders or market makers, for example), has created a situation that thwarts our plans, we become angry.
When we think we ruined our own plans because of our incompetence, we feel disappointed. Regardless, there’s a natural inclination to want to control our destiny, and when it comes to trading, we want to control the market. We may want to impose our will onto the market.
The market, however, can’t be controlled. One must accept what the market has to offer. You cannot make the market do what you want it to do.
If you accept that you are powerless over market action, you’ll be less angry or disappointed. If you anticipate and truly accept the fact that the market can, and often will, go against your trading plan, and that it isn’t personal, you’ll not be fazed by it.
You’ll just accept it, and move on. If, on the other hand, you expect the market to move in your favour, you’ll feel angry and disappointed, which often leads to feelings of revenge or despair. These emotions can be paralyzing. It is better to accept the market for what it is, take precautions (again, control risk and trade a detailed trading plan), and be ready to accept the results you achieve, good or bad, and just move on to the next trade.
Emotions are a natural part of trading. As much as we painstakingly plan our trades, the market doesn’t always meet our expectations. Indeed, it is more likely that the market will fail to meet our expectations than behave in accordance with our plans. If you accept this fact, however, and take proper precautions to work around it, you’ll be able to minimize the influence of emotions. You’ll trade more effortlessly, creatively, and profitably.