In This Episode
- Why Walter always assumes a loss
- Why it's important to take a break
- Drinking and trading
The Trading Psychology Rules We Never Break
Everyone has issues that they struggle with early in their trading career. If you trade for long enough, you come up with rules that prevent you from making the same mistakes over and over.
In this episode, we talk about rules that we put into place to prevent us from making common trading mistakes. Learn what our biggest rules are and why we created them.
Episode Transcript
Hugh: Hi, Walter. What are some trading Psychology rules that you never break?
Walter: The biggest one that I have is to allow like when I take a trade, I need to allow myself to have a loss. So when I take a trade and I am calculating out what the risk is on the different accounts, I always know, “Okay, this is money that could be gone”.
I did not always do this because I used to keep moving. One of my biggest things when I was early in my trading was I would move the stop over and over. So if my stop was at one-twenty-one-dot-zero-zero and I saw it coming down, I would move it to like one-twenty-dot-eighty, one-twenty-dot-sixty-five.
I keep moving it and I would stay up all night watching it. Hoping that it would reverse during the New York session or whatever. So when I go into a trade, in fact I will calculate the risk as such. For example, if I have an open trade and then I have a new signal, I will calculate the risk of the open trade as a loss.
So that the new trade is calculated on that balance not on what is the open, what is the equity? Where is it now? So I mark it as a loss. Open trades are marked as a loss before I do my new trade. So that is the biggest one. I count risk capital as goodbye.
Now I hope for the best. I do not think the worst. I try to be as positive as possible. I try to envision scenarios. If I am on a draw down you know, it will go in my way and stuff like that. So that is definitely true but I consider that like goodbye money and then it is a pleasant surprise if it goes the other way.
The other one is revenge trading. It was the other big one for me. So like I would go, “Oh man! That bloody Euro/Yen took me out again.” So you know I am going to get back at the Euro and I will double down or like Martingale style trading or whatever. I used to do that sort of stuff.
Not as bad as moving the stop-loss. It was definitely there. It was almost like a cloud of each currency as a person and I want to get back at it. I do not know if you've had that. So those are the biggest ones. The other thing that is really important for me is that I do not want to trade drunk and because I made that mistake too. Like you know, coming home late on Thursday night.
I used to actually drink quite a bit like in my youth, you know, ten years ago or whatever or fifteen years ago. I hardly ever drink now. There was a problem where I would come home and I would be bored. I did not have a tv or anything. So I just fire up the trading station. Have a look and go, “Hey, that looks good.” That was terrible too. So, do not trade under the influence.
I do not move my stop losses. So related to the trading on influences, is to be in the right mindset. You can use meditation, hypnosis. You can use different devices. We talked about the neurophone. You can use binaural beats you know to get yourself into alpha or theta. So that when you are watching your charts, you are in a good mindset.
I really do not like to be upset. If I just got into an argument with somebody or you know, the kids are just driving me nuts or whatever, I do not want to sit down and start you know locking in trades in my platform at that stage. I really like to have more of a pattern of relaxing, going through my meditation and then sitting down.
It is good because where I live I don't really have to look at the charts until about ten- thirty in the morning. I mean, it is just the Asian session. Not much is going on, you know. Interbank market's over. So I kind of set my trades up in the morning by around noon. Maybe you know depending on the time of year.
The clocks change in Europe and the US. Basically you know early to late morning, like mid to late morning. I have time, you know. I know it is not the case like some traders, if you live for example in California or Washington State or whatever, you might wake up and go like, “I’ve got to go see where my trade is” because New York is raging, right?
Even if you get up at like five-thirty in the morning, New York is on you know and you’ve got to go and see. I understand like you might not necessarily have that luxury, it is really hard. Some traders what they will do is they will just have a quick look and then they will go through their meditation or whatever. So that that could possibly work as well. So those are the big three rules. I am curious to hear what yours are though.
Hugh: It is funny you bring up the trading drunk thing too. I had that a couple times and that is one of mine. It is more about the mindset that you are in, not necessarily drunk. But at least good mindset, a little bit of meditation using the inner balance app or whatever.
Second one is like a two-strikes rule. So I allow myself two strikes on one trading idea. If that blows up then I stop doing that.
Walter: Sorry, can we dig into that real quick? Can I just ask? So when you say two-strikes for trading ideas, is that as simple as I am going long the Swiss/Yen? I went long yesterday and I got stopped out so I can go long today again on another? Is it like the same signal? Or is it, I guess what I am asking, is that different signals or the same? Do you know what I mean? How does that work?
Hugh: I guess it depends on the strategy but it is more like the same direction on the same pair.
Walter: Okay, got it.
Hugh: And then the third one would be, I am just taking a break when I feel burnt out.
Walter: That is a big one. That is a big one. People who were listening, that is a really big one. I do not have that problem like I used to but I did have that problem. The biggest thing that got me was when smartphones came out. I had this little like it was almost like a square phone and it had an early, early Metatrader on it.
I would be out to dinner with my wife and I would be looking at the phone. Checking my trades going and then I would micromanage them and it was a big one. Now it is even worse. Now you have even more abilities to take trades and manage trades than back then. It was actually kind of a pain to do it.
Hugh: All that stuff, right?
Walter: Exactly. Back in 2007, like back in that area 2006-2007 I think is one. So now it is even worse obviously. What happens when you lose your stylus and all that stuff? That is crazy. Totally, that is a big one.
Hugh: Yeah and I might take a break for like two weeks a month sometimes but whatever it takes.
Walter: I have a question, do you find that if you are away, let's say you take a long weekend, actually where you live the markets close Friday morning or Friday afternoon. Friday afternoon, they are closed. So five p.m New York time basically.
So let's say that you had a long weekend and you are traveling. You did not see the charts. Let's say you leave Thursday. So you do not really see Friday what London or New York did and then you get back say, Tuesday. So you do not see Sunday or Monday.
You kind of missed two and a half days. What do you find when you get back and look at the charts on that Tuesday? If you've had a break that long. We just did not get a chance to see the charts. What do you find?
Hugh: Either I am in tune with it from last week or I am totally out of tune and in that case I might not trade for the whole week.
Walter: I find that fresh eyes are a good thing. I just feel like you kind of get in like, you get these theories in your head about certain pairs where they are going and stuff and then when you watch it, you can almost make it fit.
You go, “Oh, I think the Euro is on a tear. It is going to keep going higher” and then I wake up in the morning, “Oh, it is gone down”. Well, that is just a pullback. Whereas, they come back in two days like a long weekend is the classic. Long weekend comes back, don't even check or anything. I look and I go, “Oh, that was not a pullback. That was a double top” or whatever. Do you know what I mean?
I just find that the fresh eyes, it is almost like the less time I have in front of the screen the more obvious it becomes what the market's doing. I do not know if other people have that or what. It is just really easy to get into that thing where you are using the evidence of the chart to fit your theory of what you think is happening.
Hugh: Hey there! I hope you find this episode useful. I just want to let you know that Walter and I give away something valuable every month that helps traders improve their skills. You can enter to win by simply leaving an iTunes review and leaving a comment on our YouTube videos.
At the end of each month, we'll look at the comments and reviews from the month and we'll pick a winner at random. Each comment and each review counts for one entry during the month that it's pitted.
So, if you're interested in that, be sure to enter after this podcast is over. Alright, back to the episode.
Walter: So I think it is good to have multiple theories. It could be a pullback but it could be a double top if it does this; it could be going up but it could have just actually reversed if it did that or you know it could be consolidating. It could be bouncing off the top of the box but actually it could also be breaking out right now.
So I do not know. I was just curious how you had like, what that had done for you because it really is obvious to me. If I spend time away from the charts, it is such an advantage because I am not stuck. I am no longer stuck in those ideas that I was a slave to before.
Hugh: I think it could be really easy to get infatuated with a one-hour pattern or something that you are looking at. When you are really trying the daily chart but you get stuck on that and you are like, “Oh, it has to go because this and this and this on the one-hour” and then you step away and you come back and like, “Oh no! That's just noise”.
Walter: It is true, man. It is so true.
Hugh: Cool, alright. Thanks, Walter.
Walter: See you!
Hugh: All the information in this podcast is for educational and informational purposes only and is not trading or investment advice.
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