Exiting trades too early is something many of you struggle with on a regular basis. I know for me, this was one of the most difficult trading mistakes to overcome. How many times have you exited a trade manually for a either a small win or a small loss and then the next day felt like slapping yourself in the face for doing so? I’m willing to bet it’s been more than a few.

This article is for those of you who have difficulty holding onto trades and who exit winning trades too soon or close losses before they actually hit your stop loss, time and time again.

There is usually a mix of contributing factors that cause traders to exit trades too early. It may be due to your trading process, trading psychology (mindset), personal belief systems, recency bias or some combination of those.

The most common types of premature trade exits that lead to regret are the following:

Exiting a trade at break even constantly due to fear of loss, only to watch a large portion of these trades become winners. (Breakeven is actually a loss because of the spread or commission you pay to the broker!)

Exiting a trade for a small profit but well before your planned profit target because you fear the market will reverse, only to watch the trade go on to hit your initial target and more.

Exiting a standard trade at a partial loss for whatever reason you can come up with, well before the stop loss is reached, only to watch the trade go on to be a winner.

Inability to pyramid into positions (add to winning positions), and constantly exiting these larger positions, fearing the market will reverse.

The Four Main Contributing Factors to Early Trade Exits

1. Improper Trading Process and Poor Understanding of Market Realities

The most common reason traders exit trades too early is that they simply don’t really know what they’re doing. They are trading with real money before actually having developed a concept of what their overall trading approach is and how to properly function in the market in regards to entries, exits and trade management.

If you are over-involved with your trades, sitting there all day and night staring at the charts, you’re probably going to end up screwing up the exits. Traders who have not yet learned to set and forget and ACTUALLY forget their trades after entering them, are the ones who tend to exit trades too early all the time.

If you haven’t yet learned the importance of letting the market take you out and how to do it, you really need to, asap. By letting the market take you out of your trades you are trading in-line with the market and not fighting it or trying to control it. This is the right way to manage a trade exit. You cannot predict which trades will be big winners, but by letting the market take you out, you will position yourself to take advantage of big moves when they occur. Catching big moves in the market is how fortunes are made, not by taking tiny, emotionally-charged winners.

It’s important to remember that trades go further than you think, generally speaking. This means, a good move or trend can run on much longer than you think it can. Whilst the amateurs / losers are continuously trying to predict the trend change, the professionals are happy to take “chunks” out of the market as it consistently trends higher or lower.

One of the biggest culprits of early trade exits is traders risking too much money per trade. When you over-leverage your account you are naturally more nervous and sensitive to every tick for or against your position. You imagine every move against you is the end and every move in your favor is money you need to secure; hence resulting in exiting too early! You need to reduce your dollar risk per trade until your emotions are in-check and you are able to fall asleep without worrying about your trades.

2. Recency Bias

Recency bias is a phenomenon of human psychology that essentially says our most recent experiences have more of an effect on our behavior than older experiences do. If you haven’t already done so, check out my article on recency bias in trading to learn more.

What we are concerned with here is how recent losses in trading or even other negative recent experiences can work to reinforce overly-conservative or defensive feelings in the market, in other words, they can make you fearful.

Traders often get overly-influenced by their recent trades, so if they’ve had a few losses in a row they start getting scared and start seeing the market as more risky than it may be and they start losing faith in their trade edge (very dangerous). It’s critical to remember that your trading edge materializes only over a large sample size of trades and you can never know for sure WHICH trade will be a winner and which will be a loser, until it’s over of course. Hence, to let your last trade or even your last several trades influence your feelings and behavior for your next trade, is simply not productive or logical.

3. Trading Psychology (mindset)

Not having the right mindset about trading and not understanding key realities of how markets move, is something that will definitely contribute to exiting trades too early.

Many people come into trading thinking they will get rich quick and they even quit their jobs before they’re actually making money trading, because they’re “so sure” they will making a living trading.

The truth is, only about 10% of traders survive long-term, and if you want to be one them you’ve to act and behave differently than the other 90%. How do you do that, you ask? Well, behavior is the result of mindset. Your mindset influences your habits and your habits essentially are what make or break you in the market. So, it all starts with having and maintaining the proper trading mindset.

You’ve got to accept that slow and steady wins the race and that a low frequency trading approach is how you making money “fast”. The more you try to make money, the more you will lose. Trading success is the result of focusing on trading performance; being consistent and doing all the little things right day in and day out so that there are no huge swings in your equity curve. Once you truly accept these things your mindset will be much closer to where it needs to be to become a successful trader.

4. Belief Systems and Past Experiences in Life

Many traders come into the market almost expecting it to not work out for them. They think self-deprecating things like “Well, I’ve always been poor so I will probably keep being poor”, especially after they have a losing trade or two. You cannot let negative thoughts infect your mindset or they will lead to negative emotions and poor trading habits that result in more losing!

Like it or not, what you believe about many different topics can and will have an influence on how you think about money, trading and wealth, and of course that can negatively influence your trade exits. If you are a very skeptical or negative type of person or someone who doesn’t believe that people should make money through speculation (for whatever reason) then you will have a hard time letting your trades roll into big winners. This doesn’t even have to be a conscious thing, it can be something subconscious that is affecting your decisions in the market.

The bottom line, is that to trade successfully you need to look inward and really become a student of not just the markets, but of yourself, and then you need to master both. If you do not master yourself and your own faulty thinking and logic, I promise you won’t make money in the markets no matter how good a trader you are. Likewise, if you don’t master your trading strategy and truly get in-tune with the markets you trade, you will also not make money trading.

You need to come into trading as an “empty slate” and not be skeptical of those who are teaching you or who seem to know more than you. Yes, traders do make a lot of money from speculating, not all, but some and my goal is to help you be one of the “some” who do, but I can’t help you if you don’t forget everything you thought you knew about trading behind and approach this with an open mind.

How to Prevent Early Trade Exits

Eliminating the mistake of early trade exits isn’t that difficult, it really just takes a bit of education combined with some good ole’ fashioned self-discipline. I can help you with the former but the latter is truly in your hands (I can’t force you to be disciplined).

The best way to avoid exiting trades too early is to have a trading plan that lays out your trade exit strategy and then sticking to it, no matter what. You will need to understand why set and forget trading is so powerful and be able to walk away from the market when your trades are live. Find a distraction, get a hobby, etc. the cardinal sin of trading is watching the screens too much especially with a live trade on.

Other things that can help are, having a trading journal where you record all your trades and the results, this is something that will help to keep you accountable as you trade. Having some trading affirmations that you read regularly will also help to remind you of the core principles you need to follow as well as work to train your brain in proper trading psychology and procedures.

Avoiding common early trade exit scenarios

Next, I want to drill-down and get a bit more specific by discussing some common problems that affect traders in regards to exiting trades too soon and provide some insight that might help. Now, this isn’t a perfect science, so keep that in mind, but I am trying to help you by sharing what I have learned over 18 years in the markets…

Scenario:

Exiting a trade a break even constantly due to fear of loss.

Solution:

Losing happens. Especially in trading. You’re going to have a losing trades, that is a given. The question is how well prepared are you for them and have you learned to lose properly? Yes, there is a proper and improper way to lose trades, read the previously linked text if you don’t yet know the difference. Fear is the enemy of trading success and if you are in a state of constant fear, you’re probably going to mess up your trade exits on a regular basis.

Expect to lose 1R (1 times risk) on every trade you take and give the trade room to breathe by using a wide stop loss if necessary. First, you determine what your 1R risk is per trade; what amount are you comfortable with losing on any given trade? Then, when you find a suitable trade setup, you place your stop loss properly and then you adjust your position size to maintain that 1R risk. Once the trade is live, you say “OK”, I am fine if I lose because I am comfortable potentially losing the amount I’ve risked and I know for me to possibly win I have to leave the trade alone and the let the market do it’s thing by simply backing off and leaving the screens alone. You might think by exiting at breakeven you’re avoiding a loss, but you are also potentially avoiding a win! You need to give every trade a chance to work in your favor. Accept that there is risk in trading and manage that risk properly, don’t be afraid of it!

Scenario:

Exiting a trade for a small profit, but well before your planned profit target.

Solution:

I get it, I do. You get up a decent amount of money and you think “I really should take this profit so this trade is a winner”. But in the grand scheme of things, you won’t survive on just little winners, even 1R winners aren’t enough to really make money over the long-run. You need 2R winners, 3R winners and a few “home runs” in the mix to really have a chance at long-term trading success.

You have to ignore the temptation to exit a trade for a small profit just because you see a “1 hour pin bar against your position”. What time frame did you take the trade on? The daily? Then why are you looking at the 1 hour to exit?! Stick with the plan, man! Don’t panic and don’t take small winners all the time because small winners are easily erased by normal sized 1R losing trades. You have to have patience if you want to hit big winning trades, you need to give every trade room and time to grow.

Now, that isn’t to say there isn’t a time and place for a 1R winner, because certainly it may make sense sometimes. But if you are thinking you will get ahead by chronically taking small winners, you are playing a game of slow, painful defeat my friend.

Scenario:

Exiting a trade at a partial loss for whatever reason you can come up with.

Solution:

Ever hear of “death by a thousand cuts”? Many traders kill their trading accounts by taking many small losses. Sure, it feels better than taking a bigger or standard 1R loss, but when you manually close out a trade for a small loss, before it has reached your stop loss, what you are also doing is voluntarily eliminating the opportunity the original trade idea presented, before it’s actually been eliminated. The market will show you if you were wrong or right given enough time, you need to allow it to do that. You have no idea where the market will go once your trade is live, you only know that you had a trade idea and that idea represents your edge. You have provided a stop loss for the trade that is (should be) at a point on the chart that would logically nullify your trade idea IF price reaches it. Don’t be swayed by the intraday price movement and tempted to close the trade out early just because your emotions are getting the better of you. Stick. To. The. Plan.

Scenario:

Inability to pyramid into positions (add to winning positions), fearing the market will reverse.

Solution:

How do you create real wealth from trading? By taking advantage of those rare times when one of your favorite markets is really trending strongly. I am talking about those trends that just seem to keep going in one direction with little to no pull backs. Many traders struggle with these moves because they seem almost “unreal” or “too good to be true”. But, they can and do happen and you need to really take advantage of them to build your account and put yourself ahead.

If you haven’t already done so, read my article on how to pyramid into trades to learn more about how this is done. There is a method to it, but essentially you are adding to winning positions at logical points so as to “snowball” your initial 1R risk into a much much larger risk reward winner. One good winner like this year can literally be the difference between a losing year or a very lucrative year for many traders.

You can’t be afraid and think yourself out of big, profitable moves in the market. It helps to understand how to read the price action and the footprint of money on the charts so that you can identify when a market is really trending powerfully and might be ripe for pyramiding.

Conclusion

I have made all the mistakes mentioned above and experienced all of this myself since I started trading 18+ years ago.

I learned very quickly that whilst having a good trading strategy was vital, it is equally as important to have the right trading process (how you behave, exit and manage trades), the right mindset as well as belief systems. The foundation of my trading style is built upon the premise that if a high probability trade is entered, then 90% of the work is done, and I must leave it to the universe to decide the fate of that (and every) trade, rather than constantly over thinking, over-analyzing and letting my ego get the best of me.

We all know that we can’t control the market, yet many of us try so desperately to do so, even if we aren’t aware we are doing it. In order to succeed we need to let go as much as possible, remove ourselves from the situation, and let our trading edge play out undisturbed. When you employ the set and forget trading style discussed in today’s lesson and expanded upon in my professional forex trading course, you will be trading in-line with what the market has to offer rather than trying to force your will upon it, and that is how real life-long trading success begins.

Please Leave A Comment Below With Your Thoughts On This Lesson…

Besides a little bit of luck both mentally and physically, the best professional athletes, business people and traders all have two things in common that have made the biggest contribution to their success…

Those 2 things are:

Habitual practice of the processes and (or) concepts that will bring them closer to their end-goal / success.

Complete discipline and focus on the task at hand until TOTAL mastery is reached. Then, they work to maintain it and add more ‘weapons’ to their arsenal.

This article is going to discuss how and why you should narrow your focus in trading, so that you are eliminating variables and truly perfecting your craft. The people who make the most money in this world all have one thing in common: they are VERY GOOD at a small amount of things or even just one thing. Ever heard the saying “Jack of all trades, master of none”? Think about that for a minute because it’s true and especially so in trading. The consequences for not becoming a “master” of your trading strategy are severe, whereas in other professions that may not be so.

You need to read this article, all of it, so that you truly learn why you need to practice one trading strategy “10,000” times and also, so that you learn how to do it. This lesson, if properly comprehended and implemented, has the power to transform your trading from losing or breaking even, to winning. The following Bruce Lee quote was the inspiration for today’s lesson:

“I fear not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick, 10,000 times.” – Bruce Lee

What Do The World’s Greatest Traders All Have in Common?

I don’t care what you have heard or what you think, the best traders in the world and even hedge fund managers are nothing if not insanely focused and masterful in their trading approach.

The reason for this is that these traders know you simply cannot make money in the markets consistently if you have a “scattered” trading approach that is a messy combination of many different methods. What you need is one or a small handful of simple technical analysis tools or patterns to properly analyze and trade the charts.

The best traders have practiced and employed one core trading strategy hundreds or thousands of times over their career; they are not practicing and trying to utilize many different trading strategies nor are they jumping from one trading style to the next. It takes time for any trading strategy to be learned and mastered and then more time to see it played out over a series of trades.

Here are some of the core traits that you will need in order to start being more focused on one trading strategy and eventually becoming a master of it…

Total Focus and Discipline

Focus and discipline are paramount to any life endeavour, everyone agrees on that. However, when it comes to learning one trading strategy and mastering one strategy at a time, it becomes even more important (and perhaps difficult).

You will need focus and discipline to stay committed to one price action signal at a time, for example. So that means you are not jumping at every single candlestick pattern you see on the charts. Instead, you have pre-decided you will learn one at a time and MASTER it before moving on to the next. You will accomplish this simply by picking one and learning as much as possible about what it looks like and how it’s traded and then start looking for it on the charts.

For example, you might decide to master the pin bar trading strategy first. OK, so if that is what you decided, you will learn about all types of pin bars, how they are best traded, which chart time frames are the best to trade them on and more. Your mission is to become a “pin bar expert”, here’s how you do that…

Become an Expert at Your Craft

As Bruce Lee said, he “fears not the man who has practiced 10,000 kicks once, but I fear the man who has practiced one kick, 10,000 times.” Now, why would he say that? Because practicing 10,000 kicks one time is essentially a gigantic waste of time that accomplishes nothing. The human brain needs repetition and habit to form more solidified neural pathways that make us become better at things, whether that is playing the piano or trading a specific strategy. The more you do something, the better your brain (and you) get at that thing.

Pro athletes, chess players, poker players, business people, hedge fund millionaires, actors, etc. they all know the secret to life and wealth; become an expert at your craft. Of course, first you must decide on your craft, which in trading means your trading strategy. Sadly, many traders never even get this far, they simply are too scattered and confused and possibly overwhelmed with all the conflicting information on the internet to actually decide on one particular strategy.

Now, since you are reading this and are probably interested in price action trading, we are still using the example of the pin bar signal as discussed in the previous section.

The way or the “how” to master one particular trade signal at a time lies simply in the focus and discipline we mentioned earlier. You can print out examples of the signal, study the signal from courses and mentors and look for it on the charts. You need to learn everything about it so that you reach the point of being able to open up your charts and instantly recognizing whether a quality pin bar signal (or the signal of your choosing) is present, or not.

Master One Trade Setup. Only Then Can You Add Another

If you’ve been reading my lessons for any length of time you probably know that mastering one setup at a time is a favorite “mantra” of mine and a core belief that I hold about trading and about what a trader should do especially early on in their career.

The reason why you need to commit to mastering one setup before adding any others is primarily because this gives you something concrete to do, to stay accountable to. Most traders have trouble with discipline and focus and a lot of the reason why is because they simply are too distracted and overwhelmed by all the information on the internet, they can’t make a decision. Decide, commit to doing this and you will start to see the fruits of your decision as time goes by. If there is one thing I can promise you about trading, it’s that the slower you take things and the more focused you become, the faster trading success will find you.

In a recent article I wrote about mastering one thing to reach trading success, I discucces a book I had read recently that was fittingly tilted “The One Thing” (I suggest you read it). In short, it’s about how the greatest people and companies that have achieved massive success always tend to be masters of one core process or thing; they perfect that thing and then keep repeating the process. They simply stick with the one thing they are good at and scale from there. Sound familiar? If so, it’s because it’s the same thing that I am saying to you about trading; master one setup, one strategy at a time and then build off of that, don’t trade in a random, mishap way.

Here’s an example:

You are mastering the “pin bar signal” first. One of the variations of the pin bar is trading a pin bar after a pull back within a trend. Trading a pin bar on a pull back means when you see a strong trend underway, wait for price to pull back to a horizontal level such as support / resistance, a moving average, 50% retrace or even previous event area and form a pin bar in the direction of the underlying trend.

You are looking to enter at the 50% area of the pin bar. In other words, you are waiting for price to retrace halfway up the bar and then entering near that point.

You see this is quite specific and so it’s much more than just “trading a pin bar”, there are many different variations of each of the core patterns I teach, which I get into in detail in my trading courses, but for now, let’s look at this one specific pin bar example:

In the first chart below, we have zoomed out a bit so you can see the trend and the multiple pin bars that formed after pull backs within that trend, on the daily chart. This is your setup that you’re looking for and looking to master.

The next chart shows a zoomed in view of the chart shown above, showing you how a 50% tweaked entry would have easily netted you ‘up to’ 6R + profit for a lower risk higher reward trade. I suggest you print out the setup you want to master first and tape it to your wall so you start drilling it into your memory!

Conclusion

Whether you are training to be a martial arts master like Bruce Lee or a successful trader, there are things that every successful person must do, no matter the profession. The most important thing in my opinion and the subject of today’s lesson, is practicing one thing at a time, over and over, until you have mastered it.

I have laid out the “whys” and the “hows” in this article, all you have to do is follow it. You pick a setup that you like and you learn how to trade it, inside and out, so that you are literally seeing it in your dreams. Once you do this, it will make everything else a lot easier; you won’t have to second-guess yourself as to “whether or not” there is a trade present on the charts, because you will know almost instantly. Upon mastering a trading strategy like one of the strategies that I teach in my professional price action trading course, you can put your extra time into focusing on trading psychology and money management, which are arguably more difficult to master. Yet, again, if you apply the same principles discussed today to those topics, you will end up with the same result; mastery.

Today’s article is about a seemingly obvious concept; how to measure trading profits. Yet, most traders start out measuring their profit (and loss) totally wrong, but it’s really not their fault. Conventional thinking and what is typically spread on the internet or recommended by brokers and even in many books, just isn’t how actual professional traders think about measuring trading performance or managing risk (they go hand-in-hand).

Hence, today, I want to give you a real-world lesson which is probably not what you have read or heard elsewhere, on how to properly measure your trading performance and risk in the market. After all, this is a pretty core-component to your trading career, and if you don’t have this part down how can you expect to actually make money in the market? I think you agree.

As you know if you’ve followed my blog for any length of time, I am primarily a swing trader and that is the style of trading we focus on here and that I teach my students. Why is that important? Well, because depending on how you are trading, you will want to measure your profits differently, and for swing traders like you and I, there is one way to measure profits that is clearly more logical and simply “better” than the rest.

However, before we get into how I measure risk and reward as I trade the markets, let’s be fair and transparent and go over the three primary ways traders measure this. We will discuss each of them and then I will explain which one most professional traders focus on, and why.

The 3 Primary Means of Measuring Profits:

The “2%” Method – A trader picks a percentage of their account to risk per trade (usually 2 or 3%) and sticks with that risk percentage no matter what. The basic idea here is that as a trader wins, they will gradually increase their position size in a natural way relative to account size. However, what usually happens is traders lose (for a number of reasons discussed in my other articles, check out this lesson on why traders fail for more), and then they are stuck trading smaller and smaller position sizes due to the 2% rule (the 2% means less money risked as you lose), making it harder just to get back to their starting amount, let alone actually make money!

Measuring Pips or Points – A trader is focused on pips or points gained or lost per trade. We aren’t going to focus much on this method because it is so ridiculous. Trading is a game of winning and losing money, not points or pips, so the idea that focusing on the pips will somehow improve your performance by making you less aware of the money, is just silly. You will always be aware of the money, no matter what. Only by properly controlling your risk per trade can you control your emotions, and that means you need to know what you are risking per trade in monetary form (dollars, pounds, yen, etc).

Measuring based on “R” or Fixed $ Risk – A trader predetermines how much money they are comfortable with potentially losing per trade and risks that same amount on every trade until they decide to change that dollar amount. The dollar amount they are risking per trade is known as “R” where R = Risk. Reward is measured in multiples of Risk, so a 2R reward is 2 times R, etc. Yes, there is some discretion involved with this method, but honestly, discretion and gut feel in trading is a big part of what separates the winners from the losers. I will explain more as you read on…

Fact: Size doesn’t matter.

A recent study I read on what women thought was the most important feature of a man…joking! Lol. Seriously though…

Risk per trade has to be a deeper thought process, it has to be personal based on circumstances and the entire risk profile and financial position of the trader. For example:

Trader A who risks 2% of his $5,000 account his totally different life circumstances (finances, etc.) than Trader B who would also risk 2% of his $5,000 account, as suggested by the 2% rule.

Now, answer me this: Why on Earth would two TOTALLY DIFFERENT INDIVIDUALS RISK THE SAME PERCENTAGE of their trading accounts when the actual amount of money they will be risking from that 2% may or may not make sense given their specific circumstances? It doesn’t make sense does it? The 2% rule is just designed to be “easy” and to “make sense” for the average, beginning trader, but as I talked about earlier, all it really does is cause traders to lose slowly. For a skilled trader, the 2% rule is a death sentence by a “one thousand cuts”, so to speak.

This is they the $ risk model makes MUCH more sense: Because each trader has a different risk profile and personal situations that will (or should) factor into how much money they can comfortably risk per trade. The 2% rule of risk is simply an arbitrary number in dollar terms, that may or may not end up making sense for any given trader with unique circumstances and finances.

Also, in Forex, account size is truly arbitrary because a Forex account is simply a margin account, which means it’s only there to hold a deposit on a leveraged position. Any trader who understands these facts would never put ALL their trading money in their trading account because it is simply not necessary and is not as safe or lucrative as holding that money elsewhere.

The amount you fund your trading account with does not necessarily reflect all the income you have to trade and it does not reflect your overall net worth. However, in stock trading, you need a lot more money on deposit because there is less available leverage. Typically, if you want to control 100k worth of stock you need to have 100k in your account. Forex is much more leveraged as I’ve already said, and this means that to control say 100k of currency, which is 1 standard lot, you only need around $5,000 in your trading account.

The Myth of Compounding and the 2% Rule

One of the big reasons, if not thee biggest reason that so many people push the “2% money management rule” is that it seems to show that as your account grows you will be able to increase position size exponentially. In theory, this is correct, but in the real-world, it is rubbish. Allow me to explain…

Professional traders withdrawal money (profits) from their trading accounts every so often (typically once a month or every 3) and then their account goes back down to a “baseline level. Hence, with a 2% model, you would not be increasing position size forever, because it makes no sense to never withdrawal any trading profits, after all, the point of trying to make money trading is to actually use the money, right? The fixed $ risk model makes sense for professional traders who want to derive a real income from their trading; it’s how I trade and it’s how many others I know trade.

So, if trading is a revenue business and we withdraw profits to live/spend, then compounding is dramatically impacted and simply not what it seems. Don’t believe everything you read or hear on the internet; there is no method of risk / money management that allows you to magically compound forever, it’s just not realistic.

When you use the 2% or % R rule, you will increase position size as your account grows, but once you take money out of the account, bang, your position size takes a huge hit and you are suddenly trading far smaller amounts than you just were. The fixed $ risk model avoids this and keeps everything nice, even and consistent.

How much should you actually Risk per trade?

Ok, so by now you might be thinking “Nial, how do I know how much I should risk per trade?”

The answer is much less complex than what you might think. I believe in determining a dollar amount that you are comfortable with losing on any one trade, and sticking to that dollar amount at least until you have doubled or tripled your account, at which time you can consider increasing it.

This amount should be an amount that satisfies the following requirements:

When risking this dollar amount, you can sleep sound at night without worrying about trades or checking on them from your phone or other device.

When risking this dollar amount, you are not glued to your computer screens becoming emotional at every tick for or against your position.

When risking this amount, you should be able to almost ‘forget’ about your trade for a day or two at a time if you have to…and NOT be surprised by the outcome when you check on your trade again. Think, ‘set and forget‘.

When risking this amount, you should be able to comfortably take 10 consecutive losses as a buffer, without experiencing significant emotional or financial pain. Not that you would IF you’ve mastered an effective trading strategy like my 3 core price action patterns, but it’s important you allow that much buffer for psychological reasons.

Fixed $ Risk vs. % Risk

“We need to be logical, what is a true measurement of a traders performance ?”

If you’ve read my other articles on this topic, I have argued for the fixed dollar risk model and against the 2% rule, but in case you missed that lesson, I want to discuss again why I prefer the former to the latter…

The main argument I make about this topic is that although the 2% rule will grow an account relatively quickly when a trader hits a series of winners, it actually slows account growth after a trader hits a series of losers, and makes it very difficult to bring the account back up to where it previously stood.

This is because with the % R risk model you trade fewer lots as your account value decreases, while this can be good to limit losses, it also essentially puts you in a rut that is very hard to get out of. For example, if you draw down 50% of $10,000, you are at $5,000, and to get back to $10,000 you have to make 100% return, it’s a long way back to break even and then profitability using the 2% rule, because you are effectively trading a much smaller position size once you draw down that far.

This is why I say the 2% model basically leads a trader to “death by one thousand cuts”, because they tend to just lose slowly as the position size shrinks after each loss. It deflates their confidence and they end up over-trading because traders begin to think “Since my position size is decreasing on every trade it’s OK if I trade more often”…and whilst they may not think exactly that…it is often what happens.

I personally believe the % R model makes traders lazy…it makes them take setups that they otherwise wouldn’t…because they are now risking less money per trade they don’t value that money as much…it’s human nature.

Conclusion…

If you only remember one thing from this lesson, remember that the most logical way for a trader with an effective trading edge to measure trading performance or (profits) is the fixed risk or R model.

Whilst I do not recommend traders use the “2% rule” or a fixed % model, I DO recommend that you risk a dollar amount you are totally comfortable with losing on any given trade. Remember, you never know which trade will lose and which will win over any series of trades, so it’s foolish to jack up your risk on a certain trade just because you “feel” more confident about it. If the amount you’re risking per trade is keeping you awake / unable to fall asleep at night, you are risking too much, so dial it down.

Remember, professional traders have learned to use discretion or “gut feel” to gauge whether or not to take a specific trade and they are very picky about which trades they take. This comes through screen time and practice, so you should spend some time developing your skills on a demo trading platform before going live. Although today’s topic was money management, remember that it also takes sound trading psychology and a good trading method to become a successful trader. If you would like to learn more about my fixed Risk money management method and how to trade a chart based on price action analysis, check out my advanced price action trading course for more information.

Please Leave A Comment Below With Your Thoughts On This Lesson…

Have you ever not taken a trade and then looked back in hindsight and wanted to kick yourself? Ever entered a great trade and exited too early due to low confidence or over-thinking it, only to see the trade go on to be a huge winner? How often do you find yourself in these situations or similar?

Truthfully, these situations are unavoidable sometimes, but if you’re finding that you are in a constant state of frustration and regret with your trading decisions you need to do something about it.

What if there was a way to reduce these trading errors and the mental pain that comes from them? What if you could start getting onboard these big trades that you talked yourself out of entering? What if I could help you cure this mental condition and finally set you free?

I have good news and perhaps bad news (depending on how you look at it). The good news is: This article is going to help you understand what is causing these problems and hopefully give you confidence to rectify the issue and start nailing some of these trades you keep letting get away. No more living in hindsight saying “I was going to take that trade, but…” or “I was going to let that trade run, but…”. The “bad news” is that I can’t do the work for you, I can show you the proverbial “door” to success, but it’s up to you to walk through it.

So, if you’re tired of standing in the same spot, getting nowhere fast, here is the path, all you have to do is start walking down it…..

1. Learn what recency bias really means and how to stop it

Humans tend to make decisions about the future by looking at the past and for good reason; this is usually a very helpful behavior that can prevent us from repeating the same mistakes over and over. However, although this evolutionary instinct has helped us move forward over the centuries, in trading, it tends to work against us. We call ourselves “optimists” when we learn from the past, and indeed that is typically a very optimistic thing to do, but in trading, in an environment with so many random outcomes, it can make us “pessimists” very quickly.

Allow me to explain with an example….

We tend to think that what happened recently in the past will impact what is about to happen next, and in MOST situations that would be true. However, in trading, there is a random distribution of winners and losers for any given trading edge. So, this means you never know for sure which trade will win and which lose, even if your edge is say 80% profitable over time. Even in a very small sample size of 3 winning signals and 2 losing signals on a random section of a chart, a trader could take 1 of the losing trades in that series and get mentally “shaken out”, meaning they freeze like a deer in headlights and skip the next perfectly good signal purely due to the recency bias in trading. In other words, they are being overly-influenced by the past / recent trade’s results when in reality, those outcomes have little to nothing to do with the next trade’s outcome.

An example of recency bias in action:

Now, let’s look at a recent real-world example of how recency bias can negatively impact your trading:

If your primary trading edge was pin bars on the daily chart time frame, you would have been taking the first two signals labeled “winning pin bars” on the chart below. These were long tailed pin bars, one of my favorite types. You could have profited from both of those or at worst, gotten out at breakeven, OK, no harm no foul.

Now, things get a little more interesting…

We can then see there were back-to-back pin bars that ended up losing. So, had you taken these two pin bars, if you let recency bias “get you”, there was a VERY slim chance you were taking the last pin bar to the right on the chart; which has ended up working quite nicely as of this writing. This is proof of why you need to continue taking trades that meet your trading plan criteria, despite recent trade failures or outcomes that you didn’t like. You (nor I) can see into the future, so to try and “predict” the outcome of your next trade based only on the last, is not only futile, but stupid.

I will be honest with you, we discussed the two “losing” pin bars you see in the chart above in our daily members newsletter, when they formed. They failed, as trades sometimes do. But, we then also suggested traders consider buying the most recent pin bar buy signal on the far right of the chart, which you can see is working out quite nicely, DESPITE the previous two pin bars not working out. This, my friends, is called TRADING WITH DISCIPLINE. If you let that recency bias get you, you would have sat out, fearing another loss, then you’d be riddled with regret seeing the last pin bar working out without you on board. Regret, is very, very dangerous, this can lead to you jumping back into the market and making a ‘revenge’ trade (over-trading) and this of course results in more losing.

Again, the concept I am trying to press home is believing in your edge and sticking to it. You must understand that the outcome of each trade is somewhat random and winners and losers are randomly distributed over the chart, as mentioned above. That doesn’t mean we will be taking every trade because we will filter our signals using the TLS confluence filtering model that I teach my students, but as we can see with this real-world and recent example on GBPUSD, when you see these signals, they very often lead to giant moves and we have to try to be on board a large proportion of them for our winners to out-gain our losers.

2. Don’t let fear of loss mentally disable you

The fear of loss, of losing again, is a very powerful catalyst for missing out on perfectly good trades. I am not denying that it’s difficult to take a trade after a losing streak, but you need to get to a point where it isn’t. As we mentioned above, it’s silly to keep thinking you will continue losing just because the last trade was a loser.

To avoid this fear, or to extinguish it, you need to truly treat each trade as it’s own event and as an unique experience, because that’s exactly what it is. You definitely need to NOT over-commit to any one trade, meaning, don’t risk too much money! You need to protect your bankroll (trading capital) so that you can always feel confident and positive, so that you know you can lose a trade or several in a row and keep going and be just fine. Remember, your trading capital is your “oxygen” in the market, so make sure you always have plenty so that you can keep “breathing” properly.

Many traders often associate negative experiences or events in their personal lives with their trading. These “bad things” in our personal lives can manifest in our trading or finances (think about the addicted gambler losing all his money at the casino).

This can become pretty complex, psychologically speaking, but just know that you need to be able to “compartmentalize” your personal life and negative things going on with it, from your trading. If that means you don’t trade for a week or two until a negative experience is not affecting you anymore, then that’s what it means. But, you need to protect your trading mindset and bankroll at all costs.

3. Don’t let overconfidence lead to a lack of confidence

We all start out optimistic and confident but the market typically shatters that quickly. We can set ourselves up for years of pain if we go out and try trading without the right study and practice.

We start out excited and motivated, read a few books, watch a few videos, do a course, and we go out and risk a giant chunk of our hard earned money.  This can destroy even a great trader in the making, some of the best traders don’t make it because they simply didn’t wait their turn and respect the market and the process.  One giant blow to finances can cost them the next decade mentally and financially. One series of losing trades can mentally disable even the most talented and smartest traders.

You need to use your head in the beginning of your career and truly for the duration of your career.  Sure be confident, but first protect capital, study those charts daily and stick to that routine daily, grind it out week in week out and commit.  Practice your craft, master your craft. Be at one with the charts.

4. Develop your intuition and gut feel

Broken traders lack gut feel and intuition, they have stopped trusting themselves. We need to get you back up on the horse and get that 6th sense (gut trading feel) activated again.  Jesse Livermore, in his book Reminiscences of a stock operator, often talked about “feeling the market” and “knowing what was about to happen by a hunch or feeling”, to quote him:

A man must believe in himself and his judgment if he expects to make a living at this game. That’s why I don’t believe in tips. – Jesse Livermore

If you identify and fix the three issues we discussed above, then your gut feel and intuition will develop slowly but surely, like an athlete’s stamina. Once this happens, when you go to take a trade you will begin to automatically “paint” a mental map into the future from the bars on the chart to the right and your gut feel intuition will serve you well in building the confidence to enter the trade. For a price action trader like you and I, this starts with learning to read the footprint of the market left behind by the price movement / price action.

Another thing you can do to help develop your gut trading feel or intuition is put together a list of daily trading mantras that you read to yourself, like the following:

I am confident in my trading edge and my ability to trade it.

I will respect my filtering rules and pull the trigger on valid trades.

I will not hide behind my filtering rules to excuse me from pulling the trigger.

I trust my intuition and gut feel.

I will not overthink this next trade.

I do not care about the outcome of my last trade, it’s irrelevant to my next trade.

5. Understand that the stats don’t lie

Many times, traders miss winning trades because they simply think themselves right out of them as a result of not trusting or understanding the actual facts and statistics of trading. Let me explain…

As I touched upon earlier in this lesson, there IS a random distribution of wins and losses for any given trading edge. What this means is that, despite your trading edge having XYZ win percentage, you still do not ever know “for sure” WHICH trade will be a winner and which will be a loser, the consequences of this trading fact are three-fold:

There is no point in changing your risk considerably between trades, because you do not know if the next setup will win or lose, despite “how good” it looks.

You cannot avoid losing trades, all you can do is learn to lose properly. When traders try to avoid losses by doing things like thinking they can “filter” out losers or any other similarly hair-brained idea, they put themselves in a position to blow out their trading account because they are now trying to predict that which is unpredictable which leads to a whole host of other trading mistakes.

Any one trade is simply insignificant in the grand scheme of your trading career, or at least IT SHOULD BE. If you are making any one trade overly-significant by risking too much money on it and become overly-mentally attached to it, you are setting yourself up for certain “death” in the trading world.

Conclusion

Trading is not about never missing a trade or never having a losing trade, not at all. However, if you find that you are chronically missing trades and in a state of regret about your trading, then you do need to make some changes.

As traders, our number one “enemy” and “competitor” in the market is ourselves. How long it takes you to realize that, accept it and do something about, will determine how long it takes you to start making money in the market. Today’s lesson has diagnosed and offered multiple solutions to one aspect of trading that typically causes people to “shoot themselves in the foot”, so to speak; missing out on winning trades.

Your mission as a trader is to totally overcome and eliminate all of the various self-defeating behaviors that every trader must conquer to reach a level where you are giving yourself the best possible chance at making money in the market. This is what I constantly try to teach students via my professional trading courses and it is my hope that by following me and learning from me you will eventually get out of your own way and be able to take advantage of the powerful price moves the market offers up every so often.

Please Leave A Comment Below With Your Thoughts On This Lesson…

Most traders simply want to trade. They fear missing out on the next big move and they forget that the market is still going to be there tomorrow and the next day and 10, 20, 50 years into the future. Everything in the market repeats and that means there will be another opportunity right around the corner, so stop worrying.

Today is not the last day you will have to trade and yet many people trade and think like it is! Over-trading is the number one reason that most traders don’t succeed; it’s a ‘cancer’ to your trading account and to your dreams.

What would be considering “over-trading”?

If you find you are almost always in a trade, you’re over-trading. If you find that you are preoccupied with the markets and your trades, you’re over-trading or you’re about to over-trade. If you are in more than one trade at a time you’re probably over-trading unless you have carefully divided up your overall 1R risk amongst all the trades.

There are many other examples of over-trading, but the basic fact of the matter is that you know if you’re trading too much because you won’t be able to sleep at night and you will be hemorrhaging money.

I personally only trade 1 to 6 times per month approximately, and I very carefully select my trades and filter out the signals I don’t like.

Here’s what over-trading does to your trading results and account…

Too many Trades dilutes your edge

The more trades you take, the more diluted your trading edge becomes. A trading edge increases your chances of success, but the simple fact is, there are only going to be so many high-probability trade signals each week, month, year etc. no matter what your edge is.

So, once you start breaking away from your trading edge and start taking lower-quality trades that don’t meet your criteria, you start lowering your chances of success. You are basically diluting your trading edge down to where eventually it will be no better than random or worse.

Market Noise vs Quality Trades – There is market noise, and then there are actual high-probability price events, you must know the difference. I wrote an article that touches on this titled how to trade sideways markets and I suggest you check it out to learn more and see some chart examples. The point here is that when you don’t know the difference between market noise and actual price action signals worth risking money on, you will naturally end up taking trades that are just noise and not actual signals, further diluting any edge you may have. The verdict is clear: Before you start risking your hard-earned money in the markets, make damn sure you know EXACTLY what your trading edge looks like and how to trade it so that you don’t ACCIDENTALLY end up over-trading!

The spread and commissions eat into your profits

How do you think casinos make sooooo much money? Frequency. The high-frequency of games played means that their edge is going to play out to their advantage over and over again. The house always wins. In trading, the broker is the house, and they always win because not only are there a lot of people trading but probably 90% of them are trading WAY TOO MUCH. Hence, your only REAL “edge” as a retail trader or investor is to simply TRADE LESS!

Consider this: Every 100 trades you give back at least 100 to 150 pips equivalent in spread or commissions, so the more you trade the more you cost yourself simply due to the “churn” of your account.

You want to avoid trading like you’re the casino player and premeditate, filter, and carefully select your trades. In a nutshell, to maintain your edge you want to avoid giving the market or broker the spread constantly.

Doing too much of anything is usually a bad idea

If you take a look at most endeavors, trading included, often times doing them too much or thinking too much / worrying too much about XYZ endeavor has a direct and negative relationship to how well you do at that thing.

For example: Drinking too much coke, eating too much Mcdonald’s, even working out too much or drinking too much water – all of these things can be bad for you. Being too worried about your significant other will end up pushing them away as it becomes unattractive and “needy”. One thing is true – too much of anything can hurt or even kill you and too many trades WILL kill your trading account for sure!

Your brain is wired to get addicted…

Drugs, sugar, video games, gambling, blue light from your smartphone, trading, what do all of these things have in common? They can all become insanely, dangerously addictive.

Our brains are wired and designed to become addicted to things, this is an evolutionary trait that served us well thousands of years ago as hunter-gatherers, but in modern-day society with all of its unhealthy vices and temptations, it tends to work against us and in certain cases, even kills us.

Our brains work on a reward system; when something feels good we get a little “shot” of “feel-good chemicals” such as dopamine and others. Hence, we become addicted to whatever gave us that dopamine rush, whether it was bad or good for us. For example, drugs are obviously bad for you but they can make you feel really good and we can become addicted to that good feeling even though we know the dire consequences it brings. Certain drugs like heroin are extremely addictive and can kill you very quickly, so they are especially dangerous. On the contrary, exercise also releases “feel-good” chemicals and you can become addicted to that feeling and you will be more likely to continue working out, obviously that is not a bad thing.

Knowing this basic information about how your brain works, it should be obvious that you need to be very careful and train yourself to get addicted to positive thoughts and processes so that you don’t become addicted to the negative ones.

When it comes to trading, we have a laptop in front of us with flashing colors and prices moving up or down that we can use to enter trades at the push of a button. Once we do that and hit a few winners, the brain says “hey that feels pretty damn good, do it again”, and so the trading addiction begins, if we aren’t careful.

If you do not create a trading plan where you plan out your trading edge and how you will behave in the market, you will naturally end up over-trading as you will get addicted to the feeling of “chasing” that winner. If you do not objectively plan our your trades in the beginning of your career, you will end up losing a lot of money due to trading addiction before you finally learn the lesson enough times that you either quit or have no money or desire left to trade with.

A Cure For Over-trading

I’ve been trading the markets for about 18 years, teaching traders for over half that time, and without a doubt I have learned every lesson there is to learn in the markets many times over. So, the plan I am going to lay out for you below is born out of my experience and it is my opinion that if you follow it, you will be “cured” of the over-trading “cancer” that is probably destroying your trading account right now.

Set a max 10 to 12 trades a month, ideally less.

You must have some rigid rules built into your trading plan. Think of it like this: some of your trading strategy is rigid and then within that rigid structure there is some flexibility such as how much you risk, how you enter, where you place your stop loss, etc. But, when it comes to trade frequency, it really is necessary to say, “I am not going to take more than 10 trades a month” or 5 trades or whatever. Ideally, I would not trade more than 5 – 7 times a month. If you’re trading more than 10 times a month you’re probably over-trading.

Wait for setups matching your plan and apply a filter…

When we talk about “applying a filter”, I am talking about a set of criteria that you use to check if a trade is worth taking or not. I like to use a T.L.S. filter wherein I am checking for a trade that has multiple pieces of confluence in its favor, at least 2 of 3: Trend, Level, Signal, etc.

Your goal is to trade like a sniper and wait patiently like a crocodile hunting its prey. You are not going to go after “every” target or the prey that looks strong and difficult to “kill”. Instead, you want to improve your odds of success by saving your “ammo” (trading capital) for the weaker / easier to get prey / trades. You only have so much money to risk just like a sniper only has so many bullets and a crocodile only has so much energy. Use it wisely or you’ll run out / blow out your account.

Set and forget approach…

One of the big reasons traders trade too much is because they don’t give their trades enough time to play out and then they jump into another trade right away. Remember, good trades take time to play out and if you want to catch big market moves you have to be patient, this means you also have to not trade a lot. This is one reason why you need to set and forget your trades. Doing so not only improves your chances of making big gains but prevents you from trading too much and “chasing” trades.

Limit yourself to markets clearly moving in one direction with technical evidence

Traders often make the mistake of trading in choppy market conditions, this causes them to get in a trade and it immediately starts going against them, then they want to enter another one. The dopamine chase is underway at that point. Jumping from trade to trade is very dangerous. If you stick to markets that are clearly trending and moving in one direction aggressively, you are much less likely to over-trade.

In Closing…

One of the hard truths of trading is that there simply are not a large amount of high-probability price events in the market each week, month or year. So, it goes to reason that the more you trade the less impactful your trading edge becomes. Despite these facts, most traders continuously trade far too frequently each week, and they end up losing money.

My strategy is built on a low frequency trading approach so that I am basically trading as infrequently as possible whilst not passing up the most obvious trade setups. Obviously, there is some learning and skill required to know what constitutes the “best” and “obvious trade setups”, you aren’t going to just wake up one morning and magically know what to look for. With the help of my professional trading courses and the set and forget approach that I teach, you will begin to learn what a “high-quality” price action event looks like and you’ll learn to filter out the lower-quality ones from them. My end of day trading approach is inherently low-frequency FOR A REASON; it results in a self-fulfilling type of function that works to systematically prevent over-trading which naturally increases your chances of long-term trading success. Which is what we all want, right?

Please Leave A Comment Below With Your Thoughts On This Lesson…

Thinking too much. It’s truly a form of mental ‘poison’ that if left unchecked, can consume you and drastically alter your thinking, behavior and even your personality. Needless to say, this negative habit can have disastrous consequences in any area of life: work, personal (relationships), school and especially in trading.

As with most things, a skilled trader is at his or her best when they are “in the moment” and not thinking too far ahead about all the possible outcomes of a particular trade. Trading is not a game of “chess” like so many people seem to think. It is not going to improve your odds of success by thinking more, researching more or being at your charts more, if it were that easy everyone would be doing it.

Trading success comes when a person has the proper tools to analyze and make sense of the market as well as the proper mindset that allows them to stay “in the flow” and not think too much or analyze too much.

What is “overthinking” in trading and how does it affect your performance?

Overthinking can seem like a broad and somewhat obscure topic so it’s important to define what it is so that you know when or if you are doing it so that you can being taking action to stop it.

We all know that if someone is “overthinking”, they are thinking too much about a topic, to the point where it negatively impacts them. But, the following points outline some specific examples and causes of overthinking in trading. Read along and see if these sound familiar to you:

Recency Bias on recent trade outcomes

In a recent article I wrote on recency bias in trading, I discussed how traders become overly-influenced by the outcomes of their most recent trades. Essentially, they end up overthinking them and assigning too much weight to those recent trades outcomes.

For example, if you’re guilty of having recency bias, it means you are thinking and feeling like “this trade” will be a winner “because the last one was” or that “this trade will be a loser because the last one was”. Either way, you’re wrong lol. Your last trade has basically ZERO to do with your next trade. Each trade’s outcome is essentially random from the previous trade(s), so stop thinking about it too much and becoming overly-influenced by the previous trade(s) result. Traders can even start thinking of things like “well since the last 3 trades lost, this one is bound to win” this is another example of recency bias in action. But, this too is wrong and has zero meaning in the real-world. Remember: Your current trade has NOTHING to do with your last trade!

General fear of losing money and of being wrong (bruised ego syndrome)

Many traders think so much about “losing money” and “being wrong” that they end up not taking perfectly good trades. This problem typically stems from the trader risking too much money or more than they are comfortable with losing on any one trade.

If you’re going to be a trader, you’re going to be dealing with risk so you have to accept that you can lose and instead of trying to avoid it, just try to manage your losses by managing your risk properly. It comes to down to not risking more per trade than you are comfortable with losing, this is an amount that when you have it at risk you should be able to easily fall asleep at night without worrying about the money or feeling a need to “check the trade real quick”.

Not trusting your trading strategy

When traders overthink, they often start to doubt their trading strategy and they start thinking likes like “maybe my strategy doesn’t work” or “maybe I should add some trading indicators” etc, this type of self-doubt and overthinking can be very damaging.

Not trusting your trading strategy is a result of overthinking and not “trusting the process”. Just because you hit a losing trade or even a few in a row, does not mean you should abandon your trading strategy and look for a new one.

The “Deer in the headlights” concept: Analysis Paralysis

The deer in the headlights “syndrome” is something that happens when traders (once again) overthink about the market and their trades. What happens is that a trader starts to overthink about all the possible scenarios of a trade’s outcome and they end up missing the trade altogether. They end up just staring at the trade take off without them, like a deer caught in the headlights of an oncoming car. You have to be confident and decisive when executing your trades and you can’t allow yourself to get stuck in a cycle of “what ifs” / fear.

The Hindsight Trap

The hindsight “trap” is something that happens when a trader becomes obsessed with trades after they play out. They torture themselves about missing a trade (deer in headlights) or about exiting a trade too early or a whole host of other things. The bottom-line is that living your trading life in a hindsight “haze” of “what could have been” is detrimental to your long-term trading success. You need to realize that sometimes you’ll miss trades, sometimes you won’t exit a trade exactly when you want to etc. but don’t waste your time thinking about those things too much or you will drive yourself crazy.

Trying to “outthink” the market: It’s not a chess game!

Many, many traders think they can “outsmart” or “outthink” the market by doing more research or learning the latest new trading system. However, this couldn’t be further from the truth. The market is going to do what it wants, regardless of how much time you spend reading economic reports or studying new trading methods. Unfortunately, trading is not a chess game that you can become better at simply by thinking long enough or hard enough about. Yes, you DO have to do some initial study and get some training to learn an effective trading method like price action analysis, but once you learn a method and you’ve got a weekly and daily trading routine down, any additional time to “researching” “analyzing” or “trying to figure out what will happen next” is futile.

Short time-frame charts cause overthinking

One sure-fire way to get your brain cells in an overthinking “traffic jam” is to start looking at short time frame charts. The main reason I preach trading the higher timeframe charts is because it simplifies your analysis and smooths out all the noise and random price action on the short time frames. This noise and randomness causes you to overthink and overtrade and generally just sabotages your trading.

Checking the news constantly

If you’ve been following me for any significant length of time, you know that I generally abhor trading the news because I feel the price action reflects all pertinent variables of a market and also because it causes traders to overthink and over-trade.

There are thousands of variables that can affect a market at any given moment, so truthfully, to try and analyze or “trade the news” is basically the same thing as trying to “out-think” the market or thinking that if you just “know more” you will “figure out the next move”. All that is true is that the price action is already showing you what the impact of any news on a market, so skip all the news B.S. and just learn to read the footprint of the market; the price action.

So, how can you stop overthinking and start trading?

So now that you know what overthinking is and how it negatively impacts your trading, here are some simple yet effective solutions on how to overcome this bad habit.

Trade What You See, Not What You Think

Trade what you’re actually seeing, not just what you think might happen. Traders often think themselves right out of perfectly good trade setups because instead of simply trading what the setup they see in front of them, they start imagining a whole bunch of different scenarios that may or may not happen. You just have to accept that you never know how a trade will play out before it plays out, but when you see a setup that meets your trading strategy criteria, you simply execute the trade and walk away

Ignore the News

As mentioned previously, the price action of a market, easily visible on any raw price chart, is the best and most accurate reflection of all the variables affecting a market at any given time. To focus on news or “fundamentals” is simply to distract yourself from the price action and it will set you on a course of overthinking and analyzing. Do yourself a huge favor and stop looking at trading news.

Put together a trading plan

Perhaps the single most impactful thing you can do to stop overthinking and start trading, is to put together a comprehensive yet concise trading plan. Your trading plan is your “document”, your tangible piece of accountability and guidance. You will learn a lot simply by putting it together and it will become the “glue” that holds your trading together. You should refer back to it every day and read-through it so that you remember what you need to do to not only trade your strategy properly, but to stay on track mentally. Check out my article on how to build a trading plan, for more in-depth trading plan instruction I have a trading plan template in my professional trading course.

Your trading plan is what will set into motion your trading routine. Routines influences habit and positive habits turn into success.

Understand what “gut feel” and trading intuition really is

Traders can get easily confused when they hear something like “Don’t think too much, just follow your gut…”So, I want to clarify that statement because gut feel and trading intuition are very important and necessary pieces of the pie.

The key with gut feel and trading intuition is that it doesn’t come instantly. It’s something that you develop and that will become stronger within you over time and with training and screen time. Essentially, I view it as a “subconscious piece of trading confluence” that adds weight to a trade. It’s your subconscious giving you a ‘green light’ or ‘red light’ to act based on everything you are seeing on the chart and your cumulative trading experience.

Practice and implement “set and forget trading”

You may not like this, but you need to physically leave your computer sometimes, for longer periods of time than your probably used to. You have to do this so that you don’t overthink and overtrade and get yourself into trouble.

The hardest part of trading for most people is self-control. One of the most effective and efficient ways to establish self-control in your trading routine is to build-in a section in your trading plan that describes when you will be in front of the charts, for how long and when you will physically leave the charts. You need to remember that you will miss some trades, and that’s OK, the market will be there tomorrow. We are trying to execute a trading edge with discipline, not trade everything that moves.

Eliminate fear by controlling what you can and letting go of what you can’t

Just like you cannot control another person without their being severe negative consequences in most cases, you absolutely cannot control the market. You can certainly try, but it will result in losing your money and trying to control the market is the best way to describe why most people lose at trading.

Literally, the ONLY thing you can control in the market is how much you risk per trade, your stop loss placement, your position size, your entry and your exit placement, and that is really about it. You have ZERO control over all the other market players and which way the market will move, Z-E-R-O. Yet, time and time again, traders behave in such a way that shows they are trying to control the market, whether they intend to or not.

The biggest way to eliminate fear in trading is to control your risk to a dollar amount you are mentally and emotionally OK with potentially losing on any given trade!

Stick with your trades

This is one is really just about self-discipline. You desperately need to stick with your trades once you enter them. Stop wondering “is there a better trade out there” and then you close out your current trade and enter another one. This is GAMBLING, NOT TRADING!

Remember, your trading edge (in order to be realized) needs to play out over a series of trades because you never know WHICH particular trade in a series will be a win or a loss; if you do things like close a trade out before it gets a chance to start moving, you are trying to play God of the market and that never works out. Note; there are times when you should close a trade out manually / early, but these are rare and it’s something you shouldn’t do until you’ve had enough experience, training and time.

Conclusion

To summarize, trading success all comes down to confidence, mental state of mind and trading skill. If you are stuck in a haze of overthinking and overanalyzing the charts, even if you’re a very skilled trader, you’re still not going to do well. The state of your mind and your confidence in your own abilities, as you analyze the charts, are of paramount importance to being able to properly take advantage of your trading edge. Read that last sentence again.

Tiger Woods, probably the best golfer to have ever played the game of golf, experienced some serious ups and downs in his personal life over the past 10 years. His confidence and mental state of mind went out the window, yet he still possesses the same amazing golfing skill as when he was on top. His career is far from over, but until he finds his right mind and his confidence returns (and hopefully it does for him), he won’t be able to harness his amazing skill and talent to start winning consistently again. This just goes to show that even with amazing skills, if you’re mindset isn’t right, you’re going to fail at whatever it is you’re trying to master (trading, golf, business, school, etc.)

Trading is so difficult for people because you have to control yourself in the face of constant temptations and constantly changing variables. The tendency and temptation of traders to overthink the entire trading process is immense. This is one reason you need a simplified and structured professional trading education and the guidance to keep you grounded, get you on the right track and help keep you there.

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I was having a conversation recently with an old friend of mine and we were talking about money and wealth and why some people obtain it and others (most) do not. My friend asked me “What do you think is the main reason why only a small percentage of people end up wealthy in this world?” Whilst that is a somewhat loaded question that could take a while to answer, the main answer is simply that MOST people are just not mentally prepared to do what it takes, consistently, to become wealthy. And it’s the same exact way in trading.

Most traders end up losing, just like most people end up staying middle to low-class, economically speaking. The reasons why are very, very, very similar for the most part. When you exclude variables that really aren’t fair, like being born in an economically depressed part of the world or being born with a severe physical or mental handicap, the primary reasons why 95% of people fail at things like trading and business and wealth-creation, are pretty much the same across the board.

So, What do the Top 5% of Traders Do Differently From You?

Stay in Trades Longer

The top 5% of traders, I guarantee you, are staying in trades much longer than you are. I’ve written about this topic many times but perhaps the most important lesson for you to read on it is the one I wrote on how time is the single most overlooked trading component.

Use time to your advantage in the markets. Don’t be anxious to close trades too early. Let them ride and give yourself a chance to catch a big move in the market that will net you some serious profits; this is partially how the top 5% of traders got to where they are.

Place Your Stops Properly and Intelligently (not greedily)

Properly placing your stop losses is truly one of the key factors that can or break you as a trader. Certainly, the top 5% of traders have mastered the art and skill of stop loss placement and you will have to as well. Perhaps the most helpful piece of advice I can give you on this matter is to use a wider stop loss than what you think you should. Most of the time, traders have the right idea of market direction or they pick a good entry signal, but their stop is too tight and it gets hit just from the natural daily price fluctuations that happen. They key is to place your stop outside of these daily price ranges and beyond nearby key levels.

Trade With Clean Charts and Focus On the End of Day Data

Traders who are making consistent money, over a period of years (not just a few lucky months), know that in order to see the most accurate view of the market, they need to focus on clean end-of-day charts. That means, they are focusing on higher time frame charts, mainly the daily time frame and they are primarily using THAT time frame’s price action data to make their trading decisions. You will be very hard-pressed to find any long-term successful traders who solely look at the short time frames and scalp them. Scalping or day trading is a fool’s game that not only makes the entire process much more difficult, time-consuming and stressful for you, but lowers your odds of long-term consistent trading success.

Utilize a Clear Arsenal of Trading Strategies

Professional traders know exactly what they are looking for in the markets. They have a defined set of setups, of trading strategies, and they wait patiently for things to line up just right for their entry signal to form. You must have a CLEAR arsenal of trading strategies to succeed, you cannot just “wing it” and think you’ll “figure it out”. All you will “figure out” is that you were wrong and you lost money.

You need to make a trading plan that includes print outs of the best setups that you’re looking for. So, if you’re trading my price action strategies, you would have a print out of the pin bar signal and it’s variations, for example, amongst other price action signals. You will want to have a checklist of sorts, that you go through everyday before analyzing the charts and before taking a trade.

Apply Sound Risk / Reward Per Trade

The top 5% of traders got to that position because they understand risk reward. They understand the math behind risk reward and also how to practically make it work by placing their stops and targets properly.

Part of risk / reward is actually realizing the risk / reward and you do that by letting the trades play out without your constantly interfering with them (like the bottom 95% do). When you learn to set and forget your trades, you will start seeing your trading performance improve slowly but surely.

Look For Confluence

Anytime you have multiple factors of confluence in a trade, it adds “weight” or “authority” to that trade setup, meaning it should have at least a slightly higher chance of working out in your favor. Professional traders know that they need to tilt the odds in their favor and one way they do this is by knowing what pieces of “evidence” on the charts constitute “confluence” and then waiting for those things to come together to form a high-probability entry. Essentially, you want to find as much technical chart evidence as possible to back up the trade.

Thinking and Acting Properly in The Market

How you think and act in the market are the two overarching things that determine whether or not you will make money over the long run.

You cannot become overly emotional about your trades nor can you allow yourself to become overly influenced by your most recent trades’ results (recency bias). Part of thinking and acting properly in the market is trusting yourself and remaining cool, calm and confident even in the face of the constant temptation and adversity that IS trading. The top 5% of traders have thought and acted properly for so long in the markets, that they have developed a sort of “sixth sense” in regards to trading intuition and “gut feel” in the market; which is a result of years of thinking properly about the markets and acting properly within them.

Write a Daily / Weekly Market Summary or Journal Their Trades

In order to become one of the top 5% of traders, you need to get “in tune” with the markets so that you get a feel for what has happened, what is happening and what might happen next. I refer to this as “reading the market like a book”. Once you start writing a daily summary of your favorite charts, the charts will start to make much more sense to you, you will be following the footprint of money. To get an idea of how to do this, you can check out my members daily market commentary. Starting this daily journaling / commentary of the markets will take your trading to an entirely new level.

Treat Trading Like A Business

Professional traders treat their trading career like a business. It has costs / expenses (losses, computer equipment, internet data, etc.) and it has revenues (winning trades). Just as with any business, you make PROFIT when your revenue is larger than your expenses. Sadly, for most of the bottom 95% of traders, their expenses get far too big due to losing too much money from risking too much, trading too much and / or not knowing what they’re doing.

You need to start treating your trading like a business by doing all the things discussed in this lesson and acting “as if” you are already a wildly successful trader. Remember, trade like a hedge fund manager even if you aren’t one, yet.

Get Knocked Down and Get Right Back Up (confidence and resilience)

If you want to be a successful trader, I suggest you go watch the Rocky movies, because the way he took a beating and just keep getting up and coming back to fight more, is exactly what you have to do in the markets.

You’re going to have losses. You’re going to have winners that had you let them run longer, would have been huge winners. You’re going to have trades that just barely miss your target and turn around and stop you out. You’re going to have a lot of “near misses” and “losses” as a trader, but if you let those get to you and you get emotional about them, you are doomed. You have to be able to get right back on the horse and stay cool and calm. If you feel like you can’t do that, then take some time off from the charts until you are calmed down. You can’t get afraid or mad or sad just because you lost a trade, you’ve got to be able to get knocked down and get right back up, unharmed (mentally) and ready to go.

Conclusion

Perhaps above all else, the top 5% of traders understand that self-master is the road to mastering the markets. Ironically, the market is not something anyone can master, all you can do is master yourself and then you will begin to see your trading improve.

How do you “master yourself”, you ask? Start by accepting you are not perfect, you have flaws, just like everyone else in this world, and those flaws mean you are human and humans do some very, very stupid things in the market just due to how we are wired. However, through ongoing trading education, being open-minded and not accepting failure as an option, you will have a real chance at moving up from the bottom 95% of traders into the coveted 5% group. Remember, there is no “Holy-Grail” to trading success, there is only mastering yourself, sticking to the plan and goal and doing whatever it takes to achieve it.

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It may seem a bit counter-intuitive at first, but to truly be in control of your trading and your trading mindset, you must first learn to lose the need to control the market. Traders often try to control the market and they aren’t even aware they are doing it. If you don’t already know, you cannot control the market, at all. So, if you are trying to, not only are you probably hemorrhaging money, you’re probably extremely frustrated and desperate in regards to your trading. You need to first figure out if you are indeed attempting to control the market and then figure out what to do about it if you are (you probably are).

Once you understand that in life and in the markets there are certain things you can’t control and that will always be unpredictable to a certain degree, you will learn to focus your energy on what you CAN control. Much like a master of martial arts, you can learn every punch, kick and block, but ultimately there are aspects about your opponent you can never control. As traders, we ‘fight’ on a financial battlefield with many different opponents, and the best chance we have at success is preparing a good attack-plan, preparing a good defense, and having contingencies in place. We do our best to prepare and navigate the market’s battleground, but we can not control everything, we can only control ourselves, what we do and don’t do, and how we handle each circumstance and situation.

Self-control is often the determining factor in trading success, relationship success and life in general. Every good relationship book will tell you the only thing you can control is yourself. What other people do, how they act or think, is not in our control, no matter how it may seem. By working on ourselves, we can learn, adapt and succeed in relationships of all kinds, but first we need to let go, and be at peace with what we can’t control. This applies to trading exactly the same way.

For most traders, it takes them years or even decades to realize this same truth; that we can only control ourselves and not the market. This mistake costs a trader thousands of dollars along the way, along with countless late, frustrating, sleepless nights.

Where Do You Actually Fit in in the Overall Market Picture?

There are literally hundreds of thousands, probably millions of variables affecting a market at any given moment. From economic news releases to all the different traders and their opinions and feelings on the market, there is just no way any human could possibly “control” or even collect and comprehend that amount of data. The only way we have to truly make sense of it, is to learn to analyze the footprint of the market; price action.

You need to realize that you are simply a single participant in an enormous sea of competitors / enemies on the ‘battlefield’…all of whom are trying to take home the prize (i.e. money) from the market. The market, as well as the other competitors in it, cannot be controlled, they don’t know you, they don’t care about you and it’s futile to try and control it / them.

Our one single goal and mission is to successfully execute our plan and execute our trading edge with as much discipline as possible, protecting our ass through risk management in the process.

Remember: You are only responsible for and in control of YOU in the market. So, don’t waste your time on anything that isn’t controllable.

Our Innate Need to be “In Control” and How it Works Against Us

Traders often try to control everything in the market except the only thing they can control: Themselves.

Human beings, in general, are really, really bad at self-discipline and self-control, so what do they typically do? They try controlling other people to make themselves feel better (since controlling themselves is uncomfortable and difficult). In trading, people do the same thing, but they try to control the market instead of another person. However, the market is even LESS controllable than another person might be, and the consequences of trying to control it are disastrous.

Being “in control” is really all about fear. When we aren’t in control, we feel afraid. This is why some people are afraid of flying; because they don’t have control of what is happening, they are just passive passengers along for a ride, despite the fact that it’s the safest way to travel. Similarly, in trading, people give into their fear of losing and so they start trying to control the market by over-trading or by moving their stops and targets all around, risking too much, etc. Doing these things gives them a TEMPORARY feeling of control, but as soon as the market does something they weren’t wanting it to do, that feeling quickly turns into anger and even panic.

You can only gain control of the market by losing your need to control it. Read that last sentence again. You must be at peace with what you can’t control and simply give up the innate need and temptation to act in such a way as if you have control over the uncontrollable.

Fail To Plan and You are Planning to Fail (Benjamin Franklin)

If you want to avoid naturally falling into a cycle of trying to control the market and not evening knowing you’re doing it, you need to become a trade planner, not just a “trader”. Let me explain:

The only real way to avoid trying to control the market is first knowing if you’re doing it or not (you probably are), the points made within this article will help you figure that out. Just remember if you’re losing money overall, it’s likely because you’re trying to control the market. Traders who are profitable are definitely only in control of themselves and have long ago given up trying to control the market.

Next, you have to make some type of plan when you’re not looking at charts and not in a live trade (so you’re objective and clear-headed whilst making the plan). This is so that you have a routine and a plan that you will follow which will remind you to stay disciplined and in control of yourself. Every trader needs to do this at least in the beginning or if they are losing a lot, because the market is like an untamed wilderness of constant temptation that will lull you to sleep and steal all your money if you aren’t paying attention.

Remember: Success happens where opportunity and PREPARATION meet. So, if you aren’t prepared with a trading plan and a way to circumnavigate your own human mental faults, you are not going to succeed.

The 4 Core Things We Can Actually Control

What are some of the things we can control in regards to actually analyzing the market and executing trades?

Entry and Exit – You can decide when and where you enter and exit the market.

Risk Management – You can adjust your position size and place stop losses properly so that you contain your risk on every trade.

Mental State of Mind – You can control your state of mind by having a trading plan, understanding the market and how it works, having a trading strategy, reading daily trading affirmations and also by not becoming a screen addict, amongst other ways which I outlined in my article on a winning traders mindset.

Business / Trading Plan – You can decide what you want to put in your trading plan. So, make sure you know what you will put in it and most of all, follow it to the T. The most important thing in trading is self-control and discipline.

The Easiest Way to Make Sure You’re Controlling Yourself

Now, this next point may not be much of a surprise to my regular readers, but I need to discuss it because it truly is the easiest way to remain in control of yourself as you trade.

The number one quickest and easiest thing you can do to immediately stop trying to control the market, is to simply set and forget your trades! It’s simply in theory, but in practice it can prove quite difficult because it truly is the definition of self-discipline and self-control. Can you set a trade up and then close your computer and walk away for a week? If you can, you’re probably going to succeed long-term, if you can’t, then I’d bet money you won’t succeed. Try it for a few trades and see how it goes.

Conclusion

When we talk about “controlling the market vs. controlling yourself” we are really getting into the core issue of why most people fail to make money at trading. Financial market speculation, perhaps more than anything else, is the ultimate test of one’s ability to follow a plan and ignore temptation. It’s made even more difficult because there is no boss; no one to stay accountable to. It’s not like you’re showing up an hour late to work everyday; where there will probably be a really bad consequence at some point. No, when you lose money trading or stop following your plan, no one will probably ever know but you, or care for that matter. The point is, it’s incredibly difficult to focus only on controlling yourself and to actually do it, in trading, so once you learn how to do it, you will be on the way to making money trading.

So, what this really all boils down to is You vs. You, so you have to decide which version of you will win? The out-of-control animalistic version who cares only about temporary illusions of being in control or the calm and collected version that cares only about the long-term outcome and playing the “game” in such a way that ensures that outcome is positive? You have to figure this out sooner rather than later because you certainly don’t want to just bleed money into the market over and over. You can get a “jump-start” on the entire process by learning from someone who has already been in your shoes and figured all this stuff out through much trial and error, or you can go it alone. In my professional trading course, I have a complete trading plan template all laid out for you that makes the process of creating one much easier and quicker. But, whatever you do, just know that the more you focus on yourself and on controlling yourself, the more you will see your trading performance improve.

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