A successful trader’s career mainly depends on his or her psychological
stability in stressful situations, which are common in the process
of trading. Theoretical knowledge can be acquired by reading professional
literature; practical skills and experience are acquired in the
process of actual trading. The most difficult process is adjusting psychological
stress, because in real life it is impossible to completely eliminate
the stress factor influencing human activity. Underestimating the
stress factor could play a mean trick on traders and even completely
block their abilities to make reasonable decisions in real trading situations.
The psychological stress of those trading in the FOREX (and any
other) market is extremely high. Traders must work under permanent
psychological pressure, making decisions in highly unpredictable and
uncertain market situations.
Each trader goes through mistakes, failures, and losses in his or her
own way, in accordance with his or her personality and temper. Some
might blame their failures on the market’s “wrong behavior,” which didn’t
comply with the trader’s brilliant forecast and caused the failure of the
magnificently planned speculative combination. Others blame themselves
and their own inabilities to make right decisions in situations, which afterwards
seem to be simple. It is an interesting fact that, in hindsight, traders
usually find the decision that should have been made at the lost critical
moment and can reasonably prove their point of view. Why can they find
the right decision so easily and quickly in hindsight? Was the trader unable
to do so at the right moment? I don’t think it can be simply explained
by looking at yesterday’s situation from today’s point of view. I do not
think it can be explained by the fact that classical technical analysis allows
for multiple explanations of almost any market situation. It is always
possible to find an appropriate basic explanation for any market shift after
the event takes place. In the heat of the moment, however, the trader was
influenced by stress, and that stress caused the error. This is proven by
the fact that most novice traders show exceptionally good (and even phenomenal)
results trading dummy accounts but can’t even come near those
results when trading with real money.
Being permanently under stress, a trader can often make insufficiently
considered, impulsive, and, therefore, wrong decisions that result
in losses or premature liquidation of profitable positions, that is, in lost
profit. Sometimes, after a few successive failures with various trades,
traders becomes fearful of the market. They are in a state of psychological
stupor, and even a simple market situation may cause panic. They cannot
overcome their emotions or soberly evaluate the current situation, and
they are unable to make any decision—reasonable or otherwise. In many
cases when the market situation shifts against the trader’s position, they
can only passively watch the growth of their losses, because they are unable
to make any decision at all. Often, after the market stabilizes and
traders have the opportunity to calmly analyze daily diagrams of currency
fluctuations, they come to the conclusion that the main cause of failure
was not the lack of knowledge or training but their own emotions. However,
the situation cannot be reversed. Time has passed, money has been
lost, and everything should be begun again.
Another problem that causes severe and even catastrophic consequences
is the trader’s wishful thinking. In this case, traders are sure that
their forecast of market trends is solely correct. They feel the market cannot
and should not give any surprises. They do not consider other options
that could be helpful or they think of other options in a vague and uncertain
form. Sometimes, traders consider a market shift against their position
as short-term and temporary. They begin to average their positions.
They acquire new contracts at a lower price in the hope that the market
situation will come back, and all the positions will become highly profitable.
Afterwards, as the situation worsens, they will be able to come out
of the market without serious losses. Being sure they are right, traders
lose the ability to critically evaluate the condition of the market and accordingly
their own position in the market. In this case, they consider only
those basic and technical features that justify their wishful thinking, and
they discard the contradicting features. This wishful thinking costs them
dearly and can lead to psychological frustration. The market’s “wrong behavior”
not only deprives traders of a certain amount of money and often
ruins their trading account, but also undermines their self-esteem and
their hopes of being a winner in the trading battle.
After such a loss, traders blame themselves, repeatedly going through
the details of the unsuccessful trade. They blame the market for the
“wrong behavior” or themselves for errors in what then seems an absolutely
clear situation. Sometimes, the trader-market relationship takes
the form of a vendetta. Traders consider the market as their personal enemy,
treat it in an unfriendly way (even with hate) and dream of immediate
revenge. Doing so, they miss the fact that they are essentially blaming nature
for changing sunny weather to rain. It is very important to be prepared
beforehand for this change. Trades should always have close at hand one
or a few options in case of sudden change of the situation/weather, so that
their foresight assures their good time or good profit.
The third main psychological problem is trader uncertainty, especially
when traders are inexperienced in abilities and skills—specifically about
each market position they hold. Immediately after each position is opened
and a money contract is bought, traders start questioning their choices.
This is revealed most vividly in the case of a moderately active market at
the moment of fluctuations close to the opening price of the position. Any
movement (even insignificant) against their position causes traders to
have an irresistible desire to sell the recently acquired contract to limit
losses, until it is too late and the market does not shift too far away from
their position opening price. On the other hand, an insignificant market
shift in the desirable direction causes the same desire to eliminate the position,
until it provides for any (even tiny) profit and before this profit
does not turn into losses.
Scared and troubled traders rush and race about. They open and liquidate
their positions too often, and experience many small losses and
gains. Within a short period of time, they turn intermittently into bulls or
bears. As a result, they suffer losses on a dealer’s spread and/or commissions
when there were no significant market changes, and all the market
fluctuations were no more than just regular market “noise.” Such losses
are typical for beginners and individual traders with small investment capital
or little experience and insufficient psychological preparation.
Not uncommon are cases of traders’ impulsive decisions on trading,
without any plans or serious preliminary market analysis. The position is
opened under an impulsive, invalid emotional reaction. Often, it can be
explained by traders’ fears of losing a brilliant opportunity to earn money
they think is being offered by the market at that moment. I have witnessed
these attempts to jump onto the last carriage of a departing train, and
such attempts have ruined a lot of traders. Many traders cannot calmly
watch any kind of market movements. Some of my students have confirmed
this reality. If they have no positions at the moment of more or less
significant market movement, they consider it as a lost opportunity to gain
profit. This can inflict a serious shock to them.
When they have no position, they seem unable to realize that each
market movement can be considered both ways, and the opposite situation
can quite possibly develop. Statistics show that, at each market movement,
the chances to lose are much higher than to profit. How does it
happen that reasonable people (who in everyday life, without any emotion,
can watch a bank cashier counting other people’s money) consider
the fact of market movement as a threat to their own pockets? Why is
other people’s money in the hands of a bank cashier not considered as a
lost profit, whereas capital shift on the market and the corresponding
quote fluctuations are the causes of negative emotions? I think the answer
is in the illusory simplicity of business itself, which is considered by many
people as a good and simple opportunity to earn a lot of easy money. Similar
notions are widely spread among novice currency traders. The soon
traders abandon such ideas, the sooner they become professionally efficient
traders.
The most difficult problem for every trader (regardless of their experiences)
is to learn as quickly as possible how to recover quickly from
losses, which are inevitable in this business. At the same time, they must
learn to handle shocks and psychological damage inflicted by the losses,
because these situations could negatively influence their future work.
The losses themselves and the fear of losing, both of which permanently
torture traders, negatively influence their ability to make reasonable
decisions in a complicated situation. These factors also undermine traders’
ability to follow their own rules about trade strategies and systems.
I have become personally acquainted with hundreds of traders and
have watched their activities. I have taught many students, and have had my
own experience as a trader at various steps of my career in the currency
market. Therefore, I have come to the conclusion that the main causes of
trader failures in speculative operations in the FOREX market are without a
doubt those associated with psychological trauma—the inability to control
their own emotions and to find an adequate way to fight stress.
I have explored ways of solving the psychological problems that arise
from operations in the FOREX market, with the focus on increasing selfresistance
to stressful situations and increasing trade effectiveness. As a
result of my research, I have managed to develop a trading method that
also helps to withstand shocks and keep emotions under control. To solve
the problem of stress, I had to separate the problem into several parts and
solve them one by one.
First, it was necessary to develop the philosophical conception of my
attitude toward market situations. By this I mean not only the general
trade methods, which are discussed in the second part of the course, but
also my own conception of the market and associated psychological problems,
which most traders (including myself) have to overcome daily. The following formula is essential for my conception: I can’t be wrong if I don’t
have an opinion.
I had this in mind as I thought about how to avoid unwanted stress
and emotions that are associated with trading. When you find a way to
make reasonable decisions not based on your own opinion about future
market trends but in accordance with certain market signals, the problem
of diminishing and almost completely eliminating psychological pressure
and stress will be solved. The key issue in this case is a philosophical attitude
about market trends—they are natural phenomena beyond human
control and forecast.
The trick was to develop a secure and effective trade strategy that
could advantageously use these natural phenomena. This formula seemed
logical and could provide the basis for the development of a conceptual
trading strategy. In reality, however, this job took considerable time. Nevertheless,
the formula was used as a base for the development of my system-
trade methods that I called the method of discrete-systematic trading.
Moving from the basic formula and general philosophical idea
through intermediate conclusions, I came to the development of the trade
method. This method provides for trading practically without emotions,
and it became a very effective and profitable tool to earning money in currency
speculations.
The logical chain of my arguments and intermediate conclusions is
the following:
- Idea 1. The main source of negative emotions and stresses is the unfulfilled
trader’s forecast, based on the trader’s notion about market
future trends.
- Idea 2. To avoid unnecessary emotions and psychological pressure, it
is better to completely abandon any notion about market future
trends because this notion itself forms the forecast, which could be
wrong.
- Idea 3. The basic idea of the formula “I cannot be wrong if I don’t have
an opinion” transfers the moral obligation for trading results from the
trader to the market. Now, the fluctuation of the market can be considered
as a manifestation of the so-called “God’s Will” or “Force of
Nature,” so the trader cannot be responsible for that.
- Idea 4. It is possible to abandon attempts to make forecasts and still
have a profit only if one stops trying to foresee market trends but follows
them instead.
- Idea 5. It is possible to follow market fluctuations using only the system-
trade method and developing a trading strategy providing effective
monitoring of these fluctuations.
- Idea 6. One of the best methods of this approach could be the one providing
the objective evaluation of the possibility of the market’s movements
at any moment in both possible directions.
