Psychology Isn’t Your Problem, Fix These 3 Trading Plan Mistakes

Summary

In this video, Ari Johnson explains that trading psychology is often a symptom, not the root problem—the real issue lies in an unclear or incomplete trading plan. He highlights that stress arises from uncertainty when trades don’t go exactly as expected. By refining your strategy to a single concept, defining a clear window of opportunity, and creating rules for all possible trade outcomes, traders can reduce emotional reactions. Ari emphasizes the importance of a trading journal, mechanical execution, and limiting mental clutter to make decision-making easier and more objective, ultimately improving both performance and trading confidence.

Takeaways

• 😀 Psychology is often the symptom, not the root cause of trading struggles. The real problem lies in your trading plan.
• 😀 Your trading plan should be designed to make your psychology easier to handle by preparing for uncertainty and multiple outcomes.
• 😀 Clarity is key to overcoming emotional reactions during trading. Lack of clarity leads to stress and poor decision-making.
• 😀 Build a trading plan that accounts for different possibilities (e.g., take profit, stop loss, or something in between).
• 😀 Cognitive overload occurs when you try to incorporate too many concepts into your trading plan, leading to mental distraction.
• 😀 Refine your trading plan by focusing on a single, well-understood concept. Avoid clutter by doubling down on the concepts that resonate with you.
• 😀 The law of seven (Miller’s law) suggests that the human mind can only handle 7 (or fewer) concepts at once, so simplify your approach.
• 😀 Establish a preset window of opportunity based on your trading style and availability (e.g., specific time frames for Forex or futures).
• 😀 Focusing on specific time slots when you're fresh helps keep your psychology in check and limits cognitive fatigue.
• 😀 During trading, ensure you have clear rules for entry and exit, including when to go break-even or adjust your trade, based on patterns in your trading data.

Q & A

What is the main issue that traders face according to the video?

The main issue that traders face is not their psychology, but their trading plan. A lack of clarity and incomplete rules in the trading plan can lead to emotional responses like anxiety and frustration.

How does psychology impact a trader's performance?

Psychology becomes a symptom of a larger problem in trading. Emotional responses arise when a trader encounters unexpected outcomes or uncertainty, often due to an incomplete trading plan that doesn't account for all possible scenarios.

What is the solution to improving trading psychology?

The solution is to bring clarity to your trading plan. By having a clear set of rules for every possible outcome, a trader can avoid emotional responses and reduce uncertainty during trades.

Why is clarity so important for trading psychology?

Clarity helps traders understand exactly what to do in any given situation. It eliminates uncertainty, which is the root cause of stress and emotional reactions during trading.

What role does Miller's Law play in trading?

Miller's Law suggests that the human mind can only hold a limited amount of information at once (7 plus or minus 2 items). In trading, this means that having too many concepts or rules to consider at once can cause cognitive overload and negatively impact decision-making.

How can traders refine their trading plan to avoid cognitive overload?

Traders should focus on a single concept that resonates with them and double down on it. By refining and simplifying their trading plan, they can reduce mental clutter and avoid being distracted by unnecessary concepts.

What is a 'window of opportunity' in trading?

A 'window of opportunity' refers to a predefined time frame in which a trader looks for trade opportunities. This could be a preset session or alerts set to notify the trader when certain conditions are met.

How does a preset session work, and is it suitable for all traders?

A preset session is a specific time window during the day when a trader focuses on looking for trades. It's ideal for those who trade specific assets at certain times, such as futures traders. However, it might not be suitable for swing traders or those who use higher timeframes.

What is the importance of a trader’s journal?

A trader's journal is crucial because it allows them to analyze their past trades, identify patterns, and understand what works and what doesn't. It helps refine strategies and make more objective decisions based on past data.

How can traders decide when to break even in a trade?

The decision to break even depends on the trader's trading plan and the patterns observed in their journal. By reviewing past trades, a trader can determine the most effective time to break even or decide not to break even at all based on whether it helps or hinders their profitability.