How I Beat the Mental Game of Trading [After 5 Years of Failure]

Summary

The video script delves into the psychological challenges of trading, highlighting how our evolutionary instincts for survival conflict with the patience and discipline required for profitable trading. It discusses common pitfalls like revenge trading and loss aversion, and offers strategies to overcome these issues, such as establishing a pre-trade plan, maintaining a trading journal, and developing a risk management plan. The goal is to help traders rewire their brains to associate trading with positive outcomes rather than pain, ultimately improving their chances of success.

Takeaways

• 🧠 Trading is difficult because our brains are wired for survival, not for the patience and discipline required in trading.
• 💸 The desire to trade often stems from a subconscious link to financial survival and the pursuit of unlimited income and freedom.
• 📉 Many traders fail because they are not following a proven strategy and are instead driven by emotional responses to market movements.
• 🔄 After a loss, the instinctive reaction is to 'fix' the situation by taking another trade, which often leads to more losses.
• 🎯 To become profitable, traders must move from hoping not to lose to strategically planning to win with a high degree of confidence.
• 📝 Writing a daily contract can help enforce discipline by committing to only take trades that adhere to a defined set of rules.
• 🏋️‍♂️ Establishing a good habit after a loss, such as exercising or a different activity, can interrupt the cycle of revenge trading.
• ⏰ It's crucial to never enter a trade without having a predefined stop loss, take profit, and entry point.
• 🚫 Avoid adjusting stop losses and take profits unnecessarily as it indicates a lack of a solid trading system.
• 📉 Loss aversion can lead to a host of bad trading habits, including taking profits too early and letting losses run.
• 📊 A risk management plan is essential to limit daily losses and ensure that wins outweigh losses over time.

Q & A

Why is it difficult for many traders to adhere to their trading rules?

Many traders struggle to adhere to their trading rules because of psychological factors deeply ingrained in human nature. These include tendencies towards revenge trading, impulsive market ordering, chasing prices, and frequently changing stop limits, which often stem from an emotional rather than a rational approach to trading.

What is meant by 'revenge trading' in the context of the script?

Revenge trading refers to the behavior where a trader, after experiencing a loss, makes impulsive trades in an attempt to recoup the loss quickly, often leading to more losses due to a lack of planning and emotional decision-making.

How does the human evolutionary instinct for survival conflict with the principles of successful trading?

The human brain has evolved to prioritize survival, which can conflict with successful trading. This is because the brain associates trading losses with a threat to survival, triggering an emotional response that can lead to poor trading decisions like revenge trading or overtrading.

What is the significance of the 'rock bottom' mentality mentioned in the script?

The 'rock bottom' mentality refers to the trader's belief that they have reached their lowest point and will change their behavior. However, the script suggests that this mindset often fails to lead to lasting change without addressing the psychological aspects of trading.

Why do traders often attribute their losses to the strategy rather than their psychology?

Traders often attribute their losses to the strategy because it is easier to accept than facing the more complex psychological issues at play. It is a way to externalize blame and avoid confronting the harder truth that their own emotional responses may be the real problem.

What role does the human desire for freedom and uncapped income play in attracting people to trading?

The desire for freedom and uncapped income is a significant factor attracting people to trading because it represents a potential escape from the limitations of a 9-to-5 job and a capped salary. This links trading success to survival needs, amplifying the emotional stakes involved.

What is loss aversion and how does it affect trading decisions?

Loss aversion is a psychological bias where individuals become more sensitive to avoiding losses than acquiring equivalent gains. In trading, this can lead to risk-averse behavior, such as closing profitable trades too early or holding onto losing trades in the hope of breaking even, which can undermine profitability.

Why is it recommended to not move stop limits once set?

Moving stop limits once set can indicate a lack of a mechanical system or an emotional response to market fluctuations. It is recommended to keep stop limits static to adhere to a trading plan and avoid making impulsive decisions based on fear or hope.

How can associating clicking with losing help in trading discipline?

Associating clicking with losing can serve as a Pavlovian response to avoid impulsive trading after a loss. It helps create a mental link between hasty actions and negative outcomes, potentially reducing the frequency of unconsidered trades.

What is the importance of having a risk management plan in trading?

A risk management plan is crucial for limiting losses and ensuring that traders do not overexpose themselves to risk after a losing trade. It helps maintain discipline by setting clear rules for when to stop trading for the day after a certain loss is reached.

What are some practical tips given in the script to overcome psychological pitfalls in trading?

The script suggests signing a daily contract with oneself to adhere to trading rules, recalling every trade taken, not moving stop limits, equating clicking with losing, implementing good habits after a loss, writing a summary of the trading session, and having a risk management plan.