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Yes, Give it to me

Trading Psychology: 6 Practical Tips to Master Your Mind and Money 

Last Updated: December 9, 2019

By Rayner

You know this:

Cut your losses and ride your profits.

But when the time comes, you do the exact opposite!

Why?

Because of your trading psychology.

When you’re supposed to cut your losses, you hold onto your losses… hoping it turns around so you don’t suffer a loss.

When you’re supposed to ride your profits, you exit your winners… fearing that it might turn into losses.

Weird right?

And this is just the tip of the iceberg.

I get it. I’ve been there myself. I know what you’re going through.

So in today’s trading psychology post, you’ll learn 6 insanely practical tips to master your mind and money.

I’m not going to give mumbo jumbo advice and tell you to be a more disciplined trader. You know that already.

Instead, the question is… how?

So, here’s what you’ll learn in today’s trading psychology post:

Ready?

Then let’s begin…

Get a job and overcome most of your trading psychology issues instantly

trading psychology

I know this may sound weird…

…but having a job (or an alternate source of income) improves your trading psychology and results.

Here’s why:

  • It removes the need to make money syndrome
  • It lets you grow your trading account quickly

Let me explain…

It removes the need to make money syndrome

Here’s the thing:

If trading is your only source of income, you’re putting yourself at a disadvantage psychologically.

Why?

Because you will have the need to make money every month.

This cause you to make poor trading decisions like widening your stop loss, averaging into losers, trading too large, and etc.

And that’s why many Professional traders do not rely on trading as their only source of income.

Don’t believe me? Let me prove it to you…

Ed Seykota, a Market Wizard, has a trading tribe that cost $99/month.

Mark Minervini, a stock Market Wizard, offers a master trader program that cost $5000.

Most hedge funds (even the best ones) charge a management fee every year —even if it’s a losing year.

To put things in perspective, if you run a billion dollar hedge fund and take a 2% management fee, it means you get $20m a year — guaranteed.

As you can see, professional traders and hedge funds structure their trading in a way that it’s not their only source of income.

So what can a retail trader like you do, if you want to level the playing field?

Simple — get a job.

Let me explain…

If you have a job, you have a source of income every month no matter what. This allows you to focus on your trading without having to worry whether you can pay the bills this month, or not.

And that’s not all because…

It lets you grow your account quicker so you can trade larger and make more money

Here’s the thing:

You need money to make money in trading.

Let’s say your average return is about 20% a year. This means…

On a $1000 account, you’ll make about $200 per year.

On a $100,000 account, you’ll make about $20,000 per year.

On a $1m account, you’ll make about $200,000 per year.

So now the question is…

…how do you increase the size of your trading account?

Well, you can use a portion of your income (from your job) to increase the size of your trading account. This means you can trade larger and make more money.

And in my opinion, this is one of the best things you can do for your trading — having a full-time job.

Backtest your strategy and gain massive confidence in your trading

Here’s the thing:

One of the biggest struggles you’ll face is having the confidence in your trading strategy.

Think about it…

If your trading strategy doesn’t have an edge in the markets, how do you find the conviction to trade it during a drawdown?

You won’t.

And instead, you’ll start looking for the next “best” trading strategy — and the cycle rinse repeats itself.

So here’s the deal:

To break out of the cycle, you must have an edge in the markets so you have conviction in your trading strategy.

So, how can you go about it?

Backtesting.

This refers to how your trading strategy works with past data to decide if it has an edge in the markets.

Now, if your trading strategy is proven to work using past data, then there’s a good chance it’ll work in the future — which gives you confidence in your trading, right?

So, here are 2 ways you can do it:

  1. Manual backtesting
  2. Systematic backtesting

Let me explain…

Manual backtesting

This refers to backtesting your strategy in a manual fashion. You would literally scroll through your charts and analyze the market as it unfolds bar by bar.

However, there are pros and cons to this approach.

Pros:

  • You don’t need any special skill
  • You’ll learn to read the price action of the markets

Cons:

  • The results might not be accurate because of hindsight bias
  • You don’t know what’s the overall risk on your portfolio

If manual backtesting is for you, then here’s how to do it step by step…

1. Know the trading setup you’re looking for

Before you can do any backtest, you must know what is the setup you’re looking for (whether you’re trading pullback, breakouts, and etc.).

Then, develop a trading plan so you can identify your trades objectively.

2. Scroll back to the earliest starting date of an instrument

Next, go back to the earliest date you can get on your instrument. For the daily timeframe, you should be able to go back a few years on TradingView or MT4.

3. Move the chart forward one bar at a time and look for your trading setup

This is where the fun begins. Imagine whatever in front of your screen is the “live markets” and you’re trading it in real-time.

This means your Support & Resistance must be plotted, your relevant indicators should be on the screen, and etc.

Then look for your trading setups as the price unfolds bar by bar.

Quick tip:

On TradingView, you can move forward (bar by bar) by pressing the arrow key. And for MT4, it’s the F12 key.

4. Journal your trades

Once you’ve identified your trading setup, you want to record your entry, stop loss, exit, and R multiple.

Repeat the process till you arrive at the current date. Then gather all the data you’ve recorded to see if you have an edge in the markets.

Quick tip:

If you’re a currency trader, there are tools like Forex Tester 3 that helps you to backtest more efficiently.

Now if manual backtesting isn’t for you, then check out your next option…

Systematic backtesting

This refers to backtesting your strategy is a systematic manner using a programming language like Python, R, and etc.

Here are the pros and cons to this approach:

Pros:

  • You can backtest your strategy in minutes
  • You know what your overall portfolio risk is

Cons:

  • You might curve fit past data which leads to a strategy that doesn’t work in the real world
  • You require programming knowledge

Now, systematic backtesting isn’t my area of forte so I can’t teach you how to do it.

But here are some resources that could help you…

Codeacademy — Learn how to code for free

Norgate — Premium data provider for your backtesting needs

Amibroker — Powerful backtesting software

Joemarwood – A trading blog that shares practical tips & tricks in systematic trading

Now…

If you don’t want to learn, you can always hire someone to systematically backtest your strategy.

Use the Star System and improve your trading results

The Star system is a technique I’ve developed to help traders get consistent results.

But before I get to it, let me ask you a question…

Have you ever tried using a trading strategy and after a few losses, you decide that it isn’t working and start looking for the next best strategy?

That’s a big MISTAKE.

Think about it…

If you are constantly hopping from one trading strategy to the next, how do you expect a consistent set of results?

It’s impossible!

The bottom line is this:

To have a consistent set of results, you need a consistent set of actions.

But the question is… how?

Let me introduce to use the Star system I’ve developed to help traders be consistent in their actions.

Here’s how I came up with it:

Remember when you were in kindergarten and you did well for an assignment, your teacher will give you a sticker in the shape of a star (rewarding you for a job well done).

And this is how the Star system works…

  • Develop a sound trading plan that dictates your entries, exits, trade management, and risk management
  • Every time you follow your plan, you get 1 star
  • Every time you didn’t follow your plan, you get -2 stars
  • The goal of the Star system is to accumulate 100 stars

If you realized, you get penalized badly whenever you deviate from your plan. This is to make sure you follow your plan wholeheartedly and nothing else.

Because here’s the thing:

If you can be consistent with your actions, then you have a good chance of becoming a consistently profitable trader.

Why you should be rich

trading psychology

Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like — Will Smith

Let me ask you…

When you hear someone talk about traders, you immediately think of Ferraris, Mansions, and hot chicks, right?

But here’s the truth…

An extremely small percentage of it happens in real life (and I’m talking 0.001% kind).

Because here’s the thing:

In trading, you’re dealing with probabilities. You will have winning months and LOSING months.

You want to save up during the good times so you can withstand the bad times — and not get blown out. In other words, be FRUGAL.

But if you’re spending recklessly on material wants, it puts pressure on your own trading.

You’ll have thoughts like…

  • How am I going to pay my mortgage of my mansion?
  • How can I impress those around me?
  • How can I upkeep my Ferrari?

And as you know, this leads to the need to make money syndrome (as mentioned earlier).

So what happens?

You end up making poor trading decisions that cause you to blow up your account.

So the bottom line is this:

The goal of trading is to be rich — NOT act rich.

The Matrix Technique that makes you feel numb to losing trades

trading psychology

Good trading involves following your trading plan and having risk management on every single trade.

There will be wins and losses but, if you have an edge in the markets, you’ll make money over time.

But here’s the thing:

When you’re trading in the NOW, your logic gets thrown out the window and you’re left battling against your emotions.

You watch every tick of the market.

You consider widening your stop loss so you don’t take a loss.

You wonder if you should take profits now in case the market goes against you.

If you think about it, that’s silly right?

Fussing over the outcome of a single trade when it’s random.

So, how can you suppress these emotions in real time and improve your trading performance?

Well, let me introduce you The Matrix Technique.

If you watched the “Matrix” movie, you know that humans are plugged into the matrix and detached from reality.

And this is what you want to do for your trading, to detach yourself from the outcome of your trades.

Here’s how:

Whenever you’re emotional over your trades, ask yourself…

“Are you following your trading plan?”

If the answer is NO, exit the trade immediately and stop trading (whether it’s a winner or loser).

If the answer is YES, set your stop loss and walk away from your terminal (knowing you’re doing the right thing and your risk is contained).

This is simple but it works. It detaches you away from the outcome of your trades and keeps you focused on following your plan.

How to overcome the psychological pressure of trading full-time — even if you have a family to support

trading psychology

Now:

If you have a family to feed I won’t suggest you trade full-time (unless you know what you’re doing).

The pressure to make money is so high that it harms your trading performance.

You’ve got bills to pay, mortgage, and your kids to feed.

Still, you might want to trade full-time because of the freedom it brings, no boss to answer to, and no politics to deal with.

If that’s you, then here are 6 practical tips to help you out…

1. Have a partner who works full-time and can support the family.

It’s a huge advantage if you have a partner who supports your trading wholeheartedly.

This lets you focus on your trading without worrying about the bills or putting food on the table — and removes a huge pressure off you.

2. Save up 12 months of living expenses before you make the transition

But what if you don’t have a partner?

Well, no worries.

You can save up enough money that covers at 12 months of your living expenses (and this excludes your trading capital).

This allows you to trade in peace knowing that even if you didn’t make money this month, your living expenses are still taken care of.

3. Contribute to the household income once every 6 months

Trading is all about probabilities and you need time for your edge to play itself.

This means you may not make money every month but given a long enough timeline, you should be profitable.

So, a solution to this is to contribute to the household income once every 6 months instead of every month.

4. Work part-time jobs to have an extra source of income

You can take up part-time jobs to supplement your trading income.

For example: Giving tuition, Waitering, Bartending, and etc. Basically, whatever it takes to provide an additional source of income outside of trading.

5. Educate other traders and get paid for it

You can educate other traders through own courses or coaching programs — and get paid for it.

For example:

  • Conduct a live seminar
  • Create an online course
  • Conduct a mentorship program
  • Offer private 1 to 1 coaching
  • Write trading newsletters

It’s a common approach used by many successful traders like Mark Minervini, Andreas Unger, Peter Brandt, and etc.

However, it’s suitable only for those who are consistently profitable. If you’re not, don’t worry because the next option is for you…

6. Recommend trading products and services you believe in

Now I’m sure you’ve got some trading products or services that you enjoy using.

So, why not get paid to refer other traders to use it?

For example:

If you’re happy with your broker, you can recommend others to sign up an account and get a referral fee.

Or if you enjoy using a certain charting platform (like TradingView), you can refer others to it and get a referral fee.

One last thing…

You should only refer products or services that you believe in and not because you want to earn a quick buck. That’s your moral obligation.

Summary

Here’s what you’ve learned in today’s post:

  • Get a job and overcome most of your trading psychology issues instantly
  • Backtest your strategy and gain massive confidence in your trading
  • Use the Star System and improve your trading results
  • Be rich — NOT act rich
  • The Matrix Technique — detach yourself from the outcome of your trades
  • How to overcome the psychological pressure of trading full-time — even if you have a family to support

Now here’s what I want to know…

Are there any techniques or strategies you’ve tried that improves your trading psychology?

Leave a comment below and let me know your thoughts.

  • I always enter with a pending order above the previous candle high for long setups. Stop loss is on previous candle low, so the risk us always 1 ATR. Helps me not to widen stop loss.
    For exit I use bigger time frame ATR Channel.

    Thanks so much for the advice Rayner. Getting a job and the matrix method made so much sense to me.

    Regards,
    Abhinav

  • Awesome post Rayner. Thanks for sharing these trading psychology tips in so much detail. I totally agree that without a foundation of good psychology traders will struggle (even if they have a winning system). I’ll be sure to share this post with my followers as some of the things you’ve touched on have made a huge difference for me personally!

  • Thanks a lot for sharing Rayner. I do something that helps me on my psychology and that´s having a proven and quick method to earn money on the markets to not worry about the results of my trading. In other words, I use a technic that gives me profits everymonth but it is not the trading I like, so I use it only to grow capital and dont feel the preasure to win or earn money, so I can focus on catching a trend as I feel bad everytime I do a good trade but it does not become a trend and It go against me and took me out with loosees. Always using a very low rick so I dont loose capital. Cheer! and be happy!

  • Hi Rayner,

    Thanks for your advice.

    Having a good guru will improve one’s trading psychology. A guru who guides you step by step and even informs you when he takes up a trade so that you can follow and discuss with him in detail about the set up.

  • Thanks so much Rayner. How did you know I was struggling. When I began in a super Bullish market I got a lot of advice. I picked a stretegy and backtested it. Then this August September the Breakouts were all becoming False breakouts. It’s hard to short a post break out stock when it doesn’t break more than 5-6 pips. Doesn’t even cover commisions and slippage. I have been in denial about have a viable , profitable strategy. On top of it my Canadian brokers has a low inventory of short floats. I am lost and losing. And this marvellous email comes into my inbox Yesterday. Thanks so much . You are the best Rayner. Back to the backtesting and I’ll implement the Star system. Getting over my fear of losses is my big challenge and a daily work in progress. Thanks for pointing that out. Cheers. Bruce in Montreal.

  • Thanks for the tips and for all you do to help and to educate “we, the traders.”

    Your training videos are the best!

    I use them to supplement my Apiary Fund training.

    Thanks again,
    Charles Moeller

  • Hello Ray. I’ve only recently read your articles and recommendations.

    For over 15 years I am an experienced trader, and I want to congratulate you on your professionalism, honesty and sharing of your knowledge acquired in this area.

    I agree 100% with everything you wrote in this article in particular, and I want to thank you for sharing your experiences, because you contribute to form the next generation of traders with more positive and sustained results in time.

    I’ll share your articles in my networks and with my followers on linkedln and twitter.

    Keep up the great work you’re doing.

    King regards,

    Hugo Ferreira

  • Wow,great article especially to me as I struggle with consistency and I believe the pressure of being broke is the reason. I am definitely getting a job but not loosing focus on the goal.

    Thanks a lot

  • Hi, thanks a lot for your postings it’s fantastic to read your suggestions . I have been trading for last 4 years and it has been good experience I am doing better and better with all the help from people like you and trading composer.

  • You hit the nail on the head. All of these tips are exactly what contributed to my trading success. Thank for the share! A definite bookmark!

  • $20 is a 1% stop loss on $2,000. Use the Williams%R when it’s oversold, then buy diversified, commission-free ETFs and immediately use a 1% stop loss order on all of them. The more boring the ETF is the better! Even if one is a “minimum volatility” ETF. Instead of trying to get the “perfect” setup on one stock, get a pretty good setup on 650 out of 775 stocks. At least you probably won’t lose your $20, and most likely make a positive return instead.

  • Hi Ray,

    Thank you for the article. Some very useful tips. I have been trading now for many years, and have read many books and have been on a few courses as well. To-date I have not been able to become a consistent trader, winning some and losing some, and having blown a few accounts along the way. Luckily I have other business interests such as real estate, and my wife has a handsome income so I am not rushed to make money from trading. However, it is frustrating that after sending so much effort and money I cannot become consistent. From my several years of trading, I have filtered my experience into a number of conclusions, which I am sure many traders will already know: (a) Do not over trade. If you are a day trader like me stick to 3 to 4 trades max, anything more than this you begin to give back any gains that you may have made. (b) Be PATIENT. Be patient to wait for your set-up to materialize, do not jump the gun. Wait, wait and wait until your set-up hits you squarely in the eyes. (c) Be PATIENT. Once in a trade be patient and let the trade work out. Don’t be eager to close the trade, wait until it gets to your pre-defined target, and don’t jump out of the trade prematurely at the slightest retrace, the market will always try to get rid of the weak hands. To remove emotions from the trade, which I think is impossible, have a pre-defined stop loss and a predefined profit target. (d) If you’re a day trader, and even for swing or long term traders, once you have hit your stop loss, don’t think about the trade anymore, move onto the next trade. Just try to learn something from the trades that went south or made a profit. Just like me keep learning until you make it….:)

  • Hi Rayner. You are a great man. Your courses helped me to improve my trading system , price action. Thanks a lot . Take care. With love. Rouhollah Askari

  • Hi Rayner,
    I am a new to forex trading and in the stage of developing my trading strategy. Your guidelines agree with my process now especially the trading numbers.. I normally trade 15 times a day to develop my edge. I have been trading for 2 weeks and had tripled my capital. Next market open, I will be trying to trade 3 pairs and test for my trade results consistency.
    Thanks..

    Zaynab

  • have to say your a very smart person iam 61years old been working and still working i have a 4year plan to learn how to trade and hope to make a few dollars to help me out with my pension when i stop work i have been scamed twice by online trading site i am happy i came across you i enjoy you videos and your very help full cheers

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