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“Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success.”
– Pablo Picasso
Tony Robbins. Pablo Picasso. Bruce Lee.
On the surface, it may seem like they have nothing in common. At the turn of the 20th Century, Pablo Picasso was an impoverished artist who couldn’t sell his paintings in Paris. Fifty years later, Bruce Lee dropped out of college to fulfill his dream of starting a martial arts studio. Less than a decade after Bruce Lee passed away, Tony Robbins went from serving as the student body president of his high school to working as a janitor in Southern California.
So how did they overcome these challenges to become some of the most successful people in the world? The answer may surprise you!
The #1 Reason Why Goal Setting Doesn’t Work
In 1988, two researchers from the University of Scranton studied the long-term effects of setting goals during the new year.They discovered that only 8% of the participants were able to achieve their goals, while 80% of those who were studied failed to keep their New Year’s Resolutions.
Like many of us, those participants had dreams for their future. From weight loss and health improvement to life and relationship changes, the vast majority of their goals were centered around personal issues that could have easily been addressed in the upcoming year.
And yet, only 8% succeeded. The researchers quickly discovered that their participants’ unrealistic expectations played a big role in their failure to accomplish their goals. To achieve big dreams, they needed big plans that would help them take practical steps toward producing a successful outcome — but those plans were never put into place.
So if you want to build a successful career as a trader, you have to go beyond goal setting – and especially beyond just monetary goals. An ambitious goal is only the first step if you are committed to achieving great things; the next steps will be defined by your personal strategy, and they are crucial to your success. Define your WHY and your purpose.
This is the lesson that Tony Robbins, Bruce Lee, and Pablo Picasso realized early in their careers:
As a world-renowned author, Antoine de Saint-Exupéry said, “A goal without a plan is just a wish.”
The S.M.A.R.T. Way To Achieve Your Goals
For decades, mindset coaches and self-improvement authors have insisted that they have the secret to setting effective goals — and often times, their advice contradicts the other “gurus” in their field. Either your goal is too ambitious, or it’s not ambitious enough; your goal should be a secret, or you should share your goal with everyone you know; your goal should motivate you, or your goal should be as challenging as possible.
Fortunately, psychological researchers have conducted numerous studies that examine the true strengths of goal setting, and their results are consistent with the practices that the world’s most successful people have used to achieve greatness.
As George T. Doran explained in his articleThere’s a S.M.A.R.T. way to write management’s goals and objectives, an effective goal must have the following characteristics:
It’s SPECIFIC, with a clear explanation for what you want to accomplish, who you are going to accomplish it for, and the amount that you would like to earn, spend or share as a result of accomplishing that goal.
“I would like to make $100k so I can increase my household income and spend more time with my family (the why).”
It’s MEASURABLE, with smaller goals that will allow you to track your progress and make adjustments if you get thrown off course.
“I would like to earn $100k in 36 months.”
It’s ATTAINABLEfor you, even if it means that you have to push yourself. The best way to make sure of this is to create a series of steps that will help you accomplish your goal, like joining a community of like-minded traders who follow the same approach with similar goals.
“I” will join a group of like-minded traders, start journaling all my trades, review my trading performance and spend at least 1 hour per day working on myself.”
It’s REALISTIC, or attainable with your current resources (or resources that are available to you). If you can’t realistically achieve your goal with your budget, social network, or current time frame, you might have to make changes to start small and work your way toward larger accomplishments.
“I will invest XXX USD into my trading account and add XX USD every month to my trading account until my average trade size is $1000. Then, reaching my goal of making $100k is doable.”
It’s TIME-RELATED, with a precise time frame that is bound by a start date and an end date that you must stick to.
“I will start on June 1st, and measure my progress each quarter. In addition, I will do weekly reviews with my trading journal.”
But are S.M.A.R.T. goals effective?
Based on the most recent psychological studies, they absolutely are! According to a psychological review on the effects of goal setting on performance, “specific and challenging goals led to higher performance than easy goals, ‘do your best’ goals, or no goals [at all].”
A later study at Dominican University of California found that “76 percent of participants who wrote down their goals, actions and provided weekly progress to a friend successfully achieved their goals.”
So Are You Ready To Get Started?
This is the perfect time for you to set S.M.A.R.T. goals for your career as a trader, and to take measurable steps to accomplish them this year! Tell us what your #1 S.M.A.R.T. goal is in the comments below!
And if you want to take this to the next level, we developed a unique 5-month trading mindset course.
Norcross, J. C., & Vangarelli, D. J. (1988). The resolution solution: Longitudinal examination of New Years change attempts. Journal of Substance Abuse,1(2), 127-134. doi:10.1016/s0899-3289(88)80016-6
Locke, E. A., Shaw, K. N., Saari, L. M., & Latham, G. P. (1980). Goal setting and task performance: 1969-1980. PsycEXTRA Dataset. doi:10.1037/e522282009-001
Money Flow Index (MFI) is basically a momentum indicator that oscillates between a reading of zero to a hundred. However, there is a major difference between the Money Flow Index and some of the other popular oscillators. Unlike the Average Directional Movement (ADX) or Relative Strength Index(RSI), the Money Flow Index’s mathematical model takes volume data into consideration. Hence, traders often call this indicator the volume-weighted Relative Strength Index.
The Money Flow Index Mathematical Model
In order to integrate any technical indicator into a trading system, it is important to become familiar with what the indicator values represent. To understand what the Money Flow Index indicator reading represents, first, we need to understand how the indicator value is calculated.
The creators of the indicator, Gene Quong, and Avrum Soudack, came up with an ingenious solution to incorporate volume data into the indicator in a few simple steps.
The Money Flow Index is primarily a visual representation of the so-called “money ratio.” However, to get the “money ratio,” we need to calculate a few other things first. Namely, the typical price and the money flow.
Like the Relative Strength Index, the Money Flow Index is also based on the concept of “Typical Price,” which is the average of a time period’s High, low, and Closing price. For example, if the EURUSD daily time frame’s High was 111.50, Low was 110.00 and Closing price was 110.15, then the typical price of the day would be (111.50+110.0+110.15) / 3 = 110.55.
Next, we need to calculate the money flow itself, which is simply a multiplication of the typical price and the volume of the day. Once we have the money flow, we can compare it to the previous day’s money flow to know if it is a positive money flow or a negative one.
It is very simple, really. If today’s money flow is higher, it is a positive one, if not, then it is a negative one. If it’s equal, just discard the day’s data!
Once you have your positive and negative money flows, then you need to divide the positive money flow by the negative money flow to calculate the money ratio. Now, in the final step, you can simply use the following formula to calculate the Money Flow Index:
MFI = 100 – (100 / 1 + Money Ratio)
Identifying Overbought and Oversold with Money Flow Index
While the Relative Strength Index (RSI) or other oscillator type technical indicators can also identify overbought and oversold market conditions, the Money Flow Index is particularly good at this job. The additional volume information helps the Money Flow Index weed out false overbought and oversold signals, making it rather reliable if you want to trade against the prevailing trend.
Like most momentum indicators, the Money Flow Index value also oscillates between a reading of 0 and 100. As you can probably guess it by now, when the Money Flow Index value drops below 20, it generates an Oversold signal. On the other hand, if you see the Money Flow Index value going above 80, you can take that situation as an Overbought market condition.
Figure 1: Overbought and Oversold Signal Generated by the Money Flow Index Indicator
In figure 1, we have highlighted that the Money Flow Index of GBPUSD went below the 20 level on August 13, 2018, on the Daily time frame. It signaled that the market is probably oversold. Within a few days, on August 16, 2018, the GBPUSD crossed above the 20 level once again, and a fresh bullish trend followed.
Similarly, when the Money Flow Index went above the threshold of 80 on September 13, 2018, it generated an Overbought signal. On September 27, 2018, the indicator reading finally came below the 80 level, and we saw the start of a new bearish trend.
The problem with trading most overbought and oversold signals is that you cannot simply take a position against the trend simply because the Money Flow Index generated a signal in either direction. The best way to trade it would be waiting for a confluence in terms of price action patterns to confirm the change in the prevailing trend.
Besides accurately signaling Overbought and Oversold market conditions, the Money Flow Index indicator can also help traders identify divergence in the market. Bluntly, divergence happens when the price action of an asset goes one way, but the indicator reading continues to go in the opposite direction. When such market condition exists, traders can interpret it as a sign that the directional movement of the price action will soon reverse in the direction of the underlying technical indicator.
With the Money Flow Index, we can easily identify such divergence signals be it a bullish divergence or a bearish divergence.
Figure 2: Identifying Bullish Divergence with Money Flow Index
In figure 2, starting from March 17, 2015, the Money Flow Index reading started to go up and formed a 27-degree uptrend line by the end of April 13, 2015, on the daily timeframe. However, at the same time period, the GBPUSD price action continued to go down with a negative 8-degree angle. Hence, it constituted a bullish divergence.
As we can see, starting from April 14, 2015, the GBPUSD price action replicated the direction of Money Flow Index reading and the pair went on have a sharp reversal of the bearish trend, ending up forming a new bullish trend on the daily timeframe.
Figure 3: Identifying Bearish Divergence with Money Flow Index
In figure 3, we can see that the GBPUSD price kept going up with a 10-degree angle starting from April 28 to May 18, 2017, on the daily time frame. However, during the same time period, the Money Flow Index indicator reading started falling with a negative 36-degree angle, forming a bearish divergence in the process.
As we can see, starting from May 19, 2017, the GBPUSD price action started mimicking the Money Flow Index’s direction and the price of the Forex pair started falling as well.
The Bottom Line
By incorporating volume into the mathematical model, the Money Flow Index can produce very accurate trading signals in terms of overbought and oversold. Moreover, it can visually represent emerging divergence in the market very accurately. However, like any other technical indicator, it has some basic limitations.
One of the key limitations of the Money Flow Index is it can remain oversold or overbought for a prolonged period of time and may generate false signals. However, if you learn to develop a trading strategy that incorporates price action signals, the Money Flow Index can help identify an area of a potential reversal. Armed with this information, you can easily anticipate a change in the directional movement of price and can plan your trades accordingly.
If you are like most people, you need to world to be a certain way in order for you to be satisfied.
You get upset when the person in front of you drives too slow when your friend does not answer his message even though he read it, when the waiter in the restaurant does not smile or when your spouse isn’t understanding enough. This is how most people go through life and their happiness depends on outside circumstances and how others behave.
If your level of happiness depends on things that are not in your control, you become the playball and the victim. You can try as hard as you want, but you cannot control everything that is happening around you at all times.
Such a perspective on life will not only make you unhappy, but you will feel frustrated and helpless. Because everything that seems to matter to you, you have no influence over.
In order to live a truly happy life, you must be in the driver seat. Your happiness must depend on things you can control. It all starts by making a mental shift towards realizing the aspects of your daily life you actually have control over.
Don’t complain about the weather, just wear the right clothes and appreciate the beauty of the water falling out of the sky. Stop with the road rage, traffic won’t move faster; turn on a nice podcast and make use of the time. Annoyed by your lively kid? Be happy that you have a healthy kid with energy. Upset that the in-flight WIFI is too slow? Appreciate the fact that you can travel through space in an iron box and get to any place in the world you want.
You get the idea. Of course, life won’t be blissful and amazing at all times, but YOU have the power to interpret it in a positive way. Reality is a pretty subjective thing. You can expose 100 people to the exact same thing and everyone will have a different interpretation and feel differently about it.
What do you control in trading?
This also holds true in trading. You can choose to focus on things like the latest FED announcement, worry about HFT traders manipulating the market, brokers hunting stops or the next black swan event that might be just around the corner. Of course, this will not only drive you crazy because of all the uncertainty, but it will also make you feel like a victim because you have no control over those things.
Instead, think of all the things that are under your control. You are the one that controls when to trade and when you stay out. You determine your position size and how much you are willing to risk. You are responsible for how much time you put in and, therefore, how prepared you are.
You see, those things are all much more important than the ones that you cannot control. Once you realize that you are the one in the driver seat, you can trade with confidence and make better trading decisions.
Last week, I traded the CHFJPY and the trade went into my target. Great! No! Because the price kept on going and going and going. I could have easily made 3, 4 or 5 times my actual profit.
I started to feel frustrated, although I did everything correctly. In my earlier days, this would have easily lead to bad trading decisions, chasing price, entering late and just trading with FOMO. Even though I had executed my trade perfectly fine and made profits.
This probably sounds familiar to many of you and that is why I took a few minutes to explain my current approach and how I deal with those situations.
Improve your winning trades - avoid emotional problems - YouTube
My top tips for reducing FOMO:
Stay away from the instrument that is causing the issues. If you get personal with an instrument, avoid it for a few days.
Remove yourself from the screens for a few hours.
Look into your journal to see whether you really executed the trade according to the rules.
Test different target strategies if you feel that you are missing out.
I, of course, use Edgewonk.com and if you use the code “edgewonk20” you will get $20 off the bundle.
If you would believe everything you read in social media, trading forums and financial news, you would be misled to believe that the majority of traders are rational, risk-minimizing, sophisticated and consistently profitable human beings. In the following, we summarize the findings of 20 economic research journals about traders’ overconfidence, the effect of stop loss and round numbers, media, attention-grabbing events, technical analysis and many more trading related fields that have been scientifically examined. Besides feeling entertained, a trader would do well by checking whether he can find himself in the following statements and think about his own trading behavior.
Over Confidence – What Traders Think About Themselves
1. Three-quarters of dealers rated themselves above average, which is consistent with results from other psychological studies of overconfidence. Statistically, only 50% should have rated themselves as above average without the effect of overconfidence. 1
2. Dealers also overestimate their professional success, an effect known as the “better-than-average-effect”. 1
3. Trading experience eliminates the reluctance to realize losses. 1
4. Individual investors who think that their investment skills or past performance are above trade more frequently. 2
5. By examining over 400 traders with trading experience over 12 years at a bank, currency dealers show two types of overconfidence. They tend to overestimate the precision of their information and their personal competence. 3
6. The most senior traders are no less overconfident than their more junior colleagues. 3
7. In theory, irrational traders will be driven out of asset markets by trading losses. However, the examination of 400 experienced traders indicates that overconfident currency traders are not driven out of the market despite losses. 3
8. Overconfidence among foreign exchange dealers could affect equilibrium exchange rates. 3
9. Chinese investors make trading mistakes (selling winners and hold on to losers), they are reluctant to realize their losses, they tend to be under-diversified, they seem to trade often and they show a representativeness bias. 4
10. Middle-aged investors, active investors, wealthier investors, experienced investors and those living in urban cities are often unable to overcome behavioral biases. 4
11. Investors who were successful before trading online believed that their successes are due to their own investment abilities and become overconfident. Once individuals start trading online, investors have access to vast amount of data which can lead to the illusion of knowledge. Furthermore, managing their own trades by the click of a mouse leads to the illusion of control. All of these factors lead to increased overconfidence. 11
The Effects Of Stop Loss Orders And Round Numbers
12. The response of exchange rates to stop-loss orders is larger, and lasts longer, than the response to take-profit orders. 5
13. Stop-loss orders are sometimes triggered in waves. 5
14. The reversal frequency at round numbers is greater than the reversal frequency at arbitrary price levels in 79% of examined 10 day periods. 5
15. Exchange rates trend faster after crossing round numbers which suggest that stop-loss orders propagate trends. 5
16. Large stop-loss orders are tightly clustered near rates ending in 00. In contrast, very large take-profit orders are not clustered. 5
18. Significant excess returns are possible using technical analysis in foreign exchange markets. 7
19. Technical trading rules exist for NASDAQ Composite and Russell 2000 but not for DJIA and S&P 500. Rules of technical analysis even generate significant profits and improve unprofitable trading rules. 8
20. Technical trading profits have gradually declined over time in 12 futures markets. 9
The Impacts Of Big Events And Financial Media
21. Stock prices temporarily rise following widely talked about events before reversing to pre-event levels over the next five days. On average, individuals lose 0.88% when prices reverse. 10
22. Attention-grabbing events lead active individual investors to be net buyers of stocks. 10
23. Individual investors who currently hold a company’s share, sell as prices increase during upper price limit events. 10
24. Individual investors are more likely to trade an S&P 500 index stock after an earnings announcement if that announcement was covered in the investor’s local newspaper. 18
25. The presence or absence of local media coverage is strongly related to the probability and magnitude of local trading. 18
26. On days of extreme weather events, which are likely to disturb the regular delivery of daily newspapers, the relationship between media coverage and trading is broken. 18
27. Trading patterns are strongly related to the local patterns of media coverage. 18
28. The portion of negative words in firm-specific news stories forecasts low firm earnings. Furthermore, negative words in stories about fundamentals are particularly useful predictors of both earnings and returns. 20
29. Investors who have never previously owned a stock are more likely to buy when stocks reach upper price limits such as all-time highs. Other rational investors can profit at the expense of the attention driven individual investors. 19
Random Findings Of Trading And Investing
30. After news events, traders tend to trade in parallel with their “friends”. Traders with more friends are more profitable, which suggests that traders share perspectives with each other. 12
31. Currency exchange rate dealers widened bid-ask spreads from December 1999 to January 2000 as the uncertainty surrounding the year 2000 lead to increased “safe-haven” flows. 13
32. Interdealer spreads widened on the day of the 9/11 attacks as uncertainty and volatility both rose significantly. Notably, interdealer spreads came back to normal figures the next day. 14
33. Investors are more likely to increase trade size after successful trades and more likely to decrease trade size or quit trading after unsuccessful trades. 15
34. Due to the disposition effect, day traders are more likely to close profitable positions. 15
35. The response of trading to performance depends on trader experience. The difference between profitable and unprofitable traders, for traders with less than 12 months trading experience, is nearly twice as high as for those of all day traders. 15
36. Day traders are not standard risk-averse; they may be risk-seeking or attracted to investments with highly skewed investments, that have negative expected returns but a small probability of a large payoff. 16
Awareness, and especially self-awareness, is one of the most important premises on the path to becoming a consistently profitable trader. Although the presented statistics and findings won’t make you a better trader at the first glance, waking your awareness of potential shortfalls, certain market anomalies or negative psychological effects, a trader is able to avoid costly mistakes and evolve. If you want to read more, check out our first article about economic research facts about trading.
References:1) Alicke, M.D., & Govorun, O. (2005). The better-than-average effect. In M.D. Alicke, D.A. Dunning, & J. I. Krueger, (Eds.), The self in social judgment. New York: Psychology Press.2) Glaser and Weber (2007), “Overconfidence and Trading Volume,” Forthcoming, Geneva Risk and Insurance Review.3) Thomas Oberlechner and Carol Osler (2008): OVERCONFIDENCE IN CURRENCY MARKETS. SSRN Working Paper #11087874) Gong-Meng Chena, Kenneth A. Kimb, John R. Nofsingerd, Oliver M. Ruie (2005):Behavior and performance of emerging market investors: Evidence from China,5) C. L. Osler (March 2003): STOP-LOSS ORDERS AND PRICE CASCADES IN CURRENCY MARKETS, Graduate School of International Economics and Finance; Brandeis University. 6) (Yingzi Zhu, Guofu Zhou 2009: Technical analysis: An asset allocation perspective on the use of moving averages, Journal of Financial Economics)7) Neely, Weller, Dittmar (1997): Is Technical Analysis in the Foreign Exchange Market Profitable?, Federal Reserve Bank of St. Louis)8) Hsu, Kuan: Re-Examining the Profitability ofTechnical Analysis with White’s Reality Check9) Park, Irwin (2005): The Profitability of Technical Trading Rules in US Futures Markets: A Data Snooping Free Test)10) Mark S. Seasholes, Guojun Wu (2006): Predictable behavior, profits, and attention. Journal of Empirical Finance11) Barber B., Odean T. (2002): Online Investors: Do the slow die first, The Review of Financial Studies 2002 Vol 15, No.2, pp 445 – 48712) Michael R. King, Carol Osler and Dagfinn Rime (2013): The market microstructure approach to foreign exchange: Looking back and looking forward, Norges Bank Research Working Paper13) Kaul, Aditya and Stephen Sapp (2006): Y2K fears and safe haven trading of the U.S. dollar, Journal of International Money and Finance, 25(5), pp. 760–779.:14) Mende, Alexander (2006): 09/11 on the USD/EUR foreign exchange market. Applied Financial Economics, 16(3), pp. 213–222.15) Barber, Lee, Odeon, Liu (2010): Do Day Traders Rationally Learn About Their Ability?16) Kumar, Alok, (2009): Who Gambles in the Stock Market, Journal of Finance, 64, 1889- 1933.18) Engelberg, J., & Parsons, C. (2011). The causal impact of media in financial markets. Journal of Finance, 66, 67–97.19) Seasholes, M. S., & Wu, G. (2007). Predictable behavior, profits, and attention. Journal of Empirical Finance, 15, 590–610.20) Tetlock, Paul, Maytal Saar-Tsechansky, and Sofus Macskassy, 2008, More than words: Quantifyinglanguage to measure firms’ fundamentals, Journal of Finance 63, 1437-1467.
“Trading is hard”, is something we traders know already, but there are proven psychological effects that explain why the human mind is not made for trading. In the following article, we will explore seven of the most popular psychological phenomena, what they mean for traders and what to be aware of when you interact with other traders.
#7 Bandwagon Effect
In general: The Bandwagon effect describes the phenomenon that the probability of one person adopting a belief increases based on the number of people who hold that belief. This means that if more people share a certain belief, even it is a wrong belief; it is more likely that other people will agree and also accept a group’s ideas and assumptions. In trading: If you are a member of a trading Skype group, read threads in trading forums or just exchange ideas with other traders, you are more likely to think that trade ideas are going to be correct. It can be very helpful to be part of a trading group, but not of the only goal is to get confirmation about trade signals. Think for yourself!
In general: Herding explains the effect that people tend to flock together, especially in times of uncertainty or when the going gets tough. If you have to face a difficult decision or have to deal with a situation that you cannot explain, you look for other people and mimic their behavior. The rationale is that a group, especially a big group, cannot be wrong or fooled easily.
In trading: There are two negative effects for traders that exist through Herding behavior. First, Herding can be the reason for the creation of financial bubbles. When more and more people talk about a certain investment, everyone tends to believe it is a “sure thing” because “so many people can’t be wrong”. And second, if traders fail to understand the development of a market or a trade, they will flock together to come up with certain random explanations or just unanimously agree that “the markets are weird and irrational”. This ignorance and delusion of understanding will lead to further wrong trading decisions and blaming the markets instead of facing one’s own mistakes.
#5 Information Bias
In general: The Information Bias describes the tendency to seek information when it does not change the outcome of a certain situation – more information is not always better.
In trading: Information Bias plays a very important role in the life of a trader. When traders encounter losses, they believe it is their fault and that there are certain things he doesn’t know, but could prevent him from taking losses next time. Therefore, traders go out and buy books, read in trading forums for days and weeks and watch trading webinars without end with the goal to gather more knowledge about “how the markets and trading works”.
In reality, losses don’t occur because a trader knows too little. The Information Bias is, therefore, one of the main reasons for system hopping and the endless quest for the Holy Grail in trading.
#4 Ostrich Effect
In general: The Ostrich effect describes the phenomenon to ignore dangerous or negative information by “burying” one’s head in the sand, like an ostrich. Addict smokers are a good example of the Ostrich effect when they neglect the fact that smoking causes cancer and a variety of diseases – even when faced with horrible photographs on the outside of cigarette packs.
In trading: When traders find themselves in losing trades, but cannot accept that they are wrong, they will turn into ostriches. To try to outsmart the market and to turn a loss into a profitable trade, traders will often try to average down, which means adding new positions to losing trades – a recipe for disaster. Another common ostrich-mistake is to widen stop loss orders (or taking them off completely) to delay the realization of the losing position with the hope that markets might turn around in their favor.
#3 Outcome Bias
In general: The Outcome bias describes the fact that humans judge a decision based on the outcome, rather than how the decision was made. If you win a lot of money gambling all your net worth, it doesn’t mean that it was a smart thing to do.
In trading: The Outcome bias is a very dangerous effect for traders because it can lead to wrong assumptions about how trading works. If a trader abandons his trading plan and takes a random trade based on “gut feeling” or pure guessing, but finds himself in a winning trade, he might believe that he doesn’t need a trading plan and developed some sense about how markets move, whereas in reality, it was pure luck. Therefore, never deviate from your trading plan and always stick to your trading rules.
A ‘bad’ trade can turn into a winning trade and a ‘good’ trade into a loser. In both cases, the outcome is not based on a trader’s abilities, but on the nature of how trading works.
In general: Overconfidence describes the phenomenon that some humans are too confident about their abilities, which causes them to take greater risks in their daily lives. In surveys, 84 percent of Frenchmen estimate that they are above-average lovers (Taleb). Without the overconfidence bias, the figure should be exactly at 50%.
In trading: It doesn’t matter where you listen to traders, you will always get the impression that 99% of all traders are chest-pounding millionaires, riding the markets up and down, whereas in reality, less than 1% of all traders can make profits. In a 2006 study, researcher James Montier found that 74% of the 300 professional fund managers surveyed judged their performance as above-average and almost 100% believed that their job performance was average or better.
#1 Self-Enhancing Transmission Bias
In general: The Self-enhancing transmission bias explains the effect that everyone prefers to talk about success more than about failures. This leads to a false perception of reality and the inability to accurately assess situations. Although it is obvious that most people are no high achievers like Tiger Woods, Mark Zuckerberg, Bill Gates, or Elon Musk, average people will not talk about their failures and why they are stuck in life where they are.
In trading: Traders love to talk about their winners constantly but downplay their losses. The losses are neglected because traders attribute them to unfair conditions, just a bad day or a small lack of attention which can be avoided easily (in theory). Those traders will focus on the wrong things and they could improve their trading much more effectively by working on their shortcomings. But a trader who is blind to one’s own inabilities will not see the need to fix them.
Conclusion: Humans Are Not Made To Be Profitable Traders
Psychology and research show that humans are not made for trading and second, that our belief system can be used against us by smart trading marketers. The takeaway message of this article is that being aware of how your brain works when trading is a key element on the way to becoming a profitable trader and it helps you avoid some of the most common trading traps.
Most traders pick their one time-frame and then almost never leave it. They are so locked into their timeframe that they forget about the bigger picture.
The other extreme are traders that constantly jump from timeframe to timeframe without much of a plan. Those traders are mostly driven by emotions and trade very impulsively.
A better approach is the top-down multi timframe analysis where you start on the higher timeframe, look for the bigger picture perspective and then slowly build your trading plan by going lower.
Top-down vs. bottom-up – the biggest mistake of multi timeframe analysis
The biggest mistake traders make is that they typically start their analysis on the lowest of their time-frames and then work their way up to the higher time-frames.
Starting your analysis on your execution time-frame where you place your trades creates a very narrow and one-dimensional view and it misses the point of the multiple time frame analysis. Traders just adopt a specific market direction or opinion on their lower time-frames and are then just looking for ways to confirm their opinion. The top-down approach is a much more objective way of doing your analysis because you start with a broader view and then work your way down.
! Tip: Doing a multiple time frame analysis while you are in a trade can be a real challenge because of the trade-attachment. Once in a trade, the supposedly objective performance then turns into justifying your trade. Especially when you are in a losing trade, you have to be very aware of how you are doing your analysis; avoid justifying a (losing) trade based on the “bigger-picture” market view.
Multi timeframe analysis helps you stay open-minded
Obviously, the daily time-frame is less important if you are trading off the 1 hour time-frame. However, a trader who never leaves his execution time-frame has a very narrow view on the market and cannot put things into the right context.
Every trader, regardless of his main time-frame, should has to start his trading day looking at the higher time-frames to be able to put things into the right perspective. But looking is not enough because once you arrive at your lower time-frame and are in the midst of your trading session, you will have forgotten what you saw on the higher time-frames. There are two ways to deal with this problem:
1) Get a physical notepad
On your trading desk, place a physical notepad and for every market you trade, write down what you saw.
2) Annotate your charts
All charting platforms offer text objects and you can use them to directly write on your charts. It is also advisable to mark the areas on your chart that are your areas of interest. This way you are less likely to jump the gun and enter prematurely.
Multi timeframe analysis – step by step
When it comes to actually performing your multiple time frame analysis, you don’t have to get too fancy. But knowing what to do and how to approach it can help you build a time effective routine that guides you through your trading sessions.
Weekly / Monthly – Where are we?
If you mainly use the 4 hour or 1 hour time-frame to execute your trades, you don’t have to spend too much time here. Basically, you just want to get a feeling for the overall market direction and if there are any major price levels ahead. Especially long-term support and resistance or weekly or annual highs and lows should be marked on your charts
Daily – Strategic time-frame
On the daily time-frame, you have to spend a bit more time on. Here you analyze the potential market direction for the week ahead and also determine potential trade areas. Again, draw your support and resistance lines and mark swing highs and lows – even if you don’t use them in your trading, it is worth having them on your charts because they are so commonly used.
4H (1H) – Execution
Assuming that the 4 hour is your execution time-frame, this is where you map out your trades and specific trade scenarios. Take the levels and ideas you came up with on the daily time-frame and translate them into actionable trade scenarios on the 4 hour time-frame.
Ask yourself where you would like to see price going, what has to happen before you enter a trade and what are the signals you are still missing.
3 Pro Tips!
Always create long and short trade scenarios when doing your multiple time frame analysis. This will keep you open-minded and it avoids one-dimensional thinking. A trader who is only looking for short trades, will blank out all signals that point to a long trade. Or, a trader on a long trade will miss the signals that could signal a reversal.
Furthermore, separate your charting from your actual trading platform. If you can see your open orders on your screens during your analysis, you are much more likely to be biased during the analysis.
After 12 years as a trader, i not always do the top down approach anymore. Instead, I stay on my executional timeframe and just zoom out. By zooming out, you get to see the big picture too and you canidentify the chart context. This is a good practice and I regularly zoom out many times during the day.
How to perform a top-down analysis in Forex - YouTube
I have a small notebook in which, over the years, I wrote down every time I heard something about trading that just made a lot of sense to me, or that enlightened me, or when I myself had a lightbulb moment. Today I want to share some of these wisdoms with you, unfiltered and raw. They are from my fundus of nearly a decade of gambling and trading, but as always should be taken with a grain of salt – after all, we all see the world with a different perception, and thus, acquire different truths (and trading styles). And if you want to know even more from me, take a look at our new Forex trading course. So without philosophizing too much, let’s go!
If you target less than 5 pips regularly, commissions and spread will eat your account balance.
You absolutely have to find a vent to release pressure and adrenaline – sports, drinking, painting, anything that helps.
If you can manage to find a mentor in which you believe, you will make it much faster.
Your trading style has to fit your personality and your lifestyle, or cognitive dissonance will get the better of you.
Meditation sucks, doesn’t work for me.
Don’t trade more than 4 hours per day, but those 4 hours with all the focus you can bring to the table.
Overtrading is your death.
Once you are comfortable missing a move, you will be able to trade profitably.
Not trading the news does not make sense at all – during news there is real liquidity and a real interest to push prices in one way or another. Let the market show its hand, then get in.
Let it turn, let price create structure, THEN get in, with the structure as protection in your back.
Don’t system hop, but adapt the system of your choosing to your needs.
Don’t trade overleveraged.
Yes, it is possible to turn a small account into a huge account, but don’t expect it to happen overnight, and don’t expect to be able to do it before your fifth (or so) year of trading.
Some are faster, some are slower, some will never get it.
Risk per trade is a function of the volatility of your strategy and your psychological ability to deal with swings in your equity.
Know exactly why you are trading, and what you want to achieve – which career path will be yours?
Daytrading is not easier than swingtrading or vice versa. They both simply require different skillsets, different abilities (yes, some people are just too slow for daytrading) and different preparation routines.
Trust your gut. Absolutely love the trade? Get in. Don’t love it? Just stay out.
No pain, no gain. Demo trading is ok, but don’t do it for too long. Risk micro amounts of money, get used to losing money. Because you will lose for the rest of your life if you want to be a trader. It’s part of the game. You “just” need to win more than you lose.
Listening to music while trading can be a good thing – just know yourself. If I listen to aggressive music in the car, I will push the pedal to the metal. The same happens when trading.
Have a trading journal and review, review, review.
Work on your psychology, but don’t underestimate the power of knowledge. Fear stems from not knowing. Work hard, know more, be more confident. Most psychological issues will dissolve into thin air.
Yes, I said: don’t system hop. But for the first year or two, try out everything you can. Every market, every strategy, every trading style. How can you know what fits your personality if you don’t know what’s out there? Finally, decide and take the leap of faith.
Screen time alone won’t help you. Again: review. REVIEW! You need an effective feedback loop or you will repeat the same mistakes again, and again, and again. There is no learning by doing in trading.
You don’t need to be hyper intelligent to be a trader. The best traders I know are “simple” minds. They do what works, they have no ego, and they disregard what does not make sense to them.
Do not have monetary goals. Have process-oriented goals.
Do not look at your P&L during your trading session or you WILL trade your P&L. Before and after a trading session, the money in your account is money, yes. During the session, however, the money in your account is ammunition that has to be spent in order to acquire more ammunition, if that makes sense.
If you read only two books about trading, these should be Pitbull by Marty Schwartz and Diary Of A Professional Commodity Trader by Peter Brandt.
Trading with the trend is not easier than trading against the trend. Trading with the trend is the last thing I learned and every single trader I know seems to have the hardest time following a trend.
If you want to pay for education, do your research. It is very possible to differentiate the scammers from the real traders. If something sounds too good to be true, run as fast as you can.
Never forget to be grateful at the end of the day. You are given the chance to make money by clicking a mouse from the comfort of your home. How many people on earth can say the same?
Trading fulltime is often romanticized but can quickly turn into a social nightmare. Keep up that work-life-balance.
Find other mental challenges for your brain than trading. Feeding your body McDonalds everyday will, and nothing else, will kill you. Trading every day without reading a good novel once in a while will make you braindead.
Twitter is actually a really good place to learn trading and to connect to great minds, unlike most forums, where 95% of posts are rubbish.
Likewise, there are lots of videos on Youtube with quite good content. You need to find a way to distinguish the goodies from the baddies.
Don’t be mistaken, trading is gambling. You want to be a professional gambler? Make up your mind.
A structured pre-trading routine is one of the best things you will ever do in your career as a trader. Take your time to create and establish it.
Learn your basic and classic price patterns such as Head & Shoulders, Wedges, Triangles, etc. It takes a week to get them all into your head and you will profit from that knowledge for years to come.
Never pick tops and bottoms. Take the middle of the moves and your results will improve.
Believe in your abilities and trust your strategy or you will be destroyed.
That’s it for now. I have plenty more of these in my tattered and very, very old notebook. Which do you agree with, which not? Do you want more of my wartime wisdoms? Let me know in the comments below!