Tharp Think in Practice: Trading is 100% Psychology Part II by Gabriel Grammatidis
In the first article on this topic, (Part I) I explained why Psychology is such a determining factor in trading and how it impacts your system development work as well as impacting a traders’ Fundamental Trading Beliefs.
Van has formulated two famous statements of which, I believe, a trader should be well aware of:
a) You can only trade your beliefs and
b) You are the most important factor in your trading.
In this second article, let’s focus on the next two trading aspects of psychological importance: Trade Execution and Reading Price Chart Dynamics.
(3) Trade Execution and Psychology
Once a trader can execute a trading system in a flawless, unconscious and seemingly automatic manner, he will be able to trade consistently profitably. Resistance towards inherent trading beliefs — be it the fundamental beliefs or the system-specific ones— will create inner conflict with the result of unconsciously wanting to deviate from the rule-set (to alleviate the “pain”). Not following the rules is a trading mistake and almost always a mistake translates into negative R outcomes.
Be aware that many great trading systems are counter-intuitive —which is why they work. Initially, when executing a new system, you are likely to experience some struggle, stress and resistance. This is very natural and part of the development process similar to learning any other complex performance activity such as tennis or golf. If the resistance persists, however, then trading mistakes and self-sabotage will find their way into the trading process. Successful trading needs to be learned and it is best done by applying the system rules in practice. While there are several ways to do so, I recommend combining simulation technology with the principles of Deliberate Practice. Both are powerful tools helping you to efficiently ride down your learning curve. Think how the learning stages can be broken down and then go step-by-step while allowing prior learnings to become fully integrated.
I learned how to play tennis in Germany this way, in a highly competitive environment back in the 1980s. I remember well that my learning and growth came from practicing the individual shots while hitting a large number of balls over and over again during focused training drills. And the drills included executing the shots in a flawless manner even without a ball while repeating the motions hundreds times (as if playing on the court). The same method goes for trading: the more practice trades you take in a safe and focused simulation environment, the faster you will achieve flawless execution. How did you start to trade a new system in the past? Did you jump right into live trading trying to squeeze money from the markets? I hope not. One would never think of playing tennis or golf competitively right away without the proper preparation.
What is the best approach to learning-to-trade a new system? There are certain main steps of progression a trader needs to go through and each step will take some time and require effort:
1. Unlearn destructive trading behavior.
I’m a big proponent of learning-by-doing and achieving progress through trial and error having gone through many lessons myself. One of the earliest trading lessons to learn is to find the right mental balance. Starting out typical human behavior makes you to revenge trade (anger-based) and to overtrade (euphoria-based). You need to ‘unlearn’ these behaviors but I believe a trader needs to go through these experiences first-hand to some degree. Once fully experienced (including the negative consequences), this destructive behavior typically fades away.
2. Apply the rule-set in practice until it becomes second nature.
Trading a counter-intuitive system requires new neural pathways to be established. This is best done in a simulated environment with exposure to a fast succession of practice trades and repetitions of those. Cut out as much detail and complexity as possible to focus on flawless execution of the rule-set only. Trading simulation software allows you to do this and you can build expert experience quickly. This learning step takes about 2-3 weeks and it is complete once you master mistake-free trade execution in simulation mode.
3. Build an efficient Live Trading Process that fits you.
Compared to trade-simulating, trading the live markets is much more complex than traders usually estimate. Live trading is a fast moving multi-tasking environment where you will need to master a good number of additional sub-processes, tasks and activities (e.g. efficient scanning & analysis, trade alert setting & news management etc.). In my coaching experience, this phase takes most traders about two months and it can best be achieved in a progressive way following one step after the other (see Tharp’s Thoughts newsletter #905 “A Good System Relies On A Robust Trading Process”).
4. Define the rules of your Personal Trading Game.
In his Peak 202 workshop, Van focuses on the games construct for many areas of life – including the Trading Game. Following the standard trading game, a trader is actually meant to lose together with the crowd. In Peak Performance 202, Van demonstrates how a trader can reinvent their trading game through establishing their own rules and how they define winning the game.
So how can a Winning Trading Game be set-up? One needs to unlearn some of the typical thoughts, beliefs and behavior that might be useful in the real world, but they lead to constant trading losses. As an example, when success lacks in many business ventures, “pushing harder” is often the right strategy, In trading, however, this strategy is more often a recipe for disaster (see Tharp’s Thoughts newsletter #909 “The Boom-and-Bust Cycle”).
Here’s an early warning sign about which version of the trading game you are playing: should you get confused, stressed or tense during your trading activity, then you are not playing the winning version of the trading game. You will find your profitable niche once you have fully defined your personal trading game.
5. Work on your Beliefs and Mental State.
The last step in achieving trader competence is to work on your beliefs and your mental state. While many of your beliefs might certainly be useful in life, some of those will be detrimental in trading. Focus and work especially on those beliefs that hold a negative emotional charge. Van’s Peak Performance Home Study Course provides many tools and exercises to get rid of an emotionally-loaded non-useful belief – once you take off the charge, you can change the belief, and follow it with constructive behavior.
My experience has been that good traders tend to be ‘happy people’ and their mental state rests in a general sense of gratitude. Truly, no system edge can compensate for a lack of a poor mental state for trading. During a private conversation once, Van mentioned that ‘in the end everything boils down to emotional stuff — beliefs & mental states’.
(4) Reading Price Chart Dynamics and Psychology
Market actors leave behind clear “psychological footprints” in the charts. Just as with physical footprints left in the ground, these footprints can be seen and analyzed. With a focus on low-risk trading ideas, I am looking for price candle pattern prints that form a specific visual cluster. Some of these patterns repeat over and over again as buyers and sellers are interacting in a dynamic way with one trying to conquer over each other. These psychological traces can be the source of great trading system ideas.
While some traces are more important than others, typically the best and clearest footprints are those that involve some emotional pain from both the buyers and sellers. Thus the best trading ideas come from a situation in which both parties suddenly become trapped (for different reasons) at the same time at the same pricing level. This creates an optimal Market Trap. The emotional intensity of such traps leave psychological traces that are as obvious as ‘blood trails in the snow‘. A market trap price level holds significant importance until the pain (respectively the emotion behind) is gone. Sticking with the snow metaphor, it holds until enough snow over some time has fallen onto it.
In an article I wrote for the Traders’ Magazine, I described in detail how to read those footprints of price chart dynamics. The example used is the Forex System 1 – the “Busted Breakout”. It is a very powerful visual pattern and the article shows various trading examples (please click ‘Become a Hunter’ / Traders’ Magazine).
Welcome to the Psychological Game of Trading!
Experienced traders certainly already know that Trading is 100% Psychology. If you are more of a novice trader, rest assured that trading will “push your buttons” as you start out trading. This is even more true for those entering the fascinating world of Cryptocurrencies with the huge and rapid price swings. See this as an opportunity and something positive: the spotlight is revealing your strengths, weakness and your areas to work on.
I’d like to finish with a final word of gratitude to Van. I am very grateful you opened my eyes and have shown me the way for more than a decade now. You helped me completely transform as a person and as a trader. Thank you very much!
I hope to see or hear from you soon,
Note: The article mentioned above in Traders’ Magazine above details how I came to develop Forex System 1 – the Busted Breakout system. I generalized the system’s rules in the article to suit the needs of that publication’s large subscriber base. In my coming Forex workshop, however, I teach the specific system rules and present historic execution results (which are quite good) for the system.
PS from Gabriel — I teach three low-risk systems at the next Forex Trading Systems Workshop at the Van Tharp Institute in Cary, NC. Part of my personal mission is to help others, to provide information, and to transfer knowledge so that your path of trader development becomes as smooth as possible. As more experienced traders will tell you, everybody needs to transition through certain learning stages and I enjoy helping both new and experienced traders make those transitions. With every workshop, I too learn from you in how to be a better coach. I like to stay in touch with attendees once the workshop is over and I offer various degrees of mentoring support after each event.