Why I'm focusing on trading psychology
It is my belief that you can figure out what works for you by committing chart time. As a result, I rarely watch trading videos on YouTube. In fact, I hate most of these videos.
99% of these videos show profitable trades rather than the thought process that went into the trades. There are a few exceptions, of course. TheForexGuy, aka Dale Woods, is one of them. I actually like to watch his videos because he trades a specific rejection candle off of a daily level and he shows you when the trade doesn't work out.
The other problem with these videos is that pretty much every single one of them is trying to teach you how to trade. As if it was that easy. I've wasted enough time trying to learn other people's strategy and it's just not worth it. Instead, I focus on my personal traits and develop trading strategies that fit me. How exactly does this work?
Step 1: Understand My Personality
I believe the best way to do this is to hop right onto a live account. Maybe only put a hundred bucks on the line. When real money is in play, you'll be able to fully let your emotions out.
For me, I absolutely hate losses. Hear me out before you start judging me. I hate losses in the sense where I would rather see many consistent smaller profitable trades rather than one huge profitable trade along with many smaller losses. Based on my description, you'd think I'm a scalper. I thought so too to be honest. I discovered this when I started my first trading account of $800. Boy, did it not work out.
Experiencing my first blowout, I took these trader personality tests and they indicated that I was best suited to be a scalper. After watching many of these scalping videos, I learned absolutely nothing.
Step 2: Identify My Personality Flaws
Unfortunately, my emotions and attitude toward profits and losses are a mismatch. As I analyzed my trading, I found that I have these wild swings between periods of profit and loss. Why? Because I overtrade. (This is why I now have such a dedicated focus towards trading psychology). I realized that I'm not comfortable seeing losses and I also have a tendency to overtrade. So what do I do? See Step 3.
Step 3: Adapt
If you asked me what my trading style is, I would say "scalper-like". While I liked the idea of scalping, I'm terrible at making my entries precise on the lower timeframes. Instead of trying to digest the "noise", I resorted to focusing on the higher 4-hour, daily, and weekly timeframes. As a result, it forces me to trade less frequently as there are less signals. In other words, prices move slower or the lesser perception of price movements.
This changed my mentality quite a bit and helped keep my emotions in check when I took trades based on fakeout signals. Here's how I keep my emotions in check (preserve my sanity):
- When I strictly adhere to the 2% rule, I realize that I need to have a string of 50 unprofitable trades in a row to blow up my account. This reassures me that a single loss or a short string of losses is no big deal as I'm within my risk tolerance. In a sense, it helps me reassure myself over the attitude towards losses.
- I'm scalper-like so I take high probability trades. I consider fakeouts to be high probability trades based on two fundamental ideas. The first is that it supports the buy low, sell high principle. Fakeouts or fake breakouts signal reversals. If price rallied and then made a fakeout, I should look to sell. Why would I buy when the rally already happened? I would essentially be buying at the very end when everybody else already bought and pushed the price up. The second is that fakeouts present a high reward-to-risk ratio. As a result, I'm okay with taking on a series of smaller losses for one big win. This is different than what I said in Step 2 because I found a way to balance my emotions and personality.
In my opinion, Step 3 is such a hard stage to realize and overcome. I dare say I haven't completed it yet. Finding that balance between your emotions and personality is a tough step to do and I'm still in the process of forcing that discipline in myself.