Mental Capital

I’m not going to do a full recap of the past week because my time in front of the charts was minimal. This was due to a combination of factors, including having other personal commitments and fewer signals across all the currency pairs I look at. However, I do want to cover a certain topic that is “mental capital” and highlight it in the trades that I did take.

One recurring theme or keyword that I keep hearing in podcast interviews is “mental capital.” I previously glossed over it, but I started paying attention to it more and more starting sometime over the past few weeks.

In my rotation of podcasts including Chat with Traders, Humbled Trader, Titans of Tomorrow, and Words of Rizdom, guests would often talk about having mental capital.
So what is mental capital? One definition that I subscribe to is the trader’s psychological and emotional capacity to make rational decisions, manage risk effectively, and execute their trading strategy consistently.

This definition can be simplified further by framing it as a question - how do you simplify your decision-making framework so that you’re not burdening yourself? The more complex your trade entry criteria, the less likely you’ll be able to execute it consistently.

The same also applies to trade management. If you’re trying to build rules to optimize the perfect exit, this will also add an additional burden of monitoring your trades.

This is something that I’ve been working on, and here’s an example of a live trade over the past week.

GBPAUD Daily

Structurally, I had a bearish bias on the GBPAUD pair. Price bounced off the EMA band and EMA20 was below EMA60. In addition, price attempted to trade above a horizontal level but failed to hold above it.

GBPAUD H1

My initial entry decision was well thought out and did not take too much effort. I plotted an ascending trend line to indicate the counter-trend intraday movement when the overall daily trend was down. When price crossed below the ATL, I plotted a horizontal level and entered into a sell trade on the bearish bar.

I systematically placed a take profit target of 2x ATR. This was arbitrary as I just needed a systematic rule to avoid being overly protective of my profits and prematurely closing this trade.

The label that says “SELL (Scaling attempt)” was where I fucked up. This second sell trade was forced as I plotted an arbitrary horizontal level and decided that price was holding below it.

This is where I burdened myself with more complex rules and justified a second sell trade when I already had a clear entry rule. My entry rule is simply to sell when price breaks below an ATL.

Here’s how I should’ve managed this trade.

GBPAUD H1

My initial sell trade was correct. I should’ve closed the trade when the price suddenly spiked higher. Specifically, the exit rule was based on the price crossing above EMA60, which served as an early signal of a potential trend change.

As this pair played out for another day, the price decided to trade lower. I should’ve plotted a second ATL and then entered a sell trade again to manage.

I’ve incorporated trend lines in my entry rules as a result of consuming Tori Trades’ content. The main reason that I like her content and the way it’s simplified is because it reduces the mental burden. I do not need to remember and adhere to very complex entry rules.

Now it’s just a matter of ingraining this with more and more practice.