As human beings, we like to be right. It gives us a sense of self-worth and boosts our confidence, as it should.
Think about it, how would you feel if I said to you, “you are absolutely right!”?
How about if I said, “you are completely wrong!”?
No person on earth wants to hear the latter.
While I can’t speak for everyone, I think it’s safe to say that the idea of being both right and wrong is a common occurrence for most people. After all, no person is always right just as no person is always wrong, relatively speaking of course.
But for a Forex trader, this right-versus-wrong type of thinking can be extremely damaging.
How is it damaging, you ask?
Because thinking this way only serves to fuel your ego, not to mention it creates emotional turmoil as you constantly strive to be right and beat yourself up when you are wrong. Combine that with the fact that it’s human nature to want to be right and you have a disaster waiting to happen.
The good news is that there is a solution to this problem…
Changing the way we think would be a good place to start, however attempting to alter the way our brain has operated for centuries is an uphill battle to say the least.
A much more sensible and feasible approach is to change the way we view the markets. More importantly, we want to alter the way we mentally manage a potential trade setup so that we don’t fall into the trap of allowing our ego to control the situation.
In this article we will discuss an alternate approach to viewing what the market may or may not do. This approach will help you to remove the stress from your trading and allow you to take a more objective stance on the price action that unfolds.
This article alone might just be what you need to take your mental game to the next level.
First things first, absolutes do not exist in trading, at least not in the way that we would like them to. Anyone who tells you different is flat out lying to you, including the vendor who claims he has developed a trading system with a 100% win rate.
Knowing what will happen next in life, or at least attempting to, offers a sense of relief. It doesn’t matter whether it’s knowing what the weather will be like for this weekend’s hiking trip or knowing your schedule for the upcoming week; it all helps to relieve stress.
Put a different way, the unknown scares the heck out of most people.
As Forex traders we deal with unknowns on a daily basis. There isn’t an indicator or technical pattern on earth that will allow you to know what will happen next in the market.
The good news is, you don’t have to know what will happen next to make consistent gains as a trader. In fact even attempting to predict what the market will do next is enough to get yourself in serious trouble, especially in a market as volatile as Forex.
The sooner you accept this truth, the faster you will achieve success as a Forex trader.
Every profitable trade begins with an idea. It could be something as simple as a pin bar at key support or something more complex such as a six-month head and shoulders reversal after a multi-year rally.
Regardless of the price action being traded, it always begins with a simple idea. That idea either materializes or it doesn’t, hence the simplicity in this approach.
This idea is never a prediction. It is not about trying to predict or forecast what the market will do next. Attempting to do so is a fool’s game, not to mention completely unnecessary to pull a consistent profit from the market.
So what exactly is this idea, you ask?
It is a combination of a technical level or pattern, a 4 hour or daily close as well as a directional bias. That bias could be in the form of a bullish or bearish trend and/or the pattern itself.
A great example would be a flag pattern that forms on the daily chart after a strong rally. In this case we would be biased to the upside due to the context in which the pattern formed. If the flag pattern had formed within a downtrend it would be deemed a bearish continuation pattern, in which case we would be biased to the downside.
Going back to the example of the bull flag pattern, the idea would be to go long on a daily close above resistance. Note that we have captured all three factors that contribute to the trade idea in a simple sentence.
Once we have this idea outlined, we simply sit back and let the market do the heavy lifting. There is no need for us to hope or wish for a breakout and we certainly don’t put on a position until the idea is confirmed by the market.
I really want to drive this point home because this is where many Forex traders get tripped up. They believe that in order to make money in the market, you have to know where the market will go next.
That could not be further from the truth.
A personal example would be the long-term bear flag pattern that has developed on EURUSD. I mentioned this very pattern in a recent commentary, noting the huge potential should the market confirm the price structure.
Some of my readers took this to mean that I was predicting that the EURUSD would drop to levels that we haven’t seen in fifteen years. While that is the potential of the idea, I am in no way saying that the market will do that.
I have no idea what EURUSD will do next nor do I pretend to know such things. What I do know is that the pair has just two options – move higher and break channel resistance or move lower and break channel support.
If the latter happens I’ll be ready for it. On the other hand, if the pair rallies from here and takes out resistance, I will continue to stand aside, no harm done.
To tie this into the previous topic, I have a pattern, a directional bias and a closing price that must be met in order to confirm the trade idea. That’s all I really need to effectively trade any market.
Don’t worry, I haven’t completely lost it.
Although this may sound absurd, it actually makes perfect sense when you put it into context.
The goal of any Forex trader is to become consistently profitable, right?
The answer should be a resounding, “yes”.
And in order to become consistently profitable, you have to protect your trading capital, right?
I hope this is another resounding, “yes”. In fact protecting your capital should always be your first job as a trader, making money comes second.
With this in mind, we can logically say that doing nothing when the market negates a potential setup (your trade idea) is the right thing to do.
In other words, you are right to do nothing when the market negates a trade idea.
Trading is never personal, ever. It doesn’t matter how good a setup looks, a move against your position is a move against your position, not a personal attack.
What I have noticed since I began trading in 2002, is that many traders take the market disproving their analysis or trade idea as a personal attack, as if the market is out to get them. Of course logic tells us that this is not the case, but it isn’t enough to stop many traders from falling into this trap.
As previously mentioned, most of my analysis has a directional bias depending on whether the momentum is bullish or bearish. This bias also depends on the technical pattern being traded. For example, if I am trading a six-month head and shoulders pattern after a multi-year rally, I am biased to the downside if the pattern is confirmed.
Alternatively, if I am trading an inverse head and shoulders pattern after a multi-year decline, I am biased to the upside should the price structure confirm.
Let’s assume for a second that this six-month head and shoulders pattern is on my watch list. It’s something I have been watching and commenting on for several weeks, noting that a break lower would present a great opportunity for sellers.
However instead of breaking below the neckline, the market rallies and takes out the multi-year high.
Does this mean that I was wrong?
Absolutely not. Remember, I was not predicting that the market would move lower, I simply had an idea based on the price action at the time. And although the idea never materialized into a trade setup, I was not wrong to think there was a good chance that the pair would move lower if the pattern had confirmed.
What about my analysis? Was it wrong?
Not necessarily. The market is never scripted. Traders such as myself may see a perfect head and shoulders pattern where everything lines up beautifully, but that does not mean that the market has to play along.
Last but not least, what if the market had confirmed the reversal pattern, thus setting up a favorable short opportunity. However immediately after entering short, the market reversed and closed back above the neckline.
Was I wrong to take the trade?
Again, no. There is a big difference between getting stopped out on a trade you have no business taking and one that is part of your trading plan. And because the head and shoulders reversal is part of my plan, it is never wrong for me to take the trade as long as it fits my criteria, regardless of the end result.
Becoming a successful Forex trader is not about striving to be right or beating yourself up when you believe you were wrong. It’s simply a game of probabilities where we attempt to stack the odds in our favor.
Attempting to be right as a trader only serves to boost your ego. On the surface this may sound harmless, but attempting to boost your ego inevitably leads to a drop in trading performance.
Making consistent gains as a trader is not about making predictions about what will happen next in the market. It’s about formulating trade ideas that stack the odds in your favor and then allowing the market to either confirm or negate those ideas. If an idea is negated, you take note of what happened and move on to the next one.
This type of approach allows you to remain patient and protect your capital when market conditions are unfavorable. Because as you may well know, as a Forex trader, your best offense is a good defense, a mindset that can only be achieved once you remove yourself from the equation.
Has this article helped you to see the market in a different light? Share your thoughts or opinions below.
I look forward to hearing from you.