Trading Psychology Manual

7/26/2019 Trading Psychology Manual

1/18

by Dr. Barry Burns


2/18

TRADING PSYCHOLOGY: A REAL-WORLD STRATEGY FOR BECOMING ASUCCESSFUL TRADER.

Dr. Barry Burns

Copyright 2007Wealthstyles LP

IMPORTANT-READ CAREFULLY:

Reproduction, translation, or distribution in any form or by any means, or storage in a data base or retrievalsystem, of any part of this work beyond that permitted by Section 107 or 108 of the 1976 United States Copyright

Act without the permission of the copyright holder is unlawful. Requests for permission or further informationshould be directed to:

Wealthstyles LP1534 N. Moorpark Rd, #222Thousand Oaks, CA 91360-5129(805) 491-3541

This publication is sold with the understanding that neither the publisher or author are engaged in rendering legal,accounting, investment or other professional services. Trading and investing involves substantial risk. Financialloss, even above the amount invested, is possible and common. Seek the services of a competent professionalperson before investing or trading with money.

By accepting this trading course you agree that use of the information of this course is entirely at your own risk.Neither the author nor the publisher is a registered investment advisor or a broker dealer. You understand andacknowledge that there is a very high degree of risk involved in trading options, futures and securities. Pastresults of any individual trader are not indicative of future returns by that trader, and are not indicative of futurereturns which may be realized by you. Neither the author nor publisher assume responsibility or liability for yourtrading and investment results. This course is provided for informational and educational purposes only andshould not be construed as investment advice. The author and/or publisher may hold positions in the stocks,futures or industries discussed here. You should not rely solely on this Information in making any investment. Theinformation in this course should only be used as a starting point for doing additional independent research in

order to allow you to form your own opinion regarding investments and trading strategies.

It should not be assumed that the information in this manual will result in you being a profitable trader or that it willnot result in losses. Past results are not necessarily indicative of future results. You should never trade withmoney you cannot afford to lose.

The information in this product is for educational purposes only and in no way a solicitation of any order to buy orsell. The author and publisher assume no responsibility for your trading results. There is an extremely high risk intrading.

This course is sold "AS IS," without any implied or express warranty as to its performance or to the results thatmay be obtained by using the information.

Factual statements in this course are made as of the date the course was created and are subject to changewithout notice.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS.UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUALTRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVEUNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH ASLACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACTTHAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADETHAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSESHOWN.


3/18

TABLE OF CONTENTS

Trading Psychology 4

The 10 Commandments of Discipline 7

The 7 Deadly Sins 8

Tracking your Business 11

Daily and Weekly Trading Log Explained 12

Daily Trade Log 13

Weekly Trade Log 14

POSTERS 15


4/18

TRADING PSYCHOLOGY

If youve had any education in trading at all, youve heard that self-discipline is the key tosuccessful trading and I just want to take a few moments to reinforce that. A book, video,course or mentor cannot give you self-discipline. That has to come from you. Thats why theycall it SELF-discipline!

In Market Wizards, Jack Schwager interviews some of the worlds most successful traders insearch of a commonality that can lead to success for others. His conclusion after theinterviews:

What set these traders apart? Most people think that winning in the markets hassomething to do with finding the secret formula. The truth is that any commondenominator among the traders I interviewed had more to do with ATTITUDE than

APPROACH.

In his follow-up book, The New Market Wizards, Jack Schwager wrote:

We has met the enemy, and it is us. The famous quote from Walt Kellys cartoon strip,Pogo, would provide as fitting a one-line summation of the art of trading as any. Timeand time again, those whom I interviewed for this book and its predecessor stressed theabsolutely critical role of psychological elements in trading success. When asked whatwas important to success, the Market Wizards never talked about indicators ortechniques, but rather about such things as discipline, emotional control, patience, andmental attitude toward losing. The message is clear: The key to winning in the markets isinternal, not external.

By the way, these are EXCELLENT books you should read if you havent already. They giveyou great insight into the reality of what it takes to be a successful trader.

There are 2 aspects to trading psychology:

1. You must trust your trading methodology.2. You must trust yourself.

Its obvious that to be a successful trader, you need a viable trading method with setups,rules and a plan that works. Without that, no amount of psychology is going to help you.

Unfortunately there are many traders who have a viable trading method, who never know it,because they have never tested the method divorced from their emotions.

For this reason I highly recommend that you PAPER trade my method for at least 3-6 monthsbefore you put a single real-money trade on the line. This paper trading must be done in real-time, not after the fact.


5/18

If youre a day trader, you should not actually do it on paper. Rather, get a good electronicsimulator (such as the one offered by NinjaTrader for free) and actually enter your orders inreal time so you cant cheat by later saying you would have taken this trade or that trade.

If youre a swing trader, you can use real paper, but record your trades in black and white onthe day you would enter them. Dont allow yourself the benefit of hindsight. You must practice

trading just as you would with real money. Swing traders dont get as much practice as daytraders, so I recommend you paper trade for at least a year before using real money.

This gives the additional benefit of helping you learn the timing of the entries. Learning toenter your orders without hesitation is a critical trading behavior for your success. It will alsohelp you learn whether the methodology fits your personality.

By paper trading for 3-6 months, and keeping track of every trade (using the trading logs inthe back of this manual), you will find that the method works as long as you trade it withoutemotion.

Before you can trade successfully, you need to have confidence in your method. Without the

utmost confidence in your method, you will second-guess the rules, get discouraged duringdraw downs, and pass on good setups. The ONLY thing that will create that confidence issuccess. And the best way to achieve a winning track record is to trade without emotion and at the beginning, that means trading without money.

Once youve successfully paper traded for an extended amount of time, then you know yourmethod works and its time to start trading with a SMALL AMOUNT of real money. Now if youstart losing, then you know the variable is the emotion of trading with money.

Once we solve the problem of finding a successful trading method, then we have to deal withthe problem of YOU!

Another one of my favorite books is Alan Farleys The Master Swing Trader. In that book hewrites:

The markets require a level of discipline that most fail to achieve in the rest of theirlives. So why should it be any different with trading? Stock positions offer endlessopportunities to break rules and ignore danger. Wise participants recognize NON-MARKET LIMITATIONS and deal with those before proceeding on the path to profit.Losing weight, quitting smoking, and exercising regularly all improve the odds for tradinglongevity. Add stress reduction and watch performance improve faster than taking aweekend stock course.

SWING TRADING FRUSTRATES THOSE WHO FIND GREAT ACHIEVEMENT IN

OTHER WALKS OF LIFE. Few other disciplines require constant loss to reach theirgoals. The pain of losing money stands beside profit throughout the road to success.Accept this unpleasant fact and prepare for the emotional rollercoaster. Both winningstreaks and drawdowns test rational behavior and trading strategies. Stay focused andstick to the plan. Participants who lose concentration face a gamblers paradise. And justlike all games of chance, expect to leave the bright lights with very empty pockets.Greed and fear bring out the extremes in human behavior. But swing traders can controlthe impact of emotion with solid rules and strict self-discipline.


6/18

Read those paragraphs a couple of times. Theres a lot of wisdom there. The Master SwingTrader is also a great book I highly recommend by the way!

The sad truth is that most traders who eventually succeed only find that elusive disciplineafter the market has taken their money one too many times and the issue becomes so

painful for them that they either have to change their behavior or quit the markets. Mostpeople quit the markets at this point.

Discipline has everything to do with patience. It means waiting for everything to line upaccording to your rules and not taking a trade that violates your rules because its close orlooks good anyway.

That means letting some trades go that made money, but didnt meet your criteria and notfeeling bad about missing a winner.

Overtrading is one of the biggest challenges to new traders. But one of the hallmarks ofsuccessful traders is that they actually trade very little. They wait for the PERFECT setups

because they know that is the ONLY time that the odds are really with them, and that makesthe difference between trading and gambling.

Even in the gambling world, however, the professionals know this. Profitable poker playersfold on more hands than they play. If they dont have a strong opening hand with a highprobability of winning, they simply fold and wait for a better one.

People who are way better educated than me rip my theories from here to Hades andback. They claim gambling is all math and statistical analysis. They will never grasp thetrue meaning of gambling because they have never been there.

People who think that a math equation is gonna give them a leg up on winning

ought have that leg whack them in the area where they sit on their brains.

you absolutely must have money management Topped off with a healthydose of discipline.

[The pros] dont make MISTAKES, and they dont have tells. Patience is avirtue, stupidity is a one-way street to disaster, talk is minimal, and mercy is absent.Make a MISTAKE and seven vultures circle the wagons, waiting to divide the spoils.When the night is done and you are fortunate enough to escape with a small profit, theride home gives you only a short time to count your blessings and your money.

John Patrick in MONEY MANAGEMENT FOR GAMBLERS

If youre trading every day of the week and youre not trading well according to thismethodology, its most likely because you are making mistakes.

So is there a way to eliminate mistakes? No one ever becomes a perfect trader, but the firststep to reducing your mistakes is to identify them.


7/18

First, lets look at 10 Commandments which are general rules. Then well translate them intospecific mistakes as they would relate to the rules of our trading methodology.

The 10 Commandments of Discipline

1. Thou Shalt Not Chase a Move. If you missed the best risk/reward entry, just let the tradego. Never chase the market.

2. Thou Shalt Not Trade in Choppy Markets. Trading is not a zero sum game. You losemoney on every trade on both the bid/ask slippage and commissions/fees. Without cleardirectional momentum on your side you do not have an edge and without an edge youwill not have a profit! Never trade when the 50 MA is flat!

3. Thou Shalt Not Trade Kamikazes! (shorting Higher Highs or buying Lower Lows). Thesecan look SO good, but because momentum is against you its like trying to push a Sumowrestler out of the ring.

4. Thou Shalt Not Trade Too Many Contracts for your Account Size. If you lose more money

than you are comfortable with, then you will trade badly. Everyone, even the best traders,go through periods of days, weeks, and occasionally even entire months of losses. Youneed to keep your losses per trade and per day small enough that you can financiallysurvive a major losing streak without having to refund your account.

5. Thou Shalt Not Trade for the Action. Trading is a business, not an extreme sport! Likeany good businessperson, your primary objective is to increase your bottom line.

6. Thou Shalt Guard Your Capital; it is your lifeblood. Without it you cant trade.7. Thou Shalt Never Try to Recover Losses. When you have a losing trade, that money is

gone and the trade is done. Trying to get the money back by bending your rules will onlyresult in more losses. Remember, your rules are what make you money. Theyre what isproven to give you the high-probability trades.

8. Thou Shalt Not Worry About Missing the Boat. Your goal is not to catch every move, in

fact you wont and no one does. Your ONLY objective is to trade your rules, and take themoney the market will give you each week according to those rules. Even though we talkabout trading the market, in the strictest sense you cannot trade the market, you canonly trade your rules.

9. Thou Shalt Not Place Your Stops Too Close. If you are doing this its an excellentindication that you are not in the right frame of mind for trading and you should not betrading right now. You cant trade scared. Stops should be placed where the pattern youare trading would be broken, and no closer. You must give the market room to wiggle. Itdoesnt move in a straight line. Allow for the bids/asks of individuals to move the marketaround messily within your trading setup.

10. Thou Shalt Not Take Profits Too Soon. Its nearly impossible to make money based onwin/loss ratios alone. Scalping is for the true pros, mostly the floor traders. Your money

will be made by having a respectable win/loss ratio (in the area of 40%-60%) and havingyour winning trades be larger than your losing trades. Be patient with the trends and letthem ring up big money for you.

Now lets translate those into how they intersect with our trading method in what I call the 7Deadly Sins.


8/18

7 Deadly Sins (MISTAKES ):

1. Not exiting 1st position soon enough. Keep EXIT #1 to keep losses small. THIS ISPRIORITY ONE!

2. Missing Trades. Take ALL trades today. Need to take all trades for statistics of themethodology to work and you dont want to miss the ONE big winner today. Look to stopand reverse at end of every trade

3. Trading Kamikazes Cant time them. Get stopped out 2-3 times before they work.4. Trading Flat Markets. When the 50 MA is flat or market is going above/below the 50 MA

stay out!5. Overtrading. Forget trades that worked if dont meet setup. Never try to make up for

losses, missed trades, or trade from boredom. I WILL LOSE LOTS OF MONEY if veerfrom my method at all Profits come from CONSISTENT AND PERSISTENT action.Keep max money loss per day stop.

6. Micromanaging trades. Dont get out unless it hits a stop. Dont be afraid of setups inopposite direction that havent yet triggered. Let trades run since that is where myweekly profits are. Weekly income is made from a couple of big trades per week, somust take EVERY trade and trade min of 4 contracts and use LT trails .

7. Not Focused like OLYMPIC ATHLETE. Stay in ZONE! Dont let mind wander or be lazy.Dont trade if youre tired. No emotion. NO FEAR. Most trades are small winners/losers.Dont care what happens today. When OUT: constantly analyze & look ahead for nextpotential setup & then watch for it. When IN: quick on the draw to protectself & not let things turn against me. If not in state, dont trade!Implement the rules

and let what happens happen

One of my favorite sayings in trading is:

Successful Trading is Simply a Matter of NOT MAKING MISTAKES.

I have found this to be a great truism in my trading life. As long as I dont make mistake, Icome out ahead at the end of the week or month.

The mistakes I refer to are the 10 Commandments listed above. This is my list and Iencourage you to add or subtract to it. Make it your own. Use this as a springboard forcreating your own list.

Your goal is to trade the method as strictly as possible and without making any of thesemistakes.

Avoiding mistakes is a matter of self-discipline.


9/18

Although I cant give you self-discipline, I will give you an exercise that can help youtremendously with the issue. You still have to actually stick to it, but if nothing else it canserve as a mirror as to how out of control your trading may actually be.

When most people think of getting help with the issue of trading psychology, they think ofbeing hypnotized or getting counseling. Those things can be useful, but what Im about to

share with you has helped me with my own trading MORE THAN ANYTHING Ive ever done.

Are you ready for it?

Here it is -

Use a trading log, such as the one I include in this manual and keep track of every trade youmake.

Many trading courses encourage you to do this, but heres the twist On your trading logsyou will have a place to enter themistakesyou made (if any) and a place to write what youwerethink ing and feelingwhen you entered the trade.

This gives does 2 things:

FIRST:

It gives you a record of your mistakes. which you will then transfer to your Weekly Log.After several weeks, you will be able to look at the Weekly Log and seepatterns of yourbehavior. This is the key.

The trading log is like a mirror, reveling your bad habits! On the trading logs you will alsokeep track of how much money you would have made if you DIDNT make any mistakes.Thats the killer!

When you see how much money you could have made by avoiding mistakes, comparedwith how much money you did make with the mistakes it makes a real impression onyour mind! Especially when you do this week after week, month after month. Therepetition really works on your mind.

For example, if you make an average of $500/week, but your trading log shows that if youdidnt make any mistakes you would have made $5,000/week it has a way of gettingyour attention! Thats a powerful motivator to change your behavior because it tiestogether 2 things: The fact that your method works, and the fact that big profits are rightat your fingertips if you just change your behavior.

SECOND:

By entering your thoughts and feelings on each trade, you have an instant bio-feedbackmechanism. As you review how trades worked (or didnt work) that you felt good about,that you just knew were going to be winners it will most likely reveal to you that youcant trust your own opinions and feelings!


10/18

This is a good thing. Most people arent aware of the extent to which they continue to dothe exact same (wrong) things. By keeping a disciplined record of your thoughts andfeelings when you take trades, over time it will prove to you that your own thoughts andopinions are not to be trusted when it comes to trading.

Why is this so important? To reduce, and eventually eliminate impulsive trading and thebending and breaking of your trading rules because of how you feel about any giventrade.

To help avoid overtrading, only print out enough sheets each day to log 6 trades. This is away of telling yourself that you will only allow yourself to take 6 trades the entire day so youbetter wait for the best setups, otherwise youll waste your trades on sub-par setups and notbe able to take the good ones should they come along later in the day.

Another practical technique for avoiding overtrading is to get a timer (I like to have it on a

wristwatch so it will be with me wherever I go) and the alarm to go off every 27 minutes. Goand pay bills, watch TV, play video games, or do whatever you need to do. When the alarmgoes off, then go back to your computer and look at the charts. This will get you in front ofyour charts every 3 bars on a 9 minute chart (obviously this works better if youre usingminute charts than if youre using tick or volume charts).

If you see a good setup beginning to develop, then stay and watch to see if it triggers.Otherwise, just leave and return to your other tasks until the alarm goes off again in hour(3 bars later).

The idea is the same one used in dieting where you remove all the junk food from the house.Its the same in trading: If you have a serious overtrading problem, it is best to remove the

temptation. You only need to check in with the charts every 27 minutes to see if anything isdeveloping. If the long-term and short-term charts are in complete conflict, the markets arebadly bifurcated, the 50 SMA is totally flat, or there is nothing close to a good setupdeveloping, then remove yourself from the temptation! There is nothing useful for you to do infront of the charts, so go do something else that IS useful.


11/18

TRACKING YOUR BUSINESS

Trading is a business and like any business, you need to track your results so you canreinforce what you are doing right and change what you are doing wrong. There is NOexcuse for not taking the time to do this is. Trading is not just about placing trades duringmarket hours, its about managing your business. MAKE THE TIME!

Theres a basic principle of success:

Successful people do what unsuccessful people are unwilling to do.

Notice that it doesnt say what unsuccessful people cant do, but rather what they areunwilling to do.

What most traders are unwilling to do is keep an accurate trading log day in and day out,monitoring the things Im sharing with you in this report, and analyzing the data. Most arealso unwilling to do this for a long enough period of time (minimum of 3 months) to ridethrough market ups and downs in order to get meaningful statistics and develop ingrained

habits.

This is what would actually turn a person into a profitable trader.

But it isnt glamorous, and its hard, tedious work, so instead they spend their time takingmore courses, looking for more charting patterns, seeking out more gurus, subscribing tomore newsletters, doing more back testing, playing with more indicators all the stuff that allthe other losers are doing.

So right now, as you read this, you have an opportunity to make yourself stand out from thecrowd and believe me, to succeed in trading you will have to do things the crowd is notdoing.

You have the opportunity to commit to doing what the amateurs, the losers, are not willing todo. You can commit to this process for the next 90+ days, or you can go back to the sameold vain search for the holy grail looking for love in all the wrong places!

Most people think that successful trading is about finding the right indicator, formula or pricepattern.

WRONG!

Successful trading is more like a competitive sport than mathematics (refer back to JohnPatricks quote above). Its performance based.

Its about developing good habits, and good habits are developed through perfect repetition,which is why the exercise Im sharing with you is so effective.


12/18

2

DAILY TRADING LOG

Complete this log for EVERY trade you take as you take it. If you feel youre too busy tocomplete this form for every trade, then YOU ARE OVERTRADING!

SUCCESSFUL TRADING IS SIMPLY A MATTER OF NOT MAKING MISTAKES

That is ALL that separates the pro who makes money from the educatedamateur who losesmoney.

The WAY that we evolve from an educated amateur to a profitable pro is through aDISCIPLINE of continually eliminating our mistakes. It is not a process of adding, but ofsubtracting!

But HOW do we do that? The best tool is your Daily Trading Log. Ive included a copy of theexact trading log I use. Youll notice that there is a yellow section for recording any mistakesyou made on each and every trade. This is the most important part of the log and of yourtrading process!

How do you know what you did wrong? All mistakes come from violating something in the 7Deadly Sins or the Method lists (as found on the Trading Plan).

Keep these records in a binder and review them at these intervals:

Every night, review that days trading on the charts. Either print out your chartsorgo through them on the computer bar-by-bar and review where you got in and out,and compare that with where your rules indicated you should have gotten in and out.

Every morning, review yesterdays Trading Log before trading today. Every weekend, review the entire weeks worth of trading logs

By doing these disciplines, you will see patterns develop. You will find that you are making

the same mistakes over and over and be able to correct them. Again, this is not somethinganyone can do for you, but you MUST do for yourself. You will neglect this to your ownfinancial peril!

WEEKLY TRADING LOGThis log gives you the big picture of your trading. Daily results are not very meaningful, butweekly and monthly results are very meaningful.

I review my Weekly Trading Logs most every day because they remind me of good and badpatterns Ive had.

This is where you will also be able to track your actual win/loss ratio and your actualrisk/reward ratio, the key numbers to your trading success. Finally, a lot of people are verysurprised to see how large a percentage of their winnings are reduced by commissions. Besure to record them on your log as well.

The exact way to use these trading logs is explained in the videos that accompany thismanual.


13/18

3


14/18

4


15/18

5

POSTERS

The following pages contain some posters that I personally have hanging by my monitors.They remind me of the most important psychological trading principles.


16/18

6


17/18

7


18/18

Documents

Trading Psychology Manual