How To Increase The Winning Probability Of Your Forex Trades

When trading with the online broker iqoption, price action trading strategies can be very potent ‘weapons’ to trade the markets with. To read the entire iqoption strategy on this you can check the iqoption avis here. We just have to learn to use them correctly and accurately. Most of us have a limited supply of bullets (money), so we have to make each bullet count and not waste them on low-probability targets (stupid trades).

So, how can we ‘fine tune’ our price action trading to make it into a high-probability trading ‘weapon’ so that we very rarely waste our bullets? This is your main mission as a price action trader; this mission is not an easy one and it’s going to take discipline, fortitude and the ability to pull the trigger only when your target is present. But, if you dig-deep and really want to be a profitable trader, you can make it happen.

So, without further delay, let’s get down to the business of getting your trading strategy ready to go to ‘war’ in the Forex markets:

Stop voluntarily decreasing the probability of your trading edge

Unlike lifting weights, where doing more typically makes you bigger and stronger, trading more will not make your trading account bigger or stronger. In fact, it will probably make your trading account a tiny little floundering wuss.

If you haven’t read any of my other articles on trading Forex brokers with patience, go back and do that later. For now, I will briefly explain to you why trading less frequently will make you a better and stronger trader.

The reasons are pretty simple. First off, your trading edge is not always going to be present in the market, so you have to have the patience to wait to trade until it is. This typically means you will be out of the market more than you are in it, which is of course totally contrary to what most traders do. Most traders can’t stand to be out of the market, they feel an ‘itch’ to enter a trade that will not go away until they hit that buy or sell button. So they enter a trade not based on their edge, but based on emotion instead.

The Forex Broker Libertex

The point with the broker libertex avis is this, most of the trades a losing trader makes are ones born out of emotion, or because they just feel like they want to trade. If we really stick to our predefined edge, price action trading in my case, we will naturally be waiting for our edge to form more than we will actually be trading. Any high-probability edge in the market is not going to be present all the time, we have to wait for a market to ‘show us its cards’ first, and it may only do that one or two or three times per week. So, the first and perhaps easiest thing you can do to increase the probability of your trades is to stop decreasing their probability by trading when your edge is not actually present! You can do this by employing the disciplined to ONLY trade when your edge is present…in other words, stop trading just because you ‘want’ to!

Confluence is like ‘steroids’ for a price action setup

Everyone knows I teach and trade price action. However, I know from emails that I get that a lot of people who follow me think that ‘price action trading’ means trading any old price action setup; they seem to totally ignore the market context that the setups occur in, which is actually just as important, if not more than the individual setup itself. Essentially, I am talking about confluence here, and trading price action setups at confluent points in the market is really the ‘core’ of my trading philosophy. I talk a lot about trading Forex like a sniper and not a machine gunner; well, waiting for price action setups to form at confluent points in the market is HOW you trade like a sniper. Traders who just enter any PA setup they see, without considering the context it’s occurring within, are machine gunners, not snipers.

There are many different ‘factors of confluence’ that I teach to my members, but for today’s lesson we will just stick with horizontal and dynamic support and resistance levels in order to illustrate the point. I use the 8 and 21 daily EMAs for dynamic support / resistance, and horizontal support / resistance levels are simply your classic technical analysis support and resistance levels that connect highs to highs and lows to lows.

To trade with confluence, we want to first scan the markets for an obvious, or well-defined, price action setup. If we find a setup that meets our criteria, we then look to see if it has any supporting factors of confluence.

In the chart below, we can see 3 price action setups that each has three supporting factors of confluence. All three of these setups had confluence with the near-term bullish momentum / trend, dynamic support from the 8 and 21 day EMA layer, and support from a horizontal (static) price level. This is one example of trading price action setups from confluent levels in the market.

probability

To contrast, here’s an example of two price action setups that were well-defined but didn’t have any obvious supporting factors of confluence…

In the chart below, we can see two very good looking bullish pin bar setups. Now, the obvious problem with these pin bars is that they are against the near-term trend, which was clearly down at the time. However, on top of that, they also did not have any supporting factors of confluence such as a key horizontal support level, dynamic EMA support, a 50% retrace, or any other factor.

In the chart below, we can see two very good looking bullish pin bar setups. Now, the obvious problem with these pin bars is that they are against the near-term trend, which was clearly down at the time. However, on top of that, they also did not have any supporting factors of confluence such as a key horizontal support level, dynamic EMA support, a 50% retrace, or any other factor. It’s setups like THESE that I get emails from traders about asking “Nial, I traded a well-defined pin bar the other day, why did the market go against me”?

The answer is two-fold: First, it’s important to remember that not every setup works out, even a perfect looking setup with 5 factors of confluence can and will fail sometimes. Thus, we need to always practice proper forex money management. Next, in order to use our ‘bullets’ as effectively and efficiently as possible, we need to always make sure we take high-probability price action setups, meaning setups that are well-defined AND that are in agreement with the overall market context they’ve formed in, AKA they have confluence.

probability 2

The point to take away from the above two charts, and the main point of this article, is that trading price action setups from confluent points in the market is the best thing you can do to improve the probability of your trades. Too often, traders simply aren’t patient and picky enough in regards to their trading, and they thus end up throwing their money away in the markets. Just remember that every time you find a potential trade setup it’s YOUR HARD-EARNED MONEY you are about to lay on the line, so ask yourself if the setup has enough supporting factors of confluence to be worth trading.

Think before you ‘shoot’…not after

Most beginning and losing Forex traders seem to behave as if they are best able to navigate the markets after entering. This is akin to an army general thinking that his army has the best chance of winning a war if they just dive into war first and ask the questions later. Fortunately, in (most) wars, governments usually plan and ask the tough questions first, so that they know what they are doing when they are on the battlefield.

In trading, most traders seem to do the opposite; they try to plan, think and strategize in the heat of the moment, when their money is on the line and they are the most emotional.

 I will say that we need to do our analysis and most of our thinking about the markets BEFORE we enter, this gives us the highest-probability of succeeding as traders. As soon as traders enter a trade and THEN start thinking about it and over-analyzing it, they almost always lower their overall probability of profiting over the long-term.

There’s nothing wrong with checking on your trade every 4 or 8 hours or so, but you should not be thinking about it much, if at all, in between. The best thing to do is to pre-plan all your potential interactions with the market, and then follow that plan to the T, this way you deny the possibility of emotion coming in and destroying your trading account.

Trade higher time frames

As I discussed thoroughly in a recent article on trading daily chart time frames, you can significantly improve your trading by ignoring time frames under the 1 hour chart all together. I actually NEVER look at a time frame under the 1 hour. There is simply no reason too, they are messy, full of random market noise and will tempt you to enter a trade that you know you shouldn’t. In short, if you want to improve your accuracy and the probability of your price action trade setups, focus on the higher time frame charts.

Money matters

If you want to give yourself the best chance at taking the highest probability trades and avoiding low-probability / emotional trades you’ll need to make sure you are not A) trading with money you need for other things in your life and B) not risking more than you are comfortable with losing on any one trade.

When you are only trading with disposable income and never risking more than you are OK with losing per trade, you will be much calmer and more objective. This will obviously work to help you to only take high-probability trade setups. Traders who are strung-out and frazzled because they are overly worried about the money they have at risk in the markets are naturally going to take low-probability trades because they simply are not thinking clearly.

Remember, you never know for ‘sure’ what’s going to happen

As traders, it helps to always expect a random outcome from our trades, even though we may have mastered a high-probability trading edge like price action. Even if we have say a 60% or 70% win rate, it is a randomly scattered win rate, meaning we never know which trades are going to win and which will lose. For instance, if you have a 60% win rate, you could theoretically lose 40 trades in a row out of 100 before you hit 60 winners. So, knowing this, we have to approach each trade as just another execution of our trading edge, while doing everything we can to put the odds in our favor.

Everyone knows that I don’t sugar-coat anything, so I’ll tell you that there is no ‘perfect’ trading signal, and that goes for ALL trading strategies and systems. Even if we have multiple factors of supporting confluence, a perfect trend, and a perfect price action setup, the trade can still lose. Thus, it’s important to trade with these facts in mind while simultaneously making sure you do everything you can to only take the highest-probability trade setups.

Set and Forget Forex Trading – Keep Your Day Job

‘Set and Forget Forex Trading’ is as simple as its name implies; you simply “set” the trade up and then “forget” about it for a period of time. This has two major benefits: it makes it far easier to stay emotionally disciplined and it also allows you to go about your life as you normally would, because you will not be spending hours in front of your computer over-analyzing the markets…

Often, aspiring Forex traders that want to start read the plus500 review and get engaged with the amount of data that the various financial media outlets like https://www.ft.com/ plaster all over the internet and television. It is extremely easy to experience “analysis paralysis” while trying to trade forex or any market for that matter. There are so many competing ideas and trading methods along with more fundamental data coming out every day than you could ever hope to digest, it can be overwhelming to even try and make sense of it all and develop a forex trading plan based off this amount of information. One of the biggest psychological mistakes that almost every aspiring trader makes on their journey to success is firmly believing that the amount of economic data analyzed and (or) having a technically complicated or expensive trading method will help them profit in the market. In reality, as most professional traders will attest to, these factors usually have the opposite effect on trading profits, at least after certain point. This essentially means that once you do a certain amount of analyzing market data, any further time spent analyzing this data is likely to have a negative effect on your trading; it causes you to lose money.

Why it’s Counter Productive to Analyze too Much Market Data

It may seem confusing or counter intuitive to the aspiring Forex trader when they first hear the fact that analyzing too much market data can actually cause you to lose money faster than you other wise would. The believe that “more  is better”, is a psychological trap that often keeps aspiring traders from consistently profiting in the Forex market and is the reason why many of them blow out their trading accounts and eventually give up all together.

The main reason why this occurs is because human beings have an innate need to feel in control of their life and of their surroundings, it is an evolutionary trait that has allowed our species to perpetuate its existence and ultimately arrive at our current modern day level of civilization. Unfortunately, for the aspiring Forex trader, this genetic trait of all human beings works against those trying to succeed at Forex trading. In fact, most of our normal feelings of wanting to work harder than the next guy or spend extra time studying and researching for our jobs or for school are feelings that are really not beneficial to success in the Forex market.

The problem with trying to apply the idea of “hard work” to Forex trading, is that beyond a certain level of technical chart reading ability and awareness, there really is no beneficial aspect to spending more time on tweaking a trading system or analyzing more economic reports. The bottom line here is that there are literally millions of variables involved in trading the Forex market; each person trading the market is a variable and every one of their thoughts about the market is a variable because these are all things that can cause price to move. So, unless you are somehow able to keep track of every trader in the market and all of their thoughts, in addition to the hundreds of news and economic reports that come out each day, you essentially have no control over price movement. Trying to analyze numerous pieces of economic data each day or trying to come up with an overly complicated trading method is essentially just a futile attempt to control something that simply cannot be controlled; the market.

Thus, the underlying cause of Forex trading failure begins with the idea that traders feel a psychological need to control their surroundings and when this emotional state meets the uncontrollable world of Forex trading it almost always has negative consequences. This problem works to snow-ball itself as well because once a trader loses a few trades he or she begins to get angry and wants to “get back” at the market. The way they do this is by reading another trading book or buying a different trading system that seems more “likely to work” or by analyzing the inner workings of every economic report they can find and trying to predict how it will affect the market’s price movement. Once this process has begun it is very difficult to stop because it makes logical sense to us that if we put more time in and do more work we will eventually figure out how to make more money faster in the Forex market. The difficult truth to all of this is that, as stated earlier, after you reach a certain degree of technical and fundamental understanding, any further research or system “tweaking” beyond that point will actually work against you and the rate at which you study more and do more research is probably about the rate at which you will lose your money in the market.

Less is more in Forex: ‘Set it and Forget it’

So how does the aspiring trader achieve consistent profitability trading the Forex market if we are genetically primed to over-complicate it? The very first step in this process is just accepting the fact that you cannot control the uncontrollable Forex market and checking your ego at the door. The Forex market does not care what you have done in your life before; it has no emotion and is not a living entity. It is an arena where human beings act out their beliefs about the exchange rate of a certain currency pair. These beliefs are a result of emotions, and human emotion is very predictable when it comes to money. The point here is that the people mentioned in the previous section who are doing extensive amounts of research and trying to find the “holy grail” trading system are the ones who are trying to control the market and thus trading based off emotion. These people are providing the predictability for the professionals to take advantage of.

The paradox here is that professional traders may actually do less technical and fundamental “homework” than amateur / struggling traders; pro traders have mastered their trading strategy and they simply stick to their daily trading routine and see if their edge is there. If there edge is not present, then they just walk away for a while because they know that the Forex market is a continuous stream of self-generating opportunities, thus they do not feel pressured or anxious to trade. If their edge does show up then they set their orders and walk away, accepting the fact that any further action will probably work against them because it will be a vain attempt to control the uncontrollable and would not be an objective action.

The logic of set and forget forex trading is this; if your trading edge is present then you execute your edge and do not involve yourself further in the process unless you have a valid price action-based reason to do so. Traders that decide to mess with or tweak their trade once they enter it almost always kick start an emotional roller coaster that leads to over-trading, increasing position size, moving their stop loss further from their entry, or moving their profit target further out for no logical reason. These actions almost always cause the trader to lose money because they were not objectively thought out, but were instead influenced by an emotional reaction that was caused by trying to control the uncontrollable.

In the chart below, we see an example of how many traders get into trouble by being too involved with their trades. As the market retraced back toward the entry point of the pin bar sell signal, emotional traders would have probably exited for a very small profit or near break even because they felt “scared” or “nervous” that they might lose money on the trade.

emotional trading

In the chart below, we can see that just as the market got to about the low of the pin bar sell signal where most traders would have entered, it stalled and then fell significantly lower back in-line with the downtrend. Disciplined traders who do not “meddle” in their trades for no reason would probably have still been short and would have clearly made a very nice gain. Note how a traders could have waited for an opposing obvious price action buy signal to exit the trade…this is exiting on logic and price action rather than emotions like fear or greed.

trading chart

Make Money and Save Time by Doing…Less?

It is a well-studied fact that traders who trade off higher time frames such as 4 hour, daily, and weekly charts and hold their positions for multiple days, make more money in the long run that traders who “day trade” off intra-day charts. The reason many people are attracted to day trading is because they feel more in control of the market by looking at smaller time frames and jumping in and out of positions frequently. Unfortunately for them, they have not figured out that they have the same amount of control as the swing trader who holds positions for a week or more and only looks at the market for twenty minutes a day or even less. That is to say, neither trader has any control over the market, but day-trading and scalping gives traders the illusion of more control. The only thing we really have control over in trading, is ourselves.

The ironic fact about Forex trading is that spending less time analyzing data and finding the “perfect trading system” will actually cause you to make more money faster because you will be more relaxed, less emotional, and thus less likely to over-trade or over-leverage your trading account. Many people are attracted to speculative trading because they want a way to make money that is “less difficult” than their current job, but they soon forget about that and start spending countless hours digging themselves into a huge psychological trap that most of them never dig out of. All you basically need to do to consistently make money in Forex is master an effecting trading method, develop a written out trading plan based on this method and have a solid risk management strategy, you can then check the market one to three times a day for ten to twenty minutes each time. If your edge (price action strategies) is showing up than you set up your entry, stop loss, and target and walk away until the next scheduled time to check your trades.

Trading in this manner actually elicits a snowball of positive habits that work to further perpetuate your trading success. This entire article can be summarized by the following two sentences: People who spend more time analyzing market data and trying to perfect their trading system inevitably induce a cycle of emotional mistakes that work to increase their trading failures and eventually result in lost money and lost time. People who realize that the market is uncontrollable and build their trading plan around this fact will inevitably arrive at a “set and forget” type mentality that induces an emotional state that is conducive to on-going market success and consistent profitability. The trading method used is not as important as the psychological or risk management aspects of trading, but generally speaking, a method that offers a simple high-probability edge such as the price action trading method is the best method to use to maintain your “set and forget” mindset.

Playing The Odds In Forex Trading

This article is written based on my personal experiences and reflects exactly how I think about and approach the market on a day to day basis. Here’s a close look into how my mind actually thinks every day when I open up my trading screens…

Trading is all about playing the odds. You aren’t going to win every trade; an important lesson to learn early-on in your trading career. But by playing the odds, or trading the odds, you can increases your chances of making money. Playing the odds takes discipline, and it involves patience, but if you want to make money in the market, you’ll have to learn these things.

By understanding things like market bias, key chart levels, stop loss placement and having a mastery of your trading method, you can increase your chances of trading success by trading with the odds in your favor…

Develop a ‘feel’ for the chart

You’ve got to first develop a feel for a chart by developing your bias for that chart. Once you’ve done this, you stick with that bias until it stops working.

Your aim is to develop a deeper emotional connection with the chart, then your bias will come to the surface and you will know whether you should be looking to buy or sell. Once you’ve developed your bias, you can trade the odds by sticking to that side of the market until it clearly begins to change.

If a market continues dying, e.g. the recent euro / dollar, this is when you continue on the short side; this is playing with the odds in your favor. You’ve got an edge, and that edge is basically that the market is going lower, don’t fight it. Your bias in a downtrend, will generally be selling into strength, and your bias in an uptrend will be buying into weakness.

eur / usd

Playing the odds from key chart levels

Putting the odds in our favor in trading means not only developing a bias and trading with that bias, but also understanding key chart levels and how they allow us to play the odds.

When a market approaches a key chart level, it provides us with a very good entry opportunity and a very good risk reward potential. Thus, we are increasing our chances of making money by waiting for such an entry.

Think about the recent 105.50 key level on the USDJPY chart (see chart below). This was a major level within the existing / overall uptrend in the market. By looking for a buy entry from that level or near it, you were playing the odds. You’ve got a key level that you’ve identified, and everyone is selling into it as price retraces down, but this is your ideal chance to buy. People are selling into a major level and the underlying / longer-term momentum is up. This means, by buying at that level or near it, you’re entering the market at your opponents (sellers) worst position, you are taking on their risk.

The risk reward is very favorable at key levels like this because you’re playing the odds. If price bounces from that level, you’ve got huge upside potential, i.e., a small relative risk for a large possible reward.

key chart

Wider stops help tip the odds in your favor

Wider than normal stops are something that can help tip the odds in your favor. Many traders are guilty of trading with too small of stop losses, mainly out of greed, because they want to trade a bigger lot size. However, trading with too tight of stops has the opposite effect from what the trader wants; it causes them to lose money because they get stopped out more often.

A slightly wider than normal stop loss helps you stay in a trade longer and lets your edge play out. This is contrast to a guy who is risking 20 or 50 pips on every trade; these stops are going to get ‘picked off’ often, right before the market continues on in your direction (without you on board). For most traders, trading with 20 to 50 pip stop losses is like playing the blackjack table at a casino, i.e., it’s gambling. Consider that the AUDUSD or the EURUSD moves around 100 pips a day on average…having a stop loss of less than 50 pips is a bad idea.

Know your ‘bag of tricks’ and trust them well

Finally, trading with the odds in your favor means you know your ‘bag of tricks’ inside and out and you trust them well. By this I mean, you have mastered your trading strategy and you don’t second guess it.

By knowing what my trading edge is (price action) and only trading when it is present in the market, I am trading with the odds in my favor. Trading when you’re edge is not present (over-trading) or not having mastered your trading method, is trading against the odds, obviously not what you want to do with your hard-earned money on the line.

We’ve called the market very well in our market commentaries, and it’s no secret that we use the same general formula in this lesson; simply by playing the odds and putting it all together, we have a complete plan of action to tackle the market each day and we know we are playing the odds and those odds are in our favor as long as we are consistent with our approach.

Whilst price action analysis is a way to trade, it’s one thing to call yourself a price action trader and it’s another thing to actually trade like a price action trader.

The Key to Lasting Forex Trading Success

Today’s lesson is going to ask you to dig deep within yourself and ask, “How bad do I want this?” How bad do you want to become a successful trader? Are you willing to do whatever it takes, even if that means significantly changing how you think about trading?

Most people find change very difficult. There are things involved like egos, pride, being lazy, etc. But, the simple fact is that change is the first step toward putting a ‘cork’ in your old trading habits which have been destroying your account, and getting on the path to trading success.

What follows is a brief discussion of why and how you need to change your thinking to succeed at trading. If you read this whole lesson and really make the change to your thinking, you will experience a significant improvement in your trading experience and performance.

First, you need to change how you think about trading

One of the things that gives traders a lot of trouble, is getting too attached to any one trade. In fact, you should have zero emotional or mental attachment to any one trade you take.

As I discussed in my article on randomly distributed winners and losers, whilst your trading edge might have a certain winning percentage, let’s say 60%, you need to understand what that means…

What a 60% winning percentage means: It means that over a large enough sample size or series of trades, you can expect to win about 60% of the time.

What a 60% winning percentage does NOT mean: It does not mean that any one trade has a 60% chance of being a winner.

Many traders get confused into thinking that ‘this’ trade will be a winner, or even that ‘this’ trade has a 60% chance of winning, when in fact this is simply not the case.

To think about this from a different perspective, imagine a large jar of marbles of two different colours, let’s say red and blue. Let’s say each marble represents a trade that you took, there are 100 marbles total, 40 red and 60 blue. The red marbles are losing trades and the blue marbles are winning trades. So, you have 60% winners and 40% losers, when translated to your trading method, this shows that you can expect to win 60% of your trades.

large jar of marbles

HOWEVER…here’s where the thinking part gets tricky. If you shake up that jar of marbles so they are randomly distributed within the jar, and you stick your hand in blindly and pull one out, you don’t know if it will be a red or blue marble. Thus, you would not be ‘expecting’ a blue marble, because you know there are red ones in there as well, randomly distributed.

This is how you need to think about your trades. You need to think about them being randomly distributed events, even if you expect to win 60% or even more, over time. Once you begin to realize that any given trade has an equal chance of being a winner or loser, you will stop giving too much emotional and financial importance to any one trade. Once you do this, it opens up the pathway to carefree trading and allows you to truly induce the proper trading mindset.

I get emails from traders telling me they are ‘excited’ about a trade setup. This makes me cringe because it implies they’re expecting something from that trade setup, they’re expecting it to work out for them. But, they shouldn’t. They should have no expectation of any ONE setup, because each setup has a random outcome. It’s the SERIES of trades while trading our edge (price action) that gives us a chance to make money.

When you remove all expectation and attachment to any one trade, you automatically begin to do other things properly, like managing your risk properly and not fiddling with trades after they’re live. Because you realize that each trade setup may or may not work out, you don’t want to over-commit to it and you don’t want to get in its way. You risk an amount you’re OK with losing and you let the market do ‘its thing’, because you’re just letting your edge play out over a series of trades.

Think in probabilities to avoid emotional trauma

Think about a slot machine for a minute. You put money into a slot machine knowing upfront that it’s a random event, so you have no real expectations of winning or losing on any pull of the arm. Thus, expectations of the outcome of a slot machine are in alignment with the reality of the event itself.

In trading however, you see a pattern form in the market and because maybe the same pattern worked for you last time you start to expect that it will work again this time. Once you commit to this way of thinking you are setting yourself up for potential disappointment and emotional trauma. You are forgetting that each trade has a random outcome that is unconnected to your recent trades. Just because this same exact pin bar was a winner before, does not mean the next one will be, even if it’s exactly the same.

Now, obviously if you have an effective trading edge like my price action strategies, you can greatly improve your chances of a winner over a slot machine, but still, the outcome of any one event (trade) is random. So, you cannot allow yourself to be affected by the result of any one trade.

This trade has no influence or connection to the next trade. If this trade was a loser, the next trade might be a winner (or loser) and if this one was a winner the next one might be a loser (or winner). If you have a 60% win rate on your edge, remember that it is realized over a SERIES of trades, and that might mean you have 5 or 10 losing trades in a row. It doesn’t mean you panic though. You stick with your plan and strategy and you keep taking the trades as they form, because you need to trade a large enough sample size to see your edge play out.

Key to Lasting Forex Trading Success

Your goal should be to eliminate the potential for the market to disappoint you by realizing that trading is not about being right or wrong. This is how you to need change. You need to eliminate any potential for disappointment from your trading by thinking in probabilities. Remember the jar of red and blue marbles the next time you enter a trade. You are simply blindly dipping your hand into the marble jar each time you take a trade, so don’t expect to pull out a blue marble, just know that it will be EITHER a red OR blue marble, and that once you pull them all out, you will have 60 blue (winners) and 40 red (losers). IF you can do this, you will be thinking in-line with how the market actually exists and you will be putting yourself in position to profit from the market, rather than getting battered by it like you probably are now.

How to eliminate trading mistakes and start making money

All blown out trading accounts are the result of a snowball effect of trading mistakes. You get too attached to a trade that you ‘just know’ looks ‘so perfect’ it ‘can’t possibly fail’, and so you double up your risk or triple it, hoping to hit a ‘home run’. When that trade then fails, you experience severe emotional trauma and frustration. This causes the snowball effect to begin. You start feeling mad that you lost, you get angry, so you jump back into the market and risk even more, hoping you make back your lost money. This can go on and on until you blow out your account, which doesn’t take very long.

The point is, all of this emotional strife and frustration and the snowball of trading mistakes it causes, can be AVOIDED by changing how you think. That is to say, by thinking about your trades in terms of probabilities, as discussed above, you will circumnavigate the main reason most traders lose money; expectation.

Think about when you were demo trading. You probably did awesome, as many forex traders do. Why did you do awesome? Because you had the right trading mindset… You had no real expectation about any trade because no money was on the line so you didn’t care if it that particular trade lost or won. That’s it right there; you have to not care if you lose or win on any one trade, and you do that by thinking in terms of probabilities. IF you can do that, you will be well on your way to finally making consistent money in the markets.

Stop Overthinking & Start Trading

Thinking too much. It’s truly a form of mental ‘poison’ that if left unchecked, can consume you and drastically alter your thinking, behavior and even your personality. Needless to say, this negative habit can have disastrous consequences in any area of life: work, personal (relationships), school and especially in trading.

As with most things, a skilled trader is at his or her best when they are “in the moment” and not thinking too far ahead about all the possible outcomes of a particular trade. Trading is not a game of “chess” like so many people seem to think. It is not going to improve your odds of success by thinking more, researching more or being at your charts more, if it were that easy everyone would be doing it.

Trading success comes when a person has the proper tools to analyze and make sense of the market as well as the proper mindset that allows them to stay “in the flow” and not think too much or analyze too much.

What is “overthinking” in trading and how does it affect your performance?

Overthinking can seem like a broad and somewhat obscure topic so it’s important to define what it is so that you know when or if you are doing it so that you can being taking action to stop it.

We all know that if someone is “overthinking”, they are thinking too much about a topic, to the point where it negatively impacts them. But, the following points outline some specific examples and causes of overthinking in trading. Read along and see if these sound familiar to you:

  • Recency Bias on recent trade outcomes

If you’re guilty of having recency bias, it means you are thinking and feeling like “this trade” will be a winner “because the last one was” or that “this trade will be a loser because the last one was”. Either way, you’re wrong lol. Your last trade has basically ZERO to do with your next trade. Each trade’s outcome is essentially random from the previous trade(s), so stop thinking about it too much and becoming overly-influenced by the previous trade(s) result. Traders can even start thinking of things like “well since the last 3 trades lost, this one is bound to win” this is another example of recency bias in action. But, this too is wrong and has zero meaning in the real-world. Remember: Your current trade has NOTHING to do with your last trade!

  • General fear of losing money and of being wrong (bruised ego syndrome)

Many traders think so much about “losing money” and “being wrong” that they end up not taking perfectly good trades. This problem typically stems from the trader risking too much money or more than they are comfortable with losing on any one trade.

If you’re going to be a trader, you’re going to be dealing with risk so you have to accept that you can lose and instead of trying to avoid it, just try to manage your losses by managing your risk properly. It comes to down to not risking more per trade than you are comfortable with losing, this is an amount that when you have it at risk you should be able to easily fall asleep at night without worrying about the money or feeling a need to “check the trade real quick”.

  • Not trusting your trading strategy

When traders overthink, they often start to doubt their trading strategy and they start thinking likes like “maybe my strategy doesn’t work” or “maybe I should add some trading indicators” etc, this type of self-doubt and overthinking can be very damaging.

Not trusting your trading strategy is a result of overthinking and not “trusting the process”. Just because you hit a losing trade or even a few in a row, does not mean you should abandon your trading strategy and look for a new one.

  • The “Deer in the headlights” concept: Analysis Paralysis

The deer in the headlights “syndrome” is something that happens when traders (once again) overthink about the market and their trades. What happens is that a trader starts to overthink about all the possible scenarios of a trade’s outcome and they end up missing the trade altogether. They end up just staring at the trade take off without them, like a deer caught in the headlights of an oncoming car. You have to be confident and decisive when executing your trades and you can’t allow yourself to get stuck in a cycle of “what ifs” / fear.

  • The Hindsight Trap

The hindsight “trap” is something that happens when a trader becomes obsessed with trades after they play out. They torture themselves about missing a trade (deer in headlights) or about exiting a trade too early or a whole host of other things. The bottom-line is that living your trading life in a hindsight “haze” of “what could have been” is detrimental to your long-term trading success. You need to realize that sometimes you’ll miss trades, sometimes you won’t exit a trade exactly when you want to etc. but don’t waste your time thinking about those things too much or you will drive yourself crazy.

  • Trying to “outthink” the market: It’s not a chess game!

Many, many traders think they can “outsmart” or “outthink” the market by doing more research or learning the latest new trading system. However, this couldn’t be further from the truth. The market is going to do what it wants, regardless of how much time you spend reading economic reports or studying new trading methods. Unfortunately, trading is not a chess game that you can become better at simply by thinking long enough or hard enough about. Yes, you DO have to do some initial study and get some training to learn an effective trading method like price action analysis, but once you learn a method and you’ve got a weekly and daily trading routine down, any additional time to “researching” “analyzing” or “trying to figure out what will happen next” is futile.

  • Short time-frame charts cause overthinking

One sure-fire way to get your brain cells in an overthinking “traffic jam” is to start looking at short time frame charts. The main reason I preach trading the higher timeframe charts is because it simplifies your analysis and smooths out all the noise and random price action on the short time frames. This noise and randomness causes you to overthink and overtrade and generally just sabotages your trading.

  • Checking the news constantly

If you’ve been following me for any significant length of time, you know that I generally abhor trading the news because I feel the price action reflects all pertinent variables of a market and also because it causes traders to overthink and over-trade.

There are thousands of variables that can affect a market at any given moment, so truthfully, to try and analyze or “trade the news” is basically the same thing as trying to “out-think” the market or thinking that if you just “know more” you will “figure out the next move”. All that is true is that the price action is already showing you what the impact of any news on a market, so skip all the news B.S. and just learn to read the footprint of the market; the price action.

Stop Overthinking

So, how can you stop overthinking and start trading?

So now that you know what overthinking is and how it negatively impacts your trading, here are some simple yet effective solutions on how to overcome this bad habit.

  • Trade What You See, Not What You Think

Trade what you’re actually seeing, not just what you think might happen. Traders often think themselves right out of perfectly good trade setups because instead of simply trading what the setup they see in front of them, they start imagining a whole bunch of different scenarios that may or may not happen. You just have to accept that you never know how a trade will play out before it plays out, but when you see a setup that meets your trading strategy criteria, you simply execute the trade and walk away

  • Ignore the News

As mentioned previously, the price action of a market, easily visible on any raw price chart, is the best and most accurate reflection of all the variables affecting a market at any given time. To focus on news or “fundamentals” is simply to distract yourself from the price action and it will set you on a course of overthinking and analyzing. Do yourself a huge favor and stop looking at trading news.

  • Put together a trading plan

Perhaps the single most impactful thing you can do to stop overthinking and start trading, is to put together a comprehensive yet concise trading plan. Your trading plan is your “document”, your tangible piece of accountability and guidance. You will learn a lot simply by putting it together and it will become the “glue” that holds your trading together. You should refer back to it every day and read-through it so that you remember what you need to do to not only trade your strategy properly, but to stay on track mentally.

Your trading plan is what will set into motion your trading routine. Routines influences habit and positive habits turn into success.

  • Understand what “gut feel” and trading intuition really is

Traders can get easily confused when they hear something like “Don’t think too much, just follow your gut…”So, I want to clarify that statement because gut feel and trading intuition are very important and necessary pieces of the pie.

The key with gut feel and trading intuition is that it doesn’t come instantly. It’s something that you develop and that will become stronger within you over time and with training and screen time. Essentially, I view it as a “subconscious piece of trading confluence” that adds weight to a trade. It’s your subconscious giving you a ‘green light’ or ‘red light’ to act based on everything you are seeing on the chart and your cumulative trading experience.

  • Practice and implement “set and forget trading”

You may not like this, but you need to physically leave your computer sometimes, for longer periods of time than your probably used to. You have to do this so that you don’t overthink and overtrade and get yourself into trouble.

The hardest part of trading for most people is self-control. One of the most effective and efficient ways to establish self-control in your trading routine is to build-in a section in your trading plan that describes when you will be in front of the charts, for how long and when you will physically leave the charts. You need to remember that you will miss some trades, and that’s OK, the market will be there tomorrow. We are trying to execute a trading edge with discipline, not trade everything that moves.

  • Eliminate fear by controlling what you can and letting go of what you can’t

Just like you cannot control another person without their being severe negative consequences in most cases, you absolutely cannot control the market. You can certainly try, but it will result in losing your money and trying to control the market is the best way to describe why most people lose at trading.

Literally, the ONLY thing you can control in the market is how much you risk per trade, your stop loss placement, your position size, your entry and your exit placement, and that is really about it. You have ZERO control over all the other market players and which way the market will move, Z-E-R-O. Yet, time and time again, traders behave in such a way that shows they are trying to control the market, whether they intend to or not.

The biggest way to eliminate fear in trading is to control your risk to a dollar amount you are mentally and emotionally OK with potentially losing on any given trade!

  • Stick with your trades

This is one is really just about self-discipline. You desperately need to stick with your trades once you enter them. Stop wondering “is there a better trade out there” and then you close out your current trade and enter another one. This is GAMBLING, NOT TRADING!

Remember, your trading edge (in order to be realized) needs to play out over a series of trades because you never know WHICH particular trade in a series will be a win or a loss; if you do things like close a trade out before it gets a chance to start moving, you are trying to play God of the market and that never works out. Note; there are times when you should close a trade out manually / early, but these are rare and it’s something you shouldn’t do until you’ve had enough experience, training and time.