Why is it that so many traders are successful with their demo account but are consistent failures with their live account? The answer is that even though market is the same and their tools are the same, their psychological state is different.
As a qualified Psychotherapist now in the FX market, I have spent time looking into the psychological aspects of trading and how traders react differently in the real world.
The steps to successful trading are:
1 Learn how to manage data, use graphs and risk management.
2 Understand the fundamentals and technicals.
3 Identify a trading strategy that provides a consistent profit.
4 Apply the strategy consistently in a demo account.
5 Apply the strategy consistently in a live account.
Once a trader has a strategy that works, he must practice it enough times that he commits the strategy to his unconscious mind. It is like learning to drive a car, after a while, people drive a car without thinking about it. Using a trading strategy must be like that; a trader should use the same winning strategy over and over with the minimum conscious intervention.
Where it most frequently goes wrong is in the transition from demo to live account. Emotions become too strong and he abandons his strategy. He finds himself taking trades and then wondering why; he finds himself doubling his trade size to cover his losses, he finds patterns in the market that do not actually exist.
The trader must master his mind, and to do that he must first understand himself.
Without control over his mind, the trader encounters the following obstacles:
1 Greed, the urge to make as much money as possible, and fear that he will lose it all.
2 Low confidence in himself or his strategy, which makes him enter or exit trades at the wrong time. Low self esteem is also a problem; lots of people are natural victims and believe that they will probably fail, and of course this is what they do.
3 Middle class guilt that makes the trader believe that he should not make super profits because it is morally wrong.
4 Overconfidence. Feeling that after so many winning trades he is invincible.
5 Disbelief. He believes that high rewards cannot possibly be true, and “If trading is that easy, then everyone would be doing it.” He then looks for complicated strategies in the belief that it cannot be easy.
6 Paranoia, believing that the market is conspiring against him.
7 Reward for effort, where he feels that people should be rewarded fairly for the effort that they put in. FX trading does not operate with these rules and that is confusing. The reward can be disproportionately high or can result in punishing losses, and is not dependent on just the work put in.
8 Insecurity, resulting in changing a strategy that is actually winning. All strategies must be tested and then consistently applied in order to engender confidence.
9 The urge to trade simply because he is a trader. This impatience results in entering trades when no real opportunity exists.
10 Low expectation; people with a low expectation of life tend to be less successful. Even though they may be highly intelligent, they aim for less and settle for less.
When people have these types of symptom they use willpower to try to control themselves. This is unsuccessful because these issues are located deep in the unconscious mind and are too strong for willpower alone. For example, giving up smoking is easy by comparison.
To be a successful trader, a person needs to face up to these psychological obstacles and master his own mind. Without resolving these issues, many good traders are doomed to a cycle of success with a demo account and mediocre results or losses with a live account.
It is clear that lots of people are successful traders and that there is no single winning strategy that the trader needs to discover. The main difference between the professional and the enthusiastic amateur however, is that the professional has learned to be in control of himself and his emotions.
In a later article, there will be suggestions and strategies to help traders make the transition to an emotion free professional.