By Max Munroe on March 29th, 2013

As you know, we get a lot of questions coming in from Round-Up readers. And that’s pretty useful, as it can give us ideas for articles.

And in fact, today I want to tackle an issue quite a few readers have touched on. It’s the psychology of trading.

So what do we mean by trading psychology? Well, I’m talking about how you deal with the constant mind-games you encounter as a trader!

This is crucial info. In fact, in many ways it’s more important than any strategy or technical analysis I could give you.

It’s right up there with money management techniques as something you need to know before you trade.

What I’m saying is that if you’re going to be successful in trading, you need the right approach. You need to realise that the market is ALWAYS right. And know that it doesnt care what you think.

If you understand that and know how to deal with it you stand a far better chance of success. So let’s take a look.

Key tricks to use in improving your trading

By the way, this is an enormous topic. I could probably write several books on it! But I want to cut through the waffle and get down to the key tricks that have helped me in my trading.

So the first lesson is to find a strategy that fits your personality. Never try changing yourself to suit a strategy. I can’t stress enough.

Too many traders fail initially because they are trying to operate in an environment they haven’t grown up with.

Let me give you an example.

‘Scalping’ is a trading strategy where you try to profit from small price moves. And you might try to do it 10, 20 even 100 times a day, with 5- or 10-pips of profit each time.

People can and do make a lot of money if they’re good at scalping. (If you have success scalping, I’d love to hear from you. Leave a comment at the end of the article.)

But the fact is, if you have a short attention span, then scalping on 1- or 5-minute charts will not be right for you. It just requires too much concentration throughout the day.

Another example, this time considering your daily life. Let’s say you’re working a full-time job, 9-5. You can’t use your computer to trade in office hours. It’s only evenings, after 6pm when you get home, that you can trade. Does that chime with you?

Well, then intraday trading is unlikely to work for you. You’ll just keep missing entry and exit points.

The point is, you need to figure out what fits with you and your lifestyle.

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What kind of trader are you?

So I’d say the first thing you need to do is a version of a SWOT analysis.

In other words, go through your S trengths and W eaknesses and, O pportunities and T hreats to you achieving your goals of becoming a trader.

And by the way, this in itself is a challenge to do if you’re truly honest with yourself.

Just remember that no-one but you needs to see this. But you need to be brutally honest with yourself.

Here are some of the things you need to get to the bottom of.

Can you genuinely learn techniques for trading? Do you have the time? Does your morning routine (e.g. dog walking, childcare) threaten your ability to log into the computer? If you made tomorrow’s lunch early in the evening instead of watching TV, could you free up 30 more minutes to study?

And what kind of person are you? If you’re likely to get anxious about your trades and stress about them during the day, then ‘swing’ or ‘position’ trading isn’t for you. Don’t go for scalping if you can’t stay focused.

Now let’s move to the next step.

That’s when you use your SWOT to build a profile and a set of statements which starts to define how, when, where, what you will trade.

Don’t be put off. It’s far easier to do this than I suspect you’re thinking.

It’s just common sense, really. Let me show you.

First, let’s quickly look at what the four main types of trader are (as I see them).

First we have the scalpers I mentioned above. These are the guys in an out of the market in rapid timeframes, going for less than 10 pips normally. It usually requires the ability to stare at monitors all day and repeat the same process religiously. A key concern for scalpers is costs per transaction.

Second we have the intraday traders. Normally these traders won’t hold positions over night. They trade using 15-minute to hourly charts and with profit targets somewhere in the region of 30 to 80 pips.

The intraday trader often uses alert systems to highlight potential entries and exits. These traders are looking for chart patterns. But they’ll also be focused on more general market sentiment. And often they are likely to exit a position based on their ‘gut’ feel for when the market is turning.

Next we have swing traders. These folk look to hold positions normally for a couple of days. So they tend to run much wider stops and profit targets, 100+ pips.

They tend to be more focused on the Daily and 4-hour charts and are always looking for patterns. They tend to be a little more ‘rules based’ than some intraday traders. A swing trader’s focus is on capturing large movements in the markets and parts of key trends.

Finally, we have position traders. These are the guys that will hold large positions for weeks at a time, often based on fundamental reasons. They are looking for many hundreds of pips per trade.

Embrace who you are

So these are my basic personal descriptions of the types of traders. Knowing these and understanding your strengths and weaknesses should allow you to actually understand where you ought to be focusing your energy.

It’s important. You see, I believe the majority of issues ‘newbie’ traders have are down to their lack of understanding about themselves. They try to fit themselves to manage a strategy that isn’t right for them. And they lose money.

Instead, you should embrace who you are and get a strategy to work around that.

Now in the next issue of Forex Round-Up . we’ll start looking at ways to figure this out

Look out for that on Monday.

Meantime, have a great Easter break. And please, if you already know what style of trader you are, or have anything else to share, let me know. Leave a comment below.

Max Munroe

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