Preface: A Trader’s Perspective On Trading Psychology

The purpose of this “Beginner’s Guide” is to give you traders (new and old) a perspective from actual traders on the Phantom Trading team! As of writing this, there are about 12 of us on the team, most of which are either funded through a prop firm, trade sizable personal accounts and/or trade funds that were secured through private investors. Let’s dig in

Now, we’d be doing any aspiring trader a disservice by not mentioning Mark Douglas, the pioneer of modern trade psychology. We need to give credit where it’s due because let’s face it, he is the grandfather of trade psychology and most of us at Phantom including myself attribute at least some if not all of his trade psychology teachings to our success in trading consistently and profitably. 

Unfortunately, Mark passed away in September 2015, but his legacy lives on in the form of his breakthrough work on trade psychology which has undoubtedly helped hundreds of thousands, if not millions of traders find their consistency.

The 4 Stages of Competence In Trading Psychology

Most people know what the 4 stages of competence are, but here I’m going to give it a twist and explain it to you as it relates to trading and trading psychology. We believe this is really the fundamentals to developing the emotional maturity to become a successful trader in the markets. Remember, trading shouldn’t be stressful or cause you to go on a wild roller coaster of emotions, despite what some people may think. The calm, collected trader will always outperform an emotionally impulsive one. This is why “cooler heads” always prevail.B

Unconscious Incompetence (Ignorance)

At this stage, you simply don’t know what you don’t know. Maybe you know how to enter trades, and maybe you’ve won a couple, but you have zero clue what it takes to be consistent in your trading process, execution, and of course trading psychology. This is by definition, gambling.

Conscious Incompetence (Awareness)

In the second stage, you quickly hit a losing streak and realize you have no idea what you’re doing. You thought trading was going to be easy but now you’re either reacting one of a few ways. You’re either angry, or upset, or you’re sad and you’re really feeling those losses. You may even have hit a winning streak like I did early in my investing career and come to the realization that you really don’t know what you’re doing and you feel like luck was just on your side. This step is obviously important, otherwise, you’ll stay unconsciously incompetent, much like gamblers with gambling addictions that play games that they have no chance of consistently winning in the long run.

Conscious Competence (Learning)

In the third stage, you’ve probably decided to join Phantom Trading or you’ve picked another strategy to learn to trade. I’d argue to a degree if you’re just starting out that you’re still in the previous stage, but when you’re in the thick of it, collecting data and practicing in a live market environment with a small live account, or even a demo account you’re learning to trade and manage the emotions you feel when trading the markets. This is arguably the longest stage when it comes to trading and trading psychology because it can literally take years to hone all of the necessary skills you’ll need to become truly competent. And get this, even if you are competent, it may not mean you’re consistent.

Unconscious Competence (Mastery)

Finally, at the last stage, you’re unconsciously competent, meaning you’ve not only trained yourself on the analytical and technical side, but you’ve also mastered your trading psychology in a way that you no longer are affected by your emotions. Now, this doesn’t mean you’re an emotionless trading robot, but rather it means you’ve resolved emotions by adopting healthier mindsets and beliefs to aid you in your trading. This is much like having “mental” muscle memory to execute on trades without poorly managed emotions causing you to hesitate, overreact, or over trade.

Trading Psychology For New Traders

For most of you, if you’ve only been trading for under two years, I’d still consider you a novice trader in the psychology department of things, except for rare circumstances.

If you have experience with playing professional poker, you probably have a good grasp of professional gambling, and thus the psychology you need to be a consistent player.

If you’ve been investing or trading stocks or cryptos for over 2 years (even if you’re still not consistent or profitable) you’re probably getting to a point where a trade psychology breakthrough is around the corner.

The hard thing about trading psychology is that it’s going to be different for each individual trader. You’ll have different challenges, pitfalls, and you all have different personalities and past experiences which largely dictate how you’re going to react to both the good and bad emotions you’ll feel while trading.

Don’t Stress, You’re Probably Still Figuring Out Your Trading Plan

If you are new to trading, and you’re still learning a strategy or have yet to settle on one, don’t worry. Seriously. If you’re reading this you probably have already decided you are set on making a career out of trading professionally, for which we at Phantom applaud you. You already know it won’t be easy. I cover this in our Beginner’s Guide To Forex Trading quite extensively.

Step one should always be figuring out your trading plan and really sitting down and spending time to collect data in hindsight and/or backtesting to both understand the strategy and build a trading plan that suits your personality as a trader. You need to know what is considered a valid trade and an invalid trade within the scope and rules of your trading plan (this is something we’ll cover in detail later in this article). Without that sorted out, you will undoubtedly remain inconsistent. Lucky enough for you, at Phantom Trading we give you literally all the tools you need to build a good quality trade plan.

Start With Building Patience

Why do we stress building patience first? What we’ve noticed at Phantom over the last couple of years of teaching our strategy (which has been refined about 3 times by the way) – is that most people see others taking trades and think they can replicate it without building the fundamental skills to be able to properly analyze the market using multi-timeframe analysis and the skills to recognize and execute on high probability trade setups.

Think of it this way, would you give a 16 year old who can’t ride a bicycle a 1000cc sportbike to ride to school? I certainly wouldn’t! It’d more than likely not end well. Unfortunately human nature makes us think that entering anything and everything that we see in the market will lead to more profitability. This is sadly not the case. While some things in life work well if you brute-force it, trading is not one of them. 9/10 times, less is more in trading.

So, if you’re new we highly suggest practicing self-discipline and honing in on controlling your impulsivity because it will likely not serve you well in the market. While this isn’t the case for everyone, for most of you I suggest picking 1-2 valid trade setups and sticking to them like glue. Focus on sticking to your plan and not deviating. This is easily one of the most important “variables” to turn into a “constant” in your trading.

Why Trading Is Harder Than Any Other Profession

No one here at Phantom Trading claims that learning to profitably trade the forex market is easy. Again, if anyone tells you otherwise, they are just selling you on a dream to make money off of you. Talk to any consistently profitable trader and they will all tell you that it takes 1, 2, 3 or even 5+ years to build the skills to become consistently profitable as a trader.

You Can’t Win Every Single Trade

When I personally first got into trading seriously 5 years ago (I had traded and invested my money casually in cryptocurrencies and the stock market 2 years prior to that), I had this preconceived notion that if I can just find a strategy that allows me to win every single trade, I’ll be set for life. If you think it’s mathematically possible to win every single trade you take, I’ll tell you now that you’re mistaken. 

This goes against the hard and cold fact that the market can and will do anything. Anything can affect the market from an institution manipulating price to a war on the other side of the planet causing investors to sell an asset in a frenzy of fear.

Accept early on that you will lose, and that losses are just a cost of doing business and you’ll find trading is a lot less stressful than you’re making it out to be.

Losing Can Hurt

Losing trades can definitely hurt, especially if you’re new or if you’re still figuring things out. Losing streaks can hurt even more because they can shake your confidence. Learning to lose properly is paramount to your success as a trader because it dictates how you’ll react to losing. We at Phantom advocate embracing and learning from failure because, realistically, it’s the only thing that really works when it comes to taking losses.

Ignore your losses, get angry, sad, or fight to recover them without a cool head and you’ll eventually get to a point where you’ve blown your account, or you’ll just quit trading for good.

Ideally, you want to get to a point where losses either don’t phase you or hurt very little and don’t affect your ability to execute your trade plan effectively and consistently.

Why Consistency Doesn’t Happen Overnight

As I mentioned before, finding consistency in your trading is no easy feat. If you’re expecting to find real long-term profitability and consistency in your trading, you have to be willing to sacrifice your time and effort to make it happen. This is one profession in which people no matter how accomplished in other areas of life are often humbled. Why is this? It’s because the skills you have to build are counter-intuitive.

Consistently Losing Is Better Than Inconsistently Winning

To understand what I mean when I say consistently losing is better than inconsistently winning, you have to really understand the principle of cause and effect. Check out this short 2 minute video explaining what cause and effect is below:

EMBED https://www.youtube.com/watch?v=T7uq3g0TVpU

Now that you understand cause and effect, we can understand that anything including the market, by its very nature, is driven by cause and effect. The difficult thing about markets and games of chance is that we have probability involved. In the case of the market, we can’t truly know the objective reason behind a particular move in price, unless we’re the ones moving the market around by flooding buy or sell orders into it and literally moving the price. In the forex market, unless you’re trading huge lot size volumes, it’s unlikely you’re moving price around.

So what does this have to do with consistently losing versus inconsistently winning? If you’re following your plan to the tee and you hit a streak of 7 losses, you’re on the right path to consistency in your trading. You may soon recover your losses, or maybe you just need to tweak a couple of things in your plan to make it profitable.

If you’re not following a plan and taking wins and losses inconsistently, you have a serious problem you need to address. The truth is, most traders start out like this. It’s by definition, gambling! If you don’t approach the market with a consistent method of analysis and entry you really can’t expect to be consistent as a trader. You’ll take invalid trades that lead to wins and get positive feedback from low probability trades, and you’ll take valid trades in your plan and be punished for it. This is just the nature of trading in a market that is largely driven by probabilities.

Focus on executing your plan consistently first, even if it means you’re losing a lot, then adjust. Don’t take trades just because you think there is a 10% chance of it working out, it will only burn you in the long run.

The Importance of Identifying Valid / Invalid Trades

As I covered in the last section, it’s imperative that you build a trading plan and stick to it. Without being able to differentiate valid wins and losses from invalid wins and losses, you’ll have a problem producing consistently profitable results.

Valid wins help us gain confidence and turn a well-deserved profit.
Valid losses humble us and remind us that trading is probabilistic.

Invalid wins give us a false sense of confidence and undeserved profits.
Invalid losses show us why we shouldn’t violate our trading plan and our rules.

Know What Trades Are Valid Within Your Trading Plan

Valid trade setups that you identify and enter have only 3 outcomes: 

  1. Winning Trade
  2. Losing Trade
  3. Break-even Trade

Remember, the way the market moves is all probabilistic, meaning that anything can happen at any given moment in the market. You can win, you can lose, you can go break-even. Sometimes you’ll hit winning streaks because the market aligns with your trading plan, and sometimes you’ll hit losing streaks, even if the trade setups are 100% valid. This is the nature of trading, don’t try to fight it or outsmart the market.

Stop Taking Invalid Trades Within Your Trading Plan

So what is the difference between taking a valid and invalid trade (within your plan)?

Your trade either fits the plan or it doesn’t. What are the 3 outcomes invalid trade setups have? 

Invalid trade setups that you identify and enter also have only 3 outcomes: 

  1. Winning Trade
  2. Losing Trade
  3. Break-even Trade

Now I’m going to explain the danger of taking invalid trade setups. As traders, we are much like a race car driver zooming around a track, in that we rely on feedback from the market to tell us if we’re executing our trades properly just like a race car driver relies on feedback from his car and the track to prevent himself from crashing into a wall!

Trading Is Really Just Professional Gambling

What separates professional gamblers from gamblers that consistently lose money? It’s simple, a professional gambler understands how probability works and has a proven and tested edge in the game they’re playing.

Trade Like A Casino

I know, I know. It’s a cliché term you hear thrown around all the time, but it’s true. A professional trader uses his edge in the market to extract wealth from the market because he or she has tested and proven that over a long series of trades (large sample size), their edge will produce a positive return. Does that mean they’ll always win, or that they won’t hit losing streaks? Not at all. Losing streaks happen to even the best of traders. This is an extremely important concept to understand but is hard to truly comprehend unless you experience it firsthand. This is why we always use the analogy of reading a book to learn to ride a bike. You can’t reasonably expect to learn to ride a bike from reading a book. You learn how to ride a bike by trying and failing until you build the skills necessary to do it!

Why You Should Journal Every Single Trade

Next, let’s cover the importance of journaling your trades. Whether you take a win, a loss, or break-even, you must document all of your trades. Without the discipline to sit down and reflect on your engagements with the market, you can’t reasonably expect to learn anything. At Phantom Trading, we’ve seen traders not journal trades at all because they don’t feel like it, or they’ll only journal wins, but this is an extremely counterproductive way to approach trading. 

Consistency is built first and foremost by building awareness and you can do that by simply journaling every trade you take. Not journaling trades is much like trying to drive a car with your eyes closed, you might get to the end of your street on a drive, but you’ll likely crash into an obstacle.

How To Journal Your Trades Effectively

If you haven’t already, check out our youtube video below and guide on how to journal your forex trades. This guide goes over everything you need to know about journaling your trades. I’ll also give you a quick run-down of how to journal your trades in an effective manner here.

Embed https://www.youtube.com/watch?v=sPAKl1Ap6Ic

The best way to journal your trades that we’ve found is simply by using a tool like Notion to track and document all of your trades so you can evaluate your trades in the live market whether it’s a live account, funded account, or even demo. In fact, if you’re a Phantom Member with an active subscription, I actually offer all of my resources, tools, scripts, and of course, notion templates (including one for journaling your trades) for free, all included with your membership – a $35+ value!

Most people can’t be bothered to journal their trades, but to them I say, do it anyway! You’re probably wondering, “Why does it even matter whether I journal my trades or not?” Well, the reason why it’s so important to track your trades is that if you don’t all of your wins, losses, and break-evens you’ll likely lack the necessary feedback you need to assess whether you’re overtrading, if you’re becoming overconfident, or if you’re violating the rules you set for yourself in your trade plan. Much like the analogy of the race car driver we gave above, you may crash into a metaphorical “wall”!

Do End of Day Markups / Missed Trade Recaps

Last but not least, you need to do your end-of-day markups and document all of the valid missed trades in the market in order to train your eye to recognize setups as they are happening in the live market. This is one of the best tools that we’ve found for building our pattern recognition skills and for keeping a pulse on what the markets are doing. We’d even argue that this is just as important, if not more important than doing backtesting/simulation trading.

Every team member on the Phantom team has either done this practice for an extended period of time or still does it to this day. The reason this practice works so well is that it helps us build the confidence to identify trades that we should be entering, and reminds us that being overly aggressive can be very counterproductive.

In Closing

We hope you learned something valuable in this short beginner’s guide to trading psychology and that you walk away with some simple and practical tools to help you start to develop your mindset in a way that will help you build your consistency as a professional trader. 

At Phantom Trading, we strive to help all of our members build their skills ranging from technical analysis all the way to trade psychology and risk management, so if you’re looking for an in-depth trading strategy and a community filled with like-minded traders, coaches, and team members, look no further! We at Phantom have taught thousands of traders and helped hundreds of them secure funding and find long-term consistency as traders.

Remember, success and competency in anything in life boils down to how much effort you put into it, and just as important, how you approach things from a psychological perspective. This is especially true for a complex and nuanced skill like trading. With that said, if you’re ready to join us at Phantom Trading, you can click here to get a membership today!

Happy Trading everyone 🙂

Robert Castillo – Currency & Commodities Trader,
Financial Analyst, Writer & Editor.

Robert is a funded trader based out of Toronto, Canada, and has been trading currencies, commodities, stocks, and cryptocurrencies for over 7 years. Outside of trading he enjoys producing music, mixed martial arts, and riding his motorcycle in the summer.