In this essential video, Tom Hougaard explores the most common trading fears and outlines the four steps to becoming a winning Forex trader.

Transcript:

Introduction
In my ears in the financial arena, I've rarely met a newcomer who hadn't already experienced some degree of success; either paper trading the market or opening and trading a demo account.
But once they start trading their own money, the success they had trading the demo account is not so easy to replicate trading their own money.
What tends to happen is that they suffer from one of four trading fears. And this will be the focus in this chapter.

Scene 1: 4 Trading Fears

Let’s talk a little bit about trading fears, and how it can sabotage your trading. Your trading fears are largely contained to 4 kinds of trading fears.
There is the fear of being wrong, there is the fear of losing money, and then there is the fear of missing out on a move in the market and lastly there is the fear of leaving money on the table.

Much of our fear comes from how our brain is designed, so let’s just take a quick look at the structure of our brain.
Our brain consists of three centres. There Reptile part of our brain. It’s about 500 million years old. It wakes us in the morning and it reminds your heart to beat.

And then there is our Midbrain which is only about 300 million years old. It regulates temperature, it houses our emotions and governs our flight or fight response that keeps us alive in the face of danger.

And finally there is the cortex, and this is where the problem is. 100 million years old and this is where our rational thoughts take place. And it is in the cortex that we need to go to work if we want to change we need to activate the cortex.

Scene 3: The path to change
The path to change doesn’t require large steps and grand gestures. Rather in my experience you are far more likely to succeed by taking small incremental steps, because large steps tend to generate fear and when you have fear your cortex part of the brain will shut down. If you instead take small incremental steps towards your goal you are far more likely to succeed, because the cortex doesn’t detect any discernible change in your behavior.

Scene 4: The journey to becoming a winning trader
The journey to becoming a winning trader can largely be outlined as follows:

You need to learn to execute without fear or hesitation.
You need to accept that you will get stopped out when you are wrong.
And you also need to accept that the only way to really accumulate profits on your account is to let winners run.
And finally, the fourth and probably most difficult step is to push your winners, or in other words, you add to your winning positions.

Scene 5: The objective: to remove the fear
The objective: to remove the fear:

My objective is to remove the fear so you can just play the game over and over without hesitation or without any kind of doubt.

When we have an edge, all that remains is to take each trade as it comes without prejudging whether it’s going to be a good or a bad trade.

Scene 6: The objective: to remove the fear (continued)
Can technical analysis help us with that? It certainly can, but technical analysis does not predict the future, and neither does fundamental analysis for that matter, all that technical and fundamental analysis does it that is says that there higher probability of one outcome happening over another. And that is our edge.
Over a batch of trades TA predicts the future very well. But don’t forget, on the level of one single trade the outcome is completely random. We don’t know if it’s going to be a winning trade or loosing trade.

Scene 9: The objective: to remove the fear (continued)
If we have a technical pattern which is correct 70% of the time it stands to reason that it is obviously going to be wrong 30% of the time.
So on the next trade we don’t know if it’s going to be one of the 70% or one of the 30%.

So as traders, we require two levels of belief.
One, at the level of one trade we really need to believe that the outcome is random, and we don’t know what’s going to happen next.
But at the level of a batch of trades, we need to appreciate and believe that there is a predictable outcome.

Scene 10: The objective: to remove the fear (continued)
Most of us would have no trouble playing the coin game mentioned in the previous chapter. But most of us have a major problem following a simple set of trading rules.
The difference may be simple but it is profound.

In the coin game all of us have believed since childhood that the outcome of tossing a coin is random.

Scene 11: The objective: to remove the fear (continued)
When the head turns up instead of the tail which we guessed it caused NO pain.
However, in trading we feel that we know what's going to happen next and when it does not we experience major pain.

Scene 12: The objective: to remove the fear (continued)
And here is my lesson to you. All trading pain can be removed by really believing that in one trade, anything can happen.

In contrast the amount that we believe that we can predict the outcome of any on trade will be directly proportional to the extent that we FAIL as a trader.

The expectation that we know what's going to happen next is the source of all trading pain

Scene 13: The objective: to remove the fear (continued)
Many people start to trade knowing very little about the market and do very well.

In the beginning of their trading career they have no expectation of being able to predict the market as they know nothing and have little experience.

After a few months of trading they slowly become gurus and now feel confident to predict the future on a trade by trade basis.

Slowly the pain starts and they find that trading errors of hesitation and picking trades start to surface. And so now it is time for another book, another system and another trading course. But unfortunately this is not the solution.

Scene 14: The objective: to remove the fear (continued)
The source of all trading pain is caused by the thought that we know what's going to happen next.
When the outcome is poor in relation to our expectation a wave of pain arrives.
And the most common trading error is that of hesitation of picking trades, maybe let one trade go or pick another one because it looks better, and that will result in pain.



Scene 15: The objective: to remove the fear (continued)
I don’t want to go all Freudian psychology on you here, but I want to tell you how our minds work, because it has two distinct characteristics.

One characteristic is to associate one moment with a previous moment.
Another characteristic is to avoid at any cost, both physical and emotion pain.

Scene 16: The objective: to remove the fear (continued)
When we feel as traders that we can predict the future on a trade by trade basis then emotional pain will be the result.

Let’s assume that our system has a hit rate of 66% i.e. 2 trades out 3 are winners and it has a risk to reward of 1:2.

Our job is to take each trade without fear or hesitation.

Scene 17: The objective: to remove the fear (continued)
Let’s say the first trade is a winner and the second a winner. But sooner or later a bad trade is going to come along.

If we believe that we know what's going to happen next, and that is the case for most traders, we are going to experience pain when that loss arrives.

The next trade comes along .When it’s time to execute our mind remembers the pain associated with the bad one. The mind is wired to avoid pain, so we find ourselves hesitating , it is because of the pain from the previous trade. In many people this can be very subtle, but they will make excuses for not taking the next trade.

Scene 18: The objective: to remove the fear (continued)
Many traders will avoid looking at charts for weeks at this stage. Many will go out and buy trading books or go on trading courses. Many will busy themselves in other projects instead of dealing with the trading pain.
A few weeks ago I had lunch with a stockbroker. She told me that she saw lots of great technical setups but was always too busy in admin to trade them.
My thoughts were that this was a subtle manifestation of avoiding the pain of being wrong in her trading.


Scene 19: The objective: to remove the fear
Let me make this really clear to you. Forget about chasing the Holy Grail. There is no method out there which can predict the market with anything approaching 100% accuracy. There are just too many variables around for that to happen.

Am I saying that we should forget about working on our analysis? And try to improve our results?

Of course not. Once we realize that at the level of one trade that the market cannot be predicted we can certainly work hard to get a better overall edge.



Scene 20: The objective: to remove the fear (continued)
Unfortunately some of the best analysts that I know are extremely poor traders. Consider the Elliot wave guru who spent 10 years studying wave analysis.
How easy do you think it is for this person to accept and understand that on one trade the outcome is random.

Scene 22: The objective: to remove the fear (continued)
Furthermore the Elliott wave analyst will have lots of their self worth tied up in the certainty of the prediction. If it goes wrong then that’s the source of major pain.

Elliott can be used to build an excellent edge in the market. But what is your objective – do you want to be right, or do you want to make money trading?

Scene 23: The objective: to remove the fear (continued)
The biggest problem I have in teaching short term trading techniques is the tendency for people to jump from one trading system to another.

Many traders change systems after one losing trade. They largely optimize mentally to what worked yesterday. But it rarely works that way, and just because it didn’t work yesterday doesn’t mean that it’s going to work today – and vice versa.
They tend to get caught up in a cycle until the pain is so much that they give up or simply run out of cash.

Having the discipline to stick to the one trading plan through thick and thin is quite a business.


Scene 24: The objective: to remove the fear (continued)
What we have to ask ourselves now is that, can trading discipline be built or is it it simply just the case of one has it and another doesn’t?

Of course it can be built. Of course you can build trading discipline.

When you’ve got discipline you don't need discipline any more to complete a task.

I don’t need to grit my teeth to go to the gym every day, but I certainly did in the beginning.

Scene 25: Building trading discipline
So this is what I want you to consider.
First you need to decide upon a trading system which details mechanically entry, exit, the money management, position sizing and any adding to your position that you may encounter. It should be simple and straightforward as we are in a discipline building phase, rather than system building exercise.

I will make a recommendation of trading system that I use myself in the Forex market every single day.
such a system when I give you my secret trading setup.

Scene 26: Building trading discipline (continued)
The second thing you have to do is that you have to resolve to follow this system for a batch of trades without changing the parameters or rules. Thirty trades seem to be a good number to aim for.
This can be a very difficult exercise and probably the most difficult thing you have ever done.

But I promise you, that if you persist you will reap the rewards. You don’t even have to do it with real money, you can trade this on a demo account – what is important is that you do it and that you begin to execute a batch of thirty trades with discipline and without hesitation.

Scene 27: Building trading discipline (continued)
It’s a process very similar to the personal trainers we see in gyms these days. Personal trainers are in the discipline business not the exercise business. They just want to make sure that you show up and do the exercises. And largely after maybe 30 days, you don’t even need them anymore.

Scene 28: Building trading discipline (continued)
The most amazing thing about this exercise is how the resistance just seem to melt away after somewhere between 10 and 15 trades.

You are only about 10 to 15 trades away from being the trader that you want to be. It’s that close. After those 10-15 trades all the resistance has melted away. And each one I have every taught this method begins to execute their trades without fear or hesitation.
It’s still a very difficult step to make and pretty much impossible without taking the time to study the art of being present.

Scene 33: Building trading discipline (continued)
I believe that it will be impossible for you to complete the 30 trades exercise without building your ability to be in the present moment. Because otherwise you’re going to this that the last trade was a losing trade and you’re going to worry that the next trade is going to lose you money

You can perfectly do the 30 trade exercise using a demo account. However, to emotionally get the most out of the exercise you should trade it with real money, even if it is using the smallest possible stake size you can.

The goal of the exercise is not to make money but to build discipline. The goal is to build a foundation from where you can develop a prosperous trading future.