Monday, November 27, 2017

Turn Threats into Opportunities | Trading Psychology



Today’s Trading Psychology topic is “how to turn a threat into an opportunity.”

Let’s paint a picture for you today…

It’s a Monday morning, and the markets have been choppy all morning.  It’s approaching 11:30am EST and the lunchtime slowdown is starting to creep into the price-action.

My trading plan says I need to take a break over lunch, but I haven’t found any good trades yet today, so I decide to keep looking for opportunities.  After all, I need to reach my goal for today, and I can’t do that without taking any trades.

An hour later, in the middle of the lunchtime slowdown, I find a trade that “might” work, and I enter the market. 

Two minutes later, my stop gets hit, my account is debited, and I start the afternoon session in a hole, rather than sitting at break-even.

30-minutes later, early in the afternoon session, I see the market start to run higher.  Feeling the pressure to make-up for that loss over lunch, I make an impulsive decision to chase the market, buying the market at its highs.

Sure enough, 5-minutes later, a 2-legged pullback stops me out of the trade, just before the market jams higher for a symmetrical second leg to the upside.  Ouch.

If you’ve ever traded before, you probably know exactly how this situation feels.  And if you’re like me, just describing this situation makes you want to scream.  It’s painful, its frustrating, it’s expensive, but it can easily be avoided.


Today I want to talk about how we allow a perceived threat to ruin our chances of success, and how we can methodically turn that threat into an opportunity.

In the example I just described, the lack of trading opportunities on Monday morning was a threat to me reaching my daily profit goal.

I then allowed that threat to sabotage my trading, causing a chain-reaction of poor decisions, costing me valuable capital, time and confidence.

How could I have handled that situation differently?

In hindsight, I should have followed my rules, taken a break over lunch, and came back with a positive and confident mindset that I could follow my rules and find a good trade in the afternoon session. 

And if there wasn’t a good trade to take in the afternoon, I could be confident that I am still within my WEEKLY goals, so I can always come back and try again tomorrow.

In other words, I allowed the market to threaten my daily goal, and my emotional reaction to that threat caused me to make poor decisions, which caused me a LOT more harm than it helped.

How do we change this?  How do we stop allowing such threats to sabotage our trading?

You know… traders often say that the markets make them FEEL angry, scared, frustrated, happy, etc. 

But in reality, the markets don’t have that power, only we have the power to assign an emotion to the market.

For example, if the market moves in a way that we perceive as an ally, then we feel happiness, excitement, empowerment, etc. (most of us feel like geniuses, haha)

If the market moves in a way that we perceive as a threat, we will most likely react with the emotions of fear, anger, frustration, etc. (we feel worthless and stupid)

Digging further, most traders start to feel threatened when the market is doing something that stands in our way of reaching some pre-defined expectation.

In a previous lesson, I discussed how these expectations are one of the deadliest mistakes can we make as traders… they put us on that “emotional rollercoaster.”  

The markets don’t work within the confines our expectations, so when we try to place those rigid rules on the markets, we end up seeing the market as a threat, when in reality we should see it as the exact opposite, an opportunity.

Four steps to turn a threat into an opportunity:

My goal with this lesson is to show you how to turn a threat into an opportunity, and I have four (4) stages of this process.

(#1) Identify the Threat

The first thing we need to do is begin identifying specific situations when you perceive the market as a threat.

Examples of this would be…

·        The market isn’t giving you good set-ups, threatening your daily goal
·        The trade hasn’t reached your profit target yet, threatening your stop-loss
·        You’re in a winning trade and the market reverses, threatening unrealized gains
·        You take back-to-back losses, threatening the balance of your trade account

These are painful situations, that cause distress to inexperienced traders, and most of us would rather forget about the pain and think about the winning trades and the happy times of trading, but we will never develop into successful traders if we don’t learn to identify and overcome the perception of these as threats.

This is NOT going to be easy.  Most of us live our lives every day and we never stop to pay attention to how specific situations are making us FEEL. 

If we don’t begin to identify these situations, we will never be able to turn them into an opportunity.

(#2) Journal

If you’re familiar with my work, you already know that I love to use a trading journal.

In this second step, I’m going to document every time I perceive the market as a threat, writing in my journal.

Specifically, I’m writing down exactly what happened, how it made me feel, the actions I took because of that feeling, the results of those action, and my plan to avoid that in the future.

Using the example from earlier, I would write in my journal that…

…I perceived the lack of trading opportunities as a threat to my daily goal, and I took the action of forcing a trade, and that action resulted in me losing money, which then snowballed into revenge-trading in the afternoon, triggering my daily loss limit.

The last thing I need to write in my journal is how I’m going to avoid that for next time.  The easy solution is, don’t use daily goals that you can’t control, which we’ve already discussed a few times in previous lessons, haven’t we?

(#3) Reflect

Now that we’re in the habit of identifying specific situations and writing them down in our journal, the next step is to invest the time (yes, I said the word “invest”) in reading our journal, reflecting on what happened, so that we can better-understand how these situations become triggers.

The most important thing that you can do with your journal is READ it. 

Read it at the end of the day, the end of the week, and the end of the month.  Heck, I even read through my journal picking days at random, because I always seem to find some hidden gem that will get me that much closer to becoming the best trader I can be.

After reading your journal for a few weeks, you’ll begin to realize that most of our perceived “threats” stem from a handful of our pre-defined expectations.

Your job is to find those common threats, those common pre-defined expectations which are triggering you into making poor decisions, and begin taking action to remove them from your trading.

(#4) Action

The key to self-improvement is taking firm, decisive & massive action, which will make it harder to keep making the same mistakes, and make it easier to make better decisions.

Your journal tells you where these threats are coming from, now is the time to make changes to your trading plan, changes to your daily routine, changes to your diet, changes to your lifestyle, changes that will make it easier for you to remove these threats from your trading day.

In the example I mentioned earlier, it’s as simple as replacing a daily goal with a weekly goal, that takes the pressure off, and allows me to stay patient when I need to most.

My goal with these four steps is to empower you to become more self-observant, more capable of identifying those situations that cause you to make poor decisions, and give you the tools, such as your journal, to make changes that will benefit your trading for the rest of your career.

To do a quick recap…

·        Identify the feeling of the threat (hardest part)
·        document the situation in your journal (cause, reaction, result)
·        invest the time to read your journal (daily, weekly, monthly)
·        turn that threat into an opportunity to grow by taking action…
·        repeat until you’re making fewer mistakes and earning more money than you could ever dream of.

I hope you found value in today’s trading psychology lesson…

…and I would love to hear from you about additional topics that you’re struggling with as traders.

Do me a favor…drop me a comment below this video with any topics you’d like to see me cover in my trading psychology video…

…make sure to give me a thumbs-up if you found value, and share it with a friend who can benefit from this information as well.

It doesn’t matter what market we trade, or the strategy we use, even the best traders battle with their emotions when there’s money on the line.


And don’t forget, you can find me every morning @ 8:00am EST in my trade room with all of our members here at SchoolOfTrade.com, I have a great free trial on the homepage of our website, I publish my Nightly Newsletter every evening on my blog before 8:00pm EST, and I’m excited to see you again soon on my next trading psychology lesson.

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