Lachlan Elsworth has for many years been an advocate of transparency in the markets and for the potential of both long-term and short-term trading. In this interview, Lachlan discusses the exact tips he would give any trader if they are seeking to master their trading psychology with the intent of mastering their trading.
YTE: Why is trading psychology so important to traders who want to succeed in the game of trading?
Lachlan: Whenever I am asked to write an article regarding trading or trading technique, I very much focus on strategy and the implementation of that strategy to encourage traders to be successful. I think the goal of any trader is to make significant money and do this on a regular basis so that they can move towards being a full time “laptop lifestyle” trader if they choose.
Every successful trader I work with recognises that their success in trading is 90% psychology and 10% strategy. These traders realise that their strategy is exceptionally important to their trading, but, they may as well have no strategy if they don’t have the psychology, the discipline and poise to implement their strategy effectively into the market. These traders have realised that to trade with a dysfunctional psychology is probably one of the most destructive and depressing trading cycles out there. The same traders have taken significant steps to address their ‘psychology’.
YTE: What are your secrets to building a great psychology in the game of trading?
Lachlan: To build a great trading psychology, I have found that there are four simple principles all traders can follow. These principles relate directly to keeping your trading as simple as possible and ensuring that you do not fight against the market, or fight against your broker for that matter. To me, ‘smart trading’ is about doing something simple and doing it consistently to the point that you are literally ‘following the path of least resistance’. Smart trading is not about getting caught in the emotions of the markets to the point that human fear and greed around making and losing money destroys your psychology as a trader.
|Principle One – Focus on the Short Term first.
I find that people want to see profit from their trading quickly, so they gain confidence in themselves and confidence in the very concept of trading. I have found that short-term trading, particularly on a five-minute chart, enables traders to achieve this confidence and achieve it quite quickly. This may mean you need to think outside the box, sure, but it is your trading success we are seeking to craft!
If you place a trader in a situation where their average trade is less than 30 minutes, as opposed to less than 30 days for example, I find it is easier to keep this trader disciplined and patient for the shorter term rather than asking them to be disciplined over a significantly longer period. I have found, for the traders I teach, this has a lot to do with ‘expectancy’. What do I mean by this?
Just think about the reality of trading in the volatile world that we live in. What are the chances of something going wrong in the next 30 minutes while you’re in a trade? Probably not much. In comparison, what are the chances of something going wrong in the next 30 days while you are in a far longer-term trade? Probably a lot higher. I think most people know this, even at a subconscious level, and they know they are carrying risk in the market. I find that this ‘feeling of carrying risk’ can have a profound effect on a trader and their ability to stay disciplined long enough for that trade to hit its target.
I teach my students to never hold a trade over night or over the weekend for this very reason. I always ask the question: Why sit in a trade for up to 30 days when you can take a similar value trade and be in and out of the market in under 30 minutes? I know it may seem like a tiny point, but I have seen it make a massive difference in hundreds of traders. Therefore, to me it offers potential for all of us. Trading in the short -term seems to be a lot easier for most traders and this helps us build a great trading psychology.
|Principle Two – Follow the Short-Term Trend to maximise your results and your confidence.
Whenever I teach people how to trade, I observe many behavioural patterns, but in terms of trading psychology, this one may be the most important.
I have observed first hand, on hundreds of occasions, that traders who are happy to trade with the trend have a higher average success rate when compared to traders who seek to fight the trend. I do not want to get all military on you, but in the interest of creating a great trading psychology, why would you want to fight with the trend when you do not have to? I am happy to reveal to every YTE reader that as a seasoned day trader, every trade I take is with the short-term trend.
Linking this principle to the first we discussed puts us in a great place. I teach traders globally to trade a five-minute chart across all classes of markets, from currencies to commodities to stock indexes, every market is the same for us. By using such a small ‘time frame’ chart, we can get multiple trend changes in a 24-hour period. Understanding that we can trade for up to 24 hours per day, and that we can trade both up and down, each trend change is a new opportunity for us to trade and take advantage of the trend. Trading with the trend generally results in more winning trades and as such greater confidence in trading. Greater confidence in trading builds a great psychology and before you know it, you have a winning formula that you understand and implement very well.
|Principle Three – Expectation is everything!
Principle three relates to placing a realistic expectation on both yourself as a trader and also on the strategy and market that you seek to trade.
If you put an artificial expectation on yourself as a trader, when you first start trading, you are highly likely to fail. Statements like ‘I would like to make $1,000,000.00 in my first months trading and I’m starting with a trading account of $5000.00’ is a classic example of an artificial expectation.
Why not start with an expectation of making $100-$200 per day and starting this trading journey in simulation mode. I have worked with many traders who set this as their daily goal and when they achieve this on a very consistent basis, they start to build the foundation of not only a great trading psychology but also a great career as a day trader.
Simulation mode enables all traders to prove they have the capacity to make their daily goal consistently before risking any real money. Be careful not to rush the trading education and trading apprenticeship journeys. Rushing either of these will set you up for disappointment and disappointment is one of the fastest ways to destroy your trading psychology. To all of the YTE readers I say ‘please go slow to go fast in the trading game’ and may I suggest, this is one of the fastest ways to build a great psychology around trading.
|Principle Four – Avoid Markets that can be traded against you.
Principle Four is probably the most valuable tip for any trader, globally, who wants to succeed in trading. I am well known in the industry as an ‘advocate of transparency’, so much so, I have just written an eBook entitled “Binary Options – Scam or Real Trading – You be the Judge!”. In this eBook, I have raised the issue of market transparency and it is a must read if you want to know who really owns the market you are trading in.
In short, when you are trading, make sure that you’re not potentially fighting against your broker every time you take a trade. How do you do this?
In the trading world, there are affectively two kinds of markets, OTC and non-OTC. The acronym OTC stands for ‘over the counter’ trading and the four most common OTC markets available to Mum and Dad traders are FOREX, Options, CFD’s and Binary Options. Every one of these market environments is defined as an ‘artificially manufactured market that is owned and controlled by the broker who created it for you to trade in’. As the broker created the market you are trading in, they affectively have the option, if they choose, to manipulate that market against you, whenever they want to, and they have many ingenious ways to achieve this. Now I am not suggesting for a moment that every broker does this, however, I’m concerned that they have the option to do so if they wish and this ‘freedom to manipulate’ is not being explained to Mum and Dad traders globally.
This is the very reason I choose to trade in a non-OTC trading environment called the CME (Chicago Mercantile Exchange) Futures Market. The CME, as it is known, is heavily regulated by both the CFTC (commodity futures trading commission) and the SEC (securities and exchange commission). This regulation prevents any and all forms of OTC broker market manipulation occurring against my trades while I am trading. Every CME Futures trader shares the same protection regardless of the CME based market they decide to trade.
In terms of building a great psychology around trading, I am 100% protected against broker initiated market manipulation. As such, I can get on with the job of being a great trader, understanding that nothing ‘untoward’ will ever occur while I am trading.
Can you imagine the potential impact on your trading psychology if the very market you are trading is potentially manipulated against you every time you take a trade? Ouch! There are many traders I now work with who lived in denial for a long time on this issue before they realized what was actually going on. You may be amazed at the number of traders I speak to who assume that all forms of trading are equal. This assumption could not be further from the truth. The moment I explain ‘market design’ to these traders, as I have done in the above-mentioned eBook, they very quickly realize that they may have been trading the wrong markets from the very beginning of their trading careers. Suffice to say, they are very thankful for the advice! As soon as we fix this ‘manipulation issue’ once and for all, the positive trading psychology building process can actually begin.
YTE: If you had one last message on psychology, what would that be?
Lachlan: If you want to be great at trading and hence have a great trading psychology, know who owns the markets you are trading in. This could be the most important factor in determining if you run at a profit or you run at a loss!
Many traders I meet globally have no idea that they are trading in an OTC Market environment and as such have no measure as to why their trading is failing. These traders have next to no chance of being successful in an OTC broker environment and hence no chance of ever having a positive trading psychology. My single most important piece of advice to every one reading this article is this:
Do your best at trading, in an unmanipulated market environment, and you may be amazed at what you can achieve in a very short time frame!
YTE: Thank you so much for your time.
Lachlan: As always, thank you for having me!
Lachlan Elsworth, Founder and System Architect behind the International Day Trading Academy www.idta.com.au. YTE readers can also attend a complimentary weekly live chart webinar by going to the IDTA Events page: www.idte.com.au/events/ and they can watch the 5 Minute Strategy in real time!
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