What is passive trading?
When most people hear the word passive, they think of something that can be negative. For me, having a passive attitude in trading has been a really positive thing. Some of my best trading days and weeks have been during times when I have a passive attitude in how I enter trades. To better describe this, my thought going into a trading session with a passive attitude is “I might enter a trade, and I might not.” Some of the worst trading days for me are when I wake up thinking “Boy, I can’t wait to get into a trade and pull some pips!”
What I have found is quite fascinating, it is almost as if I take power away from the market, and the Market Makers when I trade passively. Truthfully, that is exactly what happens when you trade more passively and less emotionally. The market makers make their money by fooling retail traders into entering positions, so the more emotionally you trade, the more you become a puppet on a string. The more passively you trade, the less power and control they have over you. It’s a beautiful thing!
After I talked to Steve, and read his blog post, I started to see the bigger picture, and I started to understand what was going on with my trading. At this same time, there was a period of a couple of weeks where I was really busy. I had to travel to California for work, I had a busy schedule each day, and I was starting work at 6AM, so there was really no way for me to trade during session. I almost tried to, I even brought my laptop with me. But I decided that I would take the week off. I was pretty busy the following week also, so I went almost 2 weeks without trading. This turned out to be a really good thing for me.
Taking time off from trading, accompanied with new ideas and a fresh mindset really helped me to turn things around. Does this mean that I’m pulling hundreds of pips a week? Nope. In fact I think that I’m at 18 pips for the week so far, but I’m ok with that. Slow and steady wins the race. The tortoise wins, every time.
I had always heard Rob G. say that whenever he loses two trades in a row, he takes the rest of the week off (I’m pretty sure he said that). I always thought “Why would he take the rest of the week off? Can’t he just start fresh the next day?” I think I’ve learned a good lesson here. Time off can be a powerful thing. If you find yourself spun out in your trading, take a few days or a week off. I’d bet that you come back with a new perspective. Taking a few steps back is a great way to get a better view of whats really happening.
My recent trades
Since this transition I have been doing much better. Once again, I’m not rich, nor am I slaying hundreds of pips but I’m in control and my trading is relaxed. This is such a stark contrast to the cortisol-fueled, greedy, upset, hunched over, anxious, money losing trader that I was a few weeks ago, “gargoyled” over my laptop, hoping and wishing that the market makers would let me have just one little piece of profit. Recently my trading has been much more enjoyable. I am managing my account by keeping a reasonable lot size. I am calm. I sleep in until 5:30 if I want to. I realize that I don’t have to trade. I no longer have to fight myself and make up all sorts of rules because I see the big picture.
My intention in saying all of this is not to boast or sound like I have it all figured out, but to just point out that we often make things a lot harder than they need to be. Sometimes all it takes is a slight change in attitude, or a simple shift in how we view trading to turn things around. I had taken something fun and made it stressful by focusing in the wrong things in my trading, then adding rules and more stress to correct it. That all went away (for now) when I started focusing on taking things slow and keeping things simple.
I encourage anyone who is having a hard time to remember that you have plenty of time to learn to trade (that’s another thing Steve said). Take it easy. It can be challenging but it should also be fun. If you find yourself stressed out, chill. Take a break. (Side note: taking a break helped me a lot, but I think that it is important to note that it wouldn’t have been such a powerful time if it wasn’t for the fact that I got some good advice). With that being said, ask someone for help! Get some advice. Participate and ask questions on the webinar. Read books. Use all of the tools at your disposal. Don’t be greedy. Keep the dangers of the market in perspective. Keep it simple and relaxed. The reason we learn to trade is to take stress out of life, not to add it.
The complications of greed
Several weeks ago, a friend of mine was asking me how my trading was going. I told him that it was going well and that I was slowly learning to be consistently profitable. This guy is a very savvy businessman, and has had a lot of success of his own, but has no experience with trading anything. Nevertheless, I value his opinion.
I explained to him how pips and lot size work, and told him that I was basically trading 10-20 cent pips, making a few bucks a week on positive weeks. With this info he gave the most logical encouragement he was able to give. Based on what he knew and what made sense to him, and he suggested that I lot up. He expressed the idea that by doing this I would force myself to take trades even more seriously and that this would more than likely help me grow as a trader. Since I was relatively consistent already, I expected that I would also make some extra cash by lotting up.
This made sense to me, and honestly, I was beginning to feel a little bit like I was in a demo account since I was trading such a small lot size. So lotting up was appealing for this reason, and making cash would be icing on the cake! I took my friend’s advice and threw a couple hundred bucks into my trading account and began to trade larger lot sizes.
My experience with lotting up, and focusing on profit
As soon as I began to consider the idea of lotting up, I began to dream about the money that I could make. It made sense to me that my trading would become more precise if there was more money on the line. I couldn’t have been more wrong.
As I began trading larger lot sizes, I found myself making a lot of really foolish decisions. There were days that I lost a fair amount of money, and still kept trading, taking as many as 4-5 trades per session. I would lose in a trade, and then be upset by the fact that I had lost an uncomfortable amount of money in a trade, but I would still hold onto the belief that I could make that money back. It didn’t work out well.
I didn’t know at that time exactly what I was doing wrong. I tried analyzing my trades, to no avail, because it was simply rooted in trade management. I was taking too many trades and taking foolish trades, mostly based on the hope that I could get my money back. I wanted to get back what the market had taken from me. I suppose the expression is true “Want in one hand…” and… well, you get the point.
After analyzing and making rules such as “rate each trade on a scale of 1-10 before entering,” “wait at least 5 minutes between trades” and plenty of others, I was still losing trades. I would follow this list of rules for the first trade, but then I would get trigger happy and start taking all kinds of foolish trades. I had made a little progress by making all of these rules but I was still failing to recognize the root of the problem. Not to mention the fact that more rules equals more work.
It wasn’t until a few weeks later that something really clicked. I was talking to Steve, our director of enrollment at the Institute, and he told me something that stood out to me. He said “A new trader thinks about how much money they can make, while a professional trader thinks about how much money they can lose.” You can find this in a blog post he wrote titled “Money Management In Trading.” It is a great post and I recommend everyone read it.
The effects of this paradigm shift
Realizing this key difference between new traders and professional traders has had many benefits. Many things that I was doing wrong began to almost fix themselves when I saw the bigger picture. Understanding this simple truth helped me to get to the root of the matter. It wasn’t that I didn’t know how to trade, or read the charts. It was that my trade management was horrible. Even though I was “able” to trade well, I chose not to due to the fixation I had on making money. I had become incredibly biased in my interaction with the market. I entered trades without thinking about what I could lose, always thinking “I know how to pull pips” and “I can make money.” The funny thing is that both of these things are true. But if I focus on those two things, I am forgetting that there is another element of trading that I have to keep in the forefront of my mind: the fact that I can lose!
After I began to keep in mind what I can lose by trading, and keep the dangers of the market in clear view (no longer obstructed by wild dreams of rolling in money) noticed myself not having to try as hard. I was almost not having to try at all to adhere to the list of rules that I had made for myself. Instead of forcing myself to rate each trade so that I would stay out of bad trades, I found myself staying out of low probability trades without even thinking about it. Instead of struggling with overtrading, I found myself naturally limiting myself to one trade per session, and often times going the whole session without trading. Once again, many of these big struggles that I was having were all corrected with my mindset. This mindset of thinking about what I can lose versus what I “could win” is closely related to something that I like to refer to as passive trading.
A couple of weeks ago I noticed that there were some very specific bad habits beginning to frequently occur as I was trading. Each time these habits would come up I would think “Wow that was stupid, I definitely won’t do that again.” Then guess what, I did those things again, and again, and again.
So I decided that I needed to take some time to dissect these specific issues and find out why I kept repeating these mistakes. It has been really beneficial, and I plan to do the same thing with any recurring bad habits in the future. This is what I wrote.
After seeing considerable profit in a trade, I tend to ride it negative. I have caught myself doing this fairly frequently. This happens due to the overconfident belief that price will go where I expect it to go. Most of this journal entry is written from the perspective of being in a trade, so most of the following observations apply to my mindset while in a trade.
Why does this happen?
A) I believe that price “has to” go places.
B) I stick to bias too rigidly, failing to take in new information.
C) I look at obstacles as “springboards.”
D) I tend to forget that breaths are normally larger than anything I want to ride through.
E) I stay in trades too long in hope of eventual profit due to the fact that I am limiting my trades.
F) I get greedy. After seeing a decent profit, often times 10-20 pips, I still expect more.
G) I am too excited to think logically.
A) Belief that price “has to” go somewhere
Price does no have to go anywhere. I can call directional bias, and set a profit target, but more often than not, price does not go all the way there. And if it does, most of the time it does not go straight there. Movement is only semi predictable.
To help with this issue I think that I need to remember that I don’t need to get all of the pips all of the time, anytime the market moves. Even in a predictable and unsurprising profit release it should be my goal to grab some pips out of the middle, maybe catching one of the two ends of the move, but I should never expect to get every last pip. To reinforce this, I should remind myself that 10 pips is a good trade. 10 pips is 25% of my current weekly goal. That’s not bad for one trade, yet often times I find myself turning up my nose at these profits, expecting more, and believing that I will get more.
One thing that I am realizing is that I need to treat my profit targets more like a maximum. I tend to just think that price will go to my target, and that’s that. So instead of saying, “there’s my target, that’s where price is going and I’m staying in this trade until it gets there,” I should be saying, “I could see price possibly going here, so I will stop myself just before there if price were to go that far in my favor.”
B) Sticking to bias too rigidly
This is almost the same as issue A, and the many of the same fixes apply. I need to be open to new info. I also feel like I need to feel the market to some degree. When price is moving strong in a direction and then it slows or stalls, it may not be a bad idea to get out with some profit. Usually I will find some content to back this up, often times though it is found after the fact. My point is that I should pay attention to stalling in price and look for clues as to why it may be stalling, instead of sticking to bias or belief that may not be true. I always need to be looking for clues while in trades.
C) Looking at obstacles as “springboards”
Frankly, this issue is just dumb, but it is something that I have caught myself thinking. Sure sometimes things such as dots or average prices will cause a slowing or some kind of rotation but to think that this will be followed by an acceleration in the original direction is just unfounded. It is purely imagination. I suppose where this came from in my mind is the fact that liquidity lines can fuel price movement, which, as I have learned, does not apply to dots or average prices in the same way.
To fix this issue, I should be treating obstacles as obstacles, and not imagining a magical propulsion of price in as a result of them. Perhaps instead I should imagine price rotating off of them into a breath, whereupon I would be stopped out with -20. This is a good scenario to remind myself of the reality of what may actually happen. I know this reality because I’ve been there and done that, and it ain’t fun and it sure ain’t cool.
I should also be looking at these obstacles as targets (maximums). Instead of setting a target far away on the other side of prominent dots or average price lines, perhaps I can use these points of interest as targets, or just play it by ear and watch closely how price reacts to them. This ties into what I said in the last section about feeling the market. Basically, if I see some funky stuff about to go down, maybe I should just get out of the trade, especially if I’m up in the trade.
C) The Sense of Having a Quota
This is most definitely one of the biggest factors in what causes me to switch from being precise and patient to being a loose cannon. I feel as though I have to pull some pips, often lowering standards for trading habits in hope of getting lucky and getting a few pips. This is by far most noticeable after losses. After I have lost, I feel as though I need to “get my pips back,” which most of the time leads to losing more pips. This is a variation of that sense that there is a quota to be met, or a target that I need to reach.
This “quota mentality” ties in to the “target mentality” that I have been working on lately. It seems that in the same way I can set a pip target while in a trade, and often ride it negative while waiting for price to reach my target, I can also have a pip target for the day, or some idea that there is a number of pips that I should end up with. Such targets or quotas can be dangerous if we treat them as a minimum that we must reach. One thing that helps me be consistently profitable in trades is the idea that the target should be treated more like a maximum. I think this mindset can be applied to the issue of having a daily or momentary quota also, so that I look at my quota for the day as a maximum, with the minimum being dependent on opportunity.
Regarding this issue as it relates to losses, I believe that I need to just learn to be okay with losses. Most of the time this is not an issue, but when I am not closely monitoring my emotions, that sense that I need to get my pips back can creep in, and lead to all sorts of ugly trades. I haven’t thought of a name for this yet, but it is the close relative of the Big Bad FOMO Monster. I need to keep in mind that having some pips and losing them does not mean that I have to get them back, most of the time this ends badly, and leads to out of control desperation trading.
I have noticed these problems at high news events, which often times seem harder to trade, perhaps due to the fact that emotion can quickly take over. I’ve had a couple of bad high news days that have gone something like this: I get in based on FOMO, I get stopped out once or twice, then I get back in because I am frustrated by the fact that I am losing money instead of getting paid like we are all “supposed to” on high news days. Then I make another trade or two, all within a few minutes, trading both ways, with no clear directional bias, or complete disregard for bias if I had actually established one. Then I leave even more frustrated than I already was, with the question, “What just happened?” resounding in my mind. These are the kinds of days that I want to avoid.
Some good habits to avoid the quota or target mentality:
Most everything in trading ties together, and the product of all of these aspects of my personality, style, and habits defines who I am as a trader. All of these rules or habits to help me stay on course do not work by themselves, so focusing too much on one rule may lead to oversight in other aspects of trading. These good habits have a synergistic effect, producing exponentially better results when combined. I must learn to ingrain all of these habits into my identity as a trader in order to succeed and become a consistent, disciplined and profitable trader. I am confident that with time, and constant introspection I will be able to do this.
Editor’s Note: Fx365i student Chris Gibson was kind enough to share some excellent insights from his trading journal. This is the first in a two part series.
Sometimes when I trade, I find myself switching from being very conservative and controlled to being very reckless and out of control. I get desperate for pips and lose sight of the value of conservatism in the number, frequency and style of trades. This typically leads to taking too many trades, taking trades too often, and taking lower probability trades. Trades like this are often based on nothing but emotion. Most of the time the main problem here is that I take too many trades.
Why does this happen?
A) Desperation mindset kicks in
B) Defense is forgotten in the name of offense
C) The feeling that there is a quota to be met for the day
Understanding these issues
All of these issues tie together, but to get a better understanding of all of them, I want to focus on them individually.
A) Desperation Mindset
I sometimes become desperate for pips. I become overwhelmed with a desire to get pips, to the point of becoming blind to the fact that there is no room for recklessness in trading. I feel like this is based in ego, and the desire to succeed. It is very important that I keep the consequences of this in the forefront of my mind. There needs to be a clear understanding of cause and effect, of actions and consequences, because the truth is, that the very thing I think I need to do to get pips for the day is going to be the thing that can result in me being down 20-30 for the day (this amount is 50-75% of my weekly goal in the wrong direction!). I must always remember that if I choose to trade in a desperation mindset, it can almost be guaranteed that it will end terribly.
There is much to be said about the need to keep your cool when trading, and not trade based on emotion, the type of trading that desperate trading exemplifies. I think the solution to desperate trading is broad, since the idea is rather nebulous, but some good habits to form would be:
B) Forgetting Defense In the Name of Offense
One thing that I have found important as I have been learning to trade forex is the value of a good defense. Offense is important of course, because I would get nowhere without it, I would have no pips if I had never made an offensive move to take a trade. Despite this fact, I think that it is more important to focus on defense of pips that I already have than to focus on getting more, and not allow my desire for more pips to leave me with less than I had to begin with.
The whole idea of defense in trading forex is kind of funny because no one is coming out to get you, you are safe behind your screen as long as you are careful with your trades, but as soon as you enter a trade, you have made a very serious decision to expose yourself to the risks of the market. So then, it is not necessarily the market I have to defend against, since I am the one who is clicking the rate indicator. The real fear should be of myself. This is who I need to defend against, this is the enemy. He is the one who takes my pips. The portion of my being who exposes myself, my money, and my emotions to all kinds undesirable things, this is who I need to watch out for. There is an expression: “the best defense is a good offense,” But the opposite is true in trading; the best offense is a good defense, and if I defend against my own tendency to become sloppy and careless in my trading habits, I have a great chance of being consistently profitable in trades.
Some good habits to form so that I can keep my defense strong: