Welcome back to the course this is module four, and we will be looking at trading psychology. This is a free module and can be found at my website on www dot x automated.com. So what is trading psychology, psychology definition can be summed up as the study of mental characteristics or attitudes that affects behavior in a particular context. Now for the purpose of the schools, the context that we will be considering would be that of trading. Although we will look at some general examples that hold true in various aspects of our everyday lives. Now, on my own as well as many other professional traders opinion, turning psychology could probably be considered the single most important and yet overlooked aspect of becoming a successful trader.

So in this module, we will be looking at some of those mental hurdles that are keeping you back as well as how we can identify them and to also identify the behavior as well as how to overcome them. First thing I'd like to point out, and you are probably aware of that already, but we are by nature very bad at training. Humans do not do well at something like trading. So unless you are a new trader and you are writing a very big when wave of Beginner's luck when you've been involved in markets for long enough to have overcome some of your most basic natural instincts, chances are you are very well aware of this fact, trading is not easy. Now studies have consistently shown that when it comes to making quick financial decisions, we are notoriously irrational. And that is despite what some of the major economic theorists will tell us.

Now, what Reese's research has shown us is that when it comes to matters of money, we act from the same neurological centers in our brain that we use for our most basic survival instincts. And what this means is that all decisions are based around the basic principles. of avoiding pain and gain pleasure. And unfortunately for us as traders, this means that we are faced with some very deadly biases, especially in the context of trading. So in the next slide, we will look at some of those biases. Now, we are naturally biased.

And if you haven't read about psychology before or around the general subject of psychology, I'd like you to be aware that there are certain principles or biases that you need to be aware of analysis especially true if you are a trader. Now, the first one is called prison bias. And prison bias refers to the tendency of people to give a stronger way to pay off that are closer to the present time when considering a trade offs between two future moments. And a good example of that would be a study that has been carried out we would ask a group of people whether they would prefer $100 in a year's time, or $110 in a year and one week, start Then they would ask them the same question again and say, Would you rather take $100 today, or $110 in a week's time from now? Now in the first instance, almost all of those people that has been stalking us, we've said that rather prefer the $110 in a year in one week's time, because they've already waited a year, and one week wouldn't make a difference.

Yet, when asked that same question today, with a million dollars now, or no big stamp, draw data hundred dollars now, and that is what is called present bias. And I'll explain how that comes into play in trading. The second one is called confirmation bias. And it's also called confirmatory bias and it's the tendency to search for or interpret favor or recall information in a way that confirms your pre existing beliefs or hypotheses. And this coincides with something that's called Both purchase rationalization and meaning we have to rationalize our purchasing decisions. And how that relates to trading is, for example, we feel the need to be right.

So if we enter into a trade, we believe that the market is going to move in a certain direction. In other words, we already in a confirmation bias or any signals. And so if the if the market will start to turn against you look for signals to confirm your bias, and that is one of the reasons that we cannot get rid of a losing trade. Also, you'd also start looking for reasons for your initial your initial visit and the reasoning around entering that trade due to this post purchase rationalization and that doesn't work. So I cannot tell you how often I've heard God say that if only they took the opposite side of every trade, they would have been profitable. But the truth is, even if they did take the opposite side of all the trades, the odds are, they still would have lost money.

And according to a study that was carried out by the brokerage firm FCM, they found an 83% of traders were losing money over a 12 month period. And yet, they still managed a 50 to 60% win rate. So in other words, the direction of the trades were not the problem. What they found was that most of these trades were cutting their winning trades too soon, and letting their losing trades get way too big. And this was giving them a negative risk reward ratio. Now, I will explain risk reward ratios and in some of our future modules, but for now, I just thought well, one that is sink in.

And the reason for this will boil down to the fact that because of our psychology, we are predisposed to fail at something like trading. And I'd like to do an experiment. And I'd like to involve you with this one. And we'll have a look at this to see why this is I'm going to break You have two scenarios. This is scenario one, and we have scenario two on the next slide. And I want you to choose either option A or Option B.

Now, you're welcome to pause the video at this point if you like, but have a look at it and make a decision. Here's scenario two, again, you only have to choose either option A or Option B. Now, chances are that you chose option B for both of these scenarios. And how would I know this? Well, aside from this being evident from the studies that have been carried out, everyone knows that this humans we do not like losing and this behavior is actually been well documented in what has been termed Prospect Theory. So if you like you can go and read up more about that.

Now, let me explain. In scenario one, you faced the option of being guaranteed the pleasure of walking away with $400 with absolutely no risk of loss, this would obviously be the rational choice for any rational business. Because you take photos, you walk away, no risk summary, in scenario two, you are presented the option to avoid an immediate loss and gain the possibility of maybe losing nothing. And again, this seems like the rational option. Now, that is an example of present bias because you are avoiding to realize a smaller loss now, in the hopes of maybe not having to type it later. Let's let me let's have a look at that more detail.

Here's another one again. Now what we can do is we can repeat this experiment 10 times now. Have you chosen option A getting foreigner dollars for no further risk? 10 times You would have had a guaranteed $4,000. But if you chose option B, that means you would have most likely ended up getting $1,000 at least half of those out of that 10 off of the times, meaning you will get 1000 times five, which is all been $5,000. So statistically going with option B would have been the better option.

Now then energy here is actually startling. You see it's not in this is Mario, just like a trade that would start going to profit, you would immediately feel the pressure to take the profit off the table. And that is because you feel you're you're fearing that the direction might change and you might lose the $400 that is why you would end up taking it off the table. However, if you look at the odds, if you would have stuck to your trading plan We'll get to that in a moment. But if you would have stopped, select your trading plan and go for the chance of getting that $1,000 you would have ended up with more money. Now let's look at the flip side.

There is no guarantee. If you would choose option B, which you probably didn't, you would have lost thin, Dom's 400. So, again we are repeating this experiment 10 times. So you would have probably lost $4,000 yet if you chose option A trying to avoid that immediate loss in the hopes of maybe losing nothing, you will statistically ended up with five times $1,000 loss because a $5,000 loss and the reason for this the analogy and in this scenario is that you are trying to avoid a smaller loss now and hoping the market will turn and go Back to the place where you enter your trade in the hopes of maybe losing nothing. So what I'm trying to show you here is that we are faced with certain biases, and that will negatively affect us if we are not aware of them. So let's move on.

The solution to this is that you need to trade with a plan. And, as it should be clear by now, entering into trades casually, without a plan is not going to work. And as completed by the FFC m study, they found that simply sticking to a trading plan with a predefined risk reward ratio of equal or greater than one will increase your odds of profitability almost threefold. And I will look we will look at their risk reward ratio in a future module, but for now, I just want you to think about that. Now, there's also something I also want you to be aware of. If you look at any trade, there are going to be five possible outcomes.

You are not going to have a large one take profit small one, x can be a smaller, smaller profit, a break even trade, meaning you can make anything but you didn't lose anything either. Or you're gonna have a small loss or a large loss. But if you can eliminate the possibility of a large loss loss, you should really be well on your way to success. And the reason is that training is all about probabilities, and not certainties. You can never control the outcome of a trade, but you can control your risk. And these are all key words, in managing your psychology.

It trades with plan, you have fixed target labels, your fixed stock, stock labels, that is your risk. And you have to understand that trading is a numbers game. It's going to be all about discipline and consistency. So in the next module, we will learn more about how to create and set up a trading plan as well as how to manage your risk. Thank you very much for attending this module. This is this is the end of it and I'd like you to be aware that if you have any questions you can feel free to mail them to me at info at FX automated comm and I will do my best to answer.

Thank you very much