Lesson 2. Development of Psychological Stability

Lack of discipline is one of the main weaknesses of many traders. It often leads to losing control and mistakes that could easily be avoided with proper preparation for trading activities. Such traders simply lack the psychological stability necessary to achieve success. Motivation will never replace discipline.

Our second lesson is dedicated to the development of psychological stability. This is the most important trait for effective trading. You need a strong emotional charge every trading day, because a positive attitude fosters self-discipline and allows you to focus on your trading strategy. Learn how to improve your psychological stability and protect yourself from stress.

Lesson Topics:

1. What is psychological power
2. Incremental movement towards the goal
3. Dealing with stress
4. How to achieve emotional stability

Psychological Preparation for Trading

How do you prepare for your usual trading day? You probably spend the majority of your time on fundamental analysis such as market indicators and quote charts, as well as reading expert articles and financial news from various sources.

From a psychological point of view, these efforts are aimed at reducing uncertainty and gaining a sense of control. They provide you with confidence despite the fact that market conditions are always difficult to predict. That is why many traders make every effort to analyze the market, completely ignoring their psychological state. Therefore, a lot of traders make every effort to analyze the market disregarding their psychological condition.

In Search of the Holy Grail

Let's be frank: all traders secretly look for the perfect strategy, the so-called “Holy Grail” that guarantees success on the stock exchange. Hence, traders invest so much time and effort in making complex forecasts and multi-level strategies.

For the first time, the “Holy Grail” for traders was introduced thanks to Linda Bradford Raschke, a world-famous female trader. In the mid-1990s, she came up with a set of setups designed to predict an optimal entry point into the market during precise trend movements to maximize profits and minimize risks. Trading signals were supposed to ensure an optimal risk-return ratio. Unfortunately, these classic strategies only work under perfect conditions. They are almost useless in real financial markets.

Indeed, the “Holy Grail” has gained much fame due to its name and not for its efficiency, but this doesn't mean it's useless. Linda Bradford Raschke has outlined three fundamental principles in her trading approach, which are essential both for novice and experienced traders:

• Minimizing risks and limiting losses in each transaction;
• Using systematized and structured trading processes;
• Making a transaction only if there are clearly identifiable graphic patterns.

Why Market Analysis Is Not Enough for Effective Trading

Why can't success be achieved even with the most in-depth market analysis? The answer is simple: because there is always a human factor in the financial markets. A trader's psychology is a weak link. Whether or not you'll benefit from your technical knowledge depends on the psychological endurance
and attitude to a certain situation.

Besides, we should note that the perfect strategy for binary options trading still does not exist. Do not be deceived by controversial promises, because it is impossible to earn guaranteed profit with the help of a magic trading plan. If someone offers you a similar strategy, be sure that they are trying to deceive
you.

Introspection for a Trader

If you truly want to succeed in trading, then you need to shift your focus. Do not devote all your free time to market analysis, start doing introspection. The potential profit from the emotional stability combined with knowledge of your strengths and weaknesses may be much greater than from studying raw data. You need fortitude in order to carry out your trading strategy in a systematic manner, not deviating from pre-prescribed rules in any conditions.

Introspection requires a willingness to introspect. You should learn to timely recognize your mental, behavioral and emotional patterns. Throughout your trading day, record all the episodes that caused you contradictory feelings and hindered you from following your trading plan.

Note down all the patterns you notice in your trading journal. By ignoring certain psychological impulses, you let your ego find excuses for any mistakes. At the end of the day, you will be able to re-read your notes and reflect on them in a quiet environment. Thus, you will:

• Identify your harmful behavioral patterns and their impact on the profitability of trading;
• Recognize useful patterns that you didn't even know about before.

Taking the position of a neutral observer who only records the facts is the best way to determine your strengths and weaknesses. This is a prerequisite for positive changes and further development.

Inability, and in some cases unwillingness to engage in introspection often leads to rapid stagnation of novice traders who after a while become disillusioned with trading and quit it. Almost every investor has problematic behavioral patterns. The key to success is to identify them and get better.

With the right mindset, you can turn every trading day into a positive experience. At the same time, you can’t escape losses, it is unlikely to be able to make profit on the stock exchange every day. You should not take it personally and feel like a loser.

If you focus on your strengths, implement your strategies in line with your trading plans, and record losses on time, then you will have no reason to doubt yourself. Just keep learning and improving.

Carefully observe your behavior, ask the right questions, work on your trading style and develop fortitude, and do not waste all your free time looking for the Holy Grail, which unfortunately does not exist.

Learn from mistakes

As you know, no one knows what the future holds, but you can prepare for a probable circumstance. A carefully compiled strategy will allow you to regularly make seemingly accurate and rational decisions. Unfortunately, despite the seeming correctness and rationality, they can turn out to be a failure. Even
the most well-thought strategies do not protect against inaccurate decisions.

All your trading experience, including both successful and unsuccessful ones, should take you to a new level. Do not take all the mistakes and failures personally, but analyze them in a constructive way for drawing appropriate conclusions. Meanwhile, self-flagellation is unconstructive as it leads to the fact that you focus on your weaknesses rather than strengths by losing self-confidence. We will discuss the ways to increase self-esteem in detail in the following lessons.

A good way to become more confident is to act step by step and take time. Set a lot of small, but achievable goals. Two strategies make sense:

• Set daily, weekly and monthly goals.
• Perform a certain number of tasks related to the implementation of trading strategies.

Do not forget about intermediate goals as well. A systematic approach to the achievement of results leads to tremendous motivation and is a source of dopamine. It will help you create a favorable environment for development of psychological endurance and self-confidence.

The Nature of Stress

You risk your own money while trading, so it is impossible to avoid psychological pressure. You act under risky and uncertain conditions and regularly incur losses. This may trigger tremendous stress, which you will have to somehow cope with. It is not an easy task. Let's admit it: if you are trying to completely cut stress from your life, don't be engaged in binary options trading.

Positive Stress

Stress is not always harmful for health, it is quite a natural reaction under tense situations (moments when you feel under pressure). It sharpens your senses and stimulates efficiency of work. It is easier for a person to deal with difficulties under its influence. Production of stress hormones such as adrenaline, strengthens mental focus and increases muscle tone. Positive stress mobilizes your body and mind without causing harm. From an evolutionary point of view, it is necessary for survival.

Winning deals make you stronger. They cause an adrenaline rush in all traders and lead them into a state of joyful excitement. Successful trading decisions motivate you and immediately increase your desire to work.

Negative Stress

The release of adrenaline can certainly be beneficial, but it can also be dangerous if anxiety does not stop and turns into the fear of losing control. Negative stress can easily unsettle you. If the psychological stress during trading gets out of hand, you lose emotional balance and make mistakes.

There are two types of stress in scientific research: positive (eustress) and negative (distress). The former occurs in moments of increased motivation and positive events become a stimulus. Negative stress occurs as a result of exhaustion or under the influence of tense situations. Its physical and psychological consequences are sometimes so severe that they can lead to emotional burnout syndrome.

False Beliefs

Sometimes you may pressure yourself with false expectations or unrealistic beliefs about trading. Perhaps you have never even consciously thought about them. For many traders, the following are a number of nonsense beliefs that ultimately trigger stress:

• There can be no losing transactions on a good day;
• I have to trade a lot to become successful;
• I have to earn from trading every day/week.

These beliefs inevitably lead to negative stress. You are emotionally dependent on winning days. If you think that you need to make money on the stock exchange, then the market will properly recoup on your self-esteem. Even a small jump in volatility will inevitably cause you anxiety. It is well known that losing control over a situation leads to stress. In such conditions, you simply will not be able to focus on implementing your trading strategy.

Neither the market nor the results are in your control. Therefore, remember: a good day is the one during which you properly implemented your strategy. Some of them end up being profitable, while others bring losses. The number of transactions is not a determining success factor as well. Moreover, sometimes it is better to wait and observe the market until the appropriate trading signals appear. Do not push yourself by trying to trade as much as possible. According to the Pocket Option platform’s statistics, it's realistic to make as much as $5,000 on binary options, spending only two hours a day trading.

Patience is one of the most important components of psychological endurance. It is a virtue that is not easy to develop for traders. Being patient means waiting and believing in your own forecast. This requires self-discipline and courage, because you will have to go through periods of market uncertainty. Patience demands a high degree of trust in your strategy's accuracy, and you have to be sure that the expected entry points are going to occur soon enough. You will be able to surpass yourself only if you build up the strength of your spirit.

Write down your assumptions and predictions in order to reduce stress. Think carefully about how realistic your goals are, and clearly determine which ones can really make a difference in achieving them. In the following chapters, we will discuss in more detail about how to discard beliefs that prevent you from making profit on binary options trading.

Summary

The Holy Grail (in trading) is a trading strategy developed by Linda Bradford Raschke for the Forex market.

Setup is a certain combination of circumstances in the market, which is an indicator of a good entry point.

Adrenaline is a stress hormone that increases metabolism in the body.

Emotional burnout syndrome is a state of physical, emotional and mental exhaustion.