TGIFF #008: Why The Forex Market is Way Smarter Than You

The forex market as a whole is smarter than all of us, at least when it comes to trading. 

The good news is that it doesn’t matter. You don’t need to outsmart the market to enjoy consistent profits. 

It just isn’t necessary.

Why then do so many traders attempt it? Why do they feel it necessary to prove something, only to feel disappointed when a trade goes against them? 

In this week’s newsletter I’m going to discuss all of that and more.

The teachings below can catapult you into the 5% of profitable traders if you have the discipline to apply them.

Lesson #1: The Forex Market Isn’t Emotional – You Are

The market doesn’t know you even exist, let alone care about you.

The market is a relentless beast whose only job is to transfer money from one trader to the next. 

The forex market is an interconnected web of global institutions and was created for the sole purpose of trading currencies. 

This “web” is fuelled by computer networks that are both faster and smarter than us.

Faster, yes. But how are they smarter than us, you ask? 

Because they don’t get emotional. They don’t act on greed or fear and they are never “wrong”. 

They simply process data as it comes in as efficiently as possible, never trying to guess what might happen next.

There’s something to be said for that level of neutrality. 

In fact, that kind of neutrality is what separates the consistently profitable Forex traders from those who struggle.

But to become consistently profitable, you have to know which way the market is going to move, right?

Wrong.

In fact, it’s this kind of thinking that gets many traders in trouble.

You see, profiting on any one trade isn’t about knowing which way the market is going to move. It’s about determining the probability of a move. 

But what keeps most traders from profiting consistently is far more subtle and much more damaging.

Lesson #2: Leave Your Emotions at the Door

Human beings are not great traders by design.

We are emotional creatures, not a computer network that makes cold, calculated decisions. 

This is why only a very small percentage of traders ever see consistent profits.

If a trade goes against you, it isn’t the market’s fault. The market isn’t out to get you. It’s simply doing its job processing data.

So why take it personally? It’s illogical to think this way, yet this is how most traders think.

Illogical? Yes, but surprising? No.

Remember that we’re emotional by design, which means it takes consistent self-reflection to acknowledge when we’re thinking illogically. 

It takes an even greater deal of self-reflection to change the way we think, but it can be done.

Every person has it in them to be a great trader. 

But I would be remiss to say that every trader has what it takes to be great. 

I consider those two separate things. 

You may have the stuff of greatness buried deep down inside, but to bring it to the surface takes time and a healthy dose of persistence.

Lesson #3: Ego is a Dirty Word

Before we even start talking about egos, I need to make it explicitly clear that this is all about your success as a trader. 

It’s easy to think that trading is all about technical prowess and dismiss the most important, and challenging aspect – the mental game.

Every human being has an ego. 

Big or small, we all have them. 

An ego is a false identity. It’s the persona you create for yourself, and it will often act on your behalf with little to no effort on your part. 

As vital as this can be to your success as a trader, it can also be detrimental if not properly groomed and controlled.

Your ego is what will get you into trouble when it comes to trying to outsmart the market. 

It’s that little voice that says, 

“I know what the market is going to do”. 

It’s what causes you to risk more than you should on a trade because it insists that it’s a “sure thing”.

As we all know, the only sure thing when it comes to trading Forex is that the market will move up and down. 

Aside from that, there’s no such thing as a sure thing.

So how do you eliminate these egotistical thoughts from your trading? Well, you will never eliminate them. 

The good news, however, is that there are some ways to help control these self-defeating thoughts and actions. 

The better news is that all the remedies are easy to apply because they’re all right in front of us.

Lesson #4: Understanding Your Ego

Understanding your ego is all about learning why you think what you think and do what you do. 

Do you close losing trades too early out of fear? 

Are you constantly risking too much money on trades due to greed?

Do you often stray from your trading plan? If so, why?

All of these thoughts and actions are caused by your ego. 

It’s the “dark side” of yourself that causes you to feel pain, fear and greed. It’s the invisible, self-sabotaging side of you that can only be conquered once you fully understand its actions and its motives.

So where does this self-sabotaging you come from? 

It’s born with you. 

There isn’t a single person on earth who lacks an ego. However, there are varying degrees of ego that cause individuals to act and react in certain ways.

Let’s go back to the topic at hand – trying to outsmart the market.

In other words, attempting to know what the market is going to do next. 

What’s the best way to develop an understanding of how your ego affects a bad habit such as this?

It’s quite easy. 

Do you get upset when a trade goes against you? 

Do you classify trades as “right” and “wrong”? 

If so, your ego is getting the best of you. 

You were so convinced that you had the market beat on that last trade, that when things didn’t go your way, it was as if the market was out to get you. 

You therefore took it personally.

There is no right and wrong when trading Forex. 

There’s only probabilities and outcomes. 

Sure, if you decide to sell and the market rallies, you may say that your position was on the wrong side of the market. 

But it doesn’t necessarily mean that your analysis was wrong.

This may seem like semantics, deciding what to call losing and winning trades. 

But remember that we’re working on your mental game right now.

So, it isn’t just about what you call winning and losing trades, it’s how you identify with them mentally.

Lesson #5: Becoming a Better Trader

There are of course two sides to the coin when it comes to becoming a better trader. There’s the technical side and then there’s the mental game. We’re going to cover a little of both.

Let’s start with the most misunderstood of the two:

The Mental Game

To subdue your ego from your trading and ultimately stop trying to outsmart the market, you need to first understand your ego using the tactics discussed above. 

Ask yourself those questions. 

Once you have a good understanding of how your ego is getting in the way and what signs to look for, you can then start to address it.

Knowing that there’s no need to outsmart the market is the first step in the right direction. 

Next comes an understanding that there is no right or wrong, only probabilities and outcomes.

Now this next part will be a “work in progress” for many.

 You need to develop an understanding that the market is simply a vehicle for extracting money. 

It’s robotic – without emotion or feeling and it doesn’t care whether you make money or lose money.

When was the last time getting upset about losing money served your goal of becoming consistently profitable? 

Did the market refund some of that money because it felt bad for you?

That sounds harsh, and to be honest it is. 

It’s exactly why most traders never see consistent profits.

We’re all emotional creatures trying to consistently extract money from an often unpredictable, inanimate object that could care less about our feelings. 

That is by no means an easy task. But the challenge is what keeps us hungry and coming back for more.

When it comes to the mental game, there is only one battle. It isn’t a battle between you and the market. It’s a battle between you and your ego. 

The sooner you accept this truth, the sooner you will be on your way to conquering the egotistical thoughts and actions that are holding you back.

The Technical Side

The best traders in the world all have two things in common – respect and a healthy dose of humility. 

Respect for the market and its ability to outsmart even the best analysts, and the humility to acknowledge that the market is smarter than all of us, and that’s okay.

All we’re looking for is a small piece of the pie. 

We don’t need to concern ourselves with being right or getting upset when the market moves against us. 

It isn’t personal. The market doesn’t care, and neither should we.

So, what’s the best way to stop trying to outsmart the market? 

Good question, and one that is surprisingly easy to answer.

The best way is to develop a more neutral mindset by allowing the market to make the first move. 

Have you ever heard the saying, “he who speaks first, loses”? 

It’s a common saying in negotiation tactics. Put simply, it means whoever speaks first will be at an instant disadvantage.

So don’t be the first one to make a move. 

Let the market make the first move and then react accordingly. 

That’s the true essence of a price action trader.

This can be accomplished by waiting for a clear price action signal or using a breakout strategy. 

It takes patience and discipline, but both of these attributes are necessary to become a consistently profitable trader.

Here’s a great example of allowing the market to make the first move.

We had two options. The first was to blindly buy at support, hoping for another rally.

The second option was to wait patiently to see what the market would do.

When it didn’t produce a bullish price action signal and instead broke support, we had a clear signal to enter short.

The trader who tries to outsmart the market would have blindly bought at support without first waiting for a bullish price action signal.

Remember, let the market make the first move.

Buying at option 1 in the chart above without a bullish pin bar of some sort means that you’re making the first move, putting yourself at an instant disadvantage.

Always let the market make the first move and show its hand. All you must do then is react accordingly.

On a Final Note,

I truly hope this newsletter has helped you to understand how your ego can interfere with your trading. 

My hope was to cover various topics on the subject to illustrate why it isn’t necessary to try to outsmart the market.

If you aren’t getting the results you desire as a trader, it may be time to weigh your ego against your trading account. 

In other words, decide which is more important – feeding your ego by trying to be “right”, or making consistent profits. 

I trust you’ll join me in choosing the latter.

In closing, here are some of the key points from the lesson:

• There’s no need to try and outsmart the Forex market to become consistently profitable.
• Finding consistent profits isn’t about knowing which way a market is going to move, it’s about determining the probability of a move.
• An ego is a false identity, it’s the persona you create for yourself.
• There’s no right and wrong when trading Forex, there’s only probabilities and outcomes.
• The mental game has just one battle, the battle between you and your ego.
• The best way to subdue your ego from the technical side of trading is to develop a more neutral mindset.
• Always let the market make the first move and then react accordingly.

I’ll see you next Friday.

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