The following is an interview with Lachlan Elsworth, conducted for Your Trading Edge magazine. Check out the previous article How to Develop a Great Trading Psychology – Part 1 if you missed it.
Lachlan Elsworth (“Lachy”) is the Founder and Trading System Architect at the International Day Trading Academy, based on the Gold Coast of Australia. Lachlan is a global advocate for honesty and transparency in trading and is globally recognised as the emerging force in Futures Trading and coaching globally. In this interview, Part One of a Two-Part Series, Lachlan discusses how to avoid Self Sabotage in trading and the tactics he uses every day to stay on top of his trading psychology.
YTE: Ok Lachy, let’s get into it! How do you develop a great psychology around trading?
Lachy: Hi there, great question, may I suggest there are 4 Key Steps to developing a great psychology around trading.
Step 1 – Go Slow to Go Fast.
One of the most important keys to trading successfully is ensuring that you start your trading journey with a realistic expectation about what you are likely to achieve. This expectation is both human based and strategy based so let me comment on both.
Typically, when people start trading, they are in a rush to make money and they are also in a rush to prove that their trading strategy works. It is this rush that may undermine their potential success at trading, so this is what we need to address.
Instead of rushing, I think it is more important that people set a goal of proving their strategy works for a minimum of 90 days. Once a strategy is proven profitable, this will naturally build confidence around the use of the strategy and we have set the foundation for a great psychology around trading. Trading profitably for a minimum of 90 days also sets the benchmark for taking advantage of leverage in the market and this is where traders can really accelerate quickly. A trader that is seeking to earn $100.00 AUD when they first start trading will eventually be targeting $1000.00 AUD per day if they understand and take advantage of leverage.
The best thing to do is start trading with a realistic expectation like $100.00 AUD per day and prove that both you and your strategy work. To do this very well you could consider using Step 2 below. May I mention that 90 days to practice your trading may seem like an inconvenience if you are in a rush, sure, but it is a very short apprenticeship for a potentially life changing income as a professional trader.
Step 2 – Set Realistic Targets for each trade that you take.
One of the number one mistakes made by traders globally is that they set unrealistic targets and then get disappointed when these targets are not met. Clearly this disappointment is not going to build a great trading psychology so let’s reverse engineer this mistake and put a plan in place to address it.
The best target setting guide I have ever seen used in trading is the volatility of the market at the time you seek to take your trade. The best way to measure this volatility is the trading chart that you are using at that time. All you need to do is measure the average height of the candles on your trading chart and use this as a guide as to how far the next candle is likely to travel. This may seem like a simple principle, sure, but it is a very accurate target setting guide that I use every day when I trade.
If you trade a 5-Minute Chart like I do, then you can use the average size of the 5-Minute Chart candles to set an expectation as to how far the market is likely to go in the next 5 minutes. If the average candle is 10 tics tall, then you can expect the next candle to move 10 tics as a minimum. You can then use this 10 Tics to set a target based on the relative volatility of the market at the time you seek to take your trade. 10 Tics on the NASDAQ, as a Futures Trader, is a $50.00 AUD Target, so let’s see how we would go using this principle in the chart below.
I would like to point out that Image 1 is a LIVE NASDAQ Chart as we do this interview. I have placed labels on the chart post interview to highlight my points.
The black arrow (left-hand side of image) points to an indicator that tells me the average size of the candles on the chart live in the market. At the time I took this screen shot, the relative volatility of the market was 10 tics, meaning traders should set a 10-tic target on the next trade if they are seeking to use a high probability target for this trade.
The yellow circle (top of image) is highlighting a red arrow pointing down. This red arrow is an automated sell signal I have written to assist my students to trade the markets just like I do.
The red dashed line in Image 1 is the designated entry point for this sell trade and the green dashed line is a 10 Tic $50.00 AUD Target. The market suggested that it would move 10 Tics based on the relative volatility of the market at the time the trade triggered, and this is exactly where the market went.
The risk on the trade was as little as $20.00 AUD and the trade was finished in less than 1 candle which on this chart is 5 Minutes. Traders who follow this ‘relative volatility’ concept to set their targets have just got a great confidence boost as they set a realistic expectation using a 5-Minute Chart trade and got paid accordingly. One of the most important keys to trading successfully is ensuring that you start your trading journey with a realistic expectation about what you are likely to achieve.
Step 3 – Know how long a typical trade takes to go to target and develop an expectation around that.
Another very common mistake made by traders globally is that they strangle a trade early and typically don’t let that trade go to its full profit potential for the market conditions they are trading in. Strangling an otherwise profitable trade is again no good for your trading psychology, so let’s reverse engineer this tendency and put a strategy in place to address it.
When it comes to setting expectations in trading, we can extend that expectation setting to include a time expectation on each trade you take. Markets typically move in an identical rhythm at the same time every day and you can use this rhythm to estimate how long a trade is likely to take. If you know how long a typical trade takes, you can seek to stay disciplined for that defined time with the intent of maximising the profit of that trade given the market conditions that created it.
In the case of Image 1, the average trade on the NASDAQ @ Japanese Open (10.00 a.m. Gold Coast time) is between 12 and 15 minutes using the strategy I have developed. Knowing this to be the case, traders know not to interfere with a trade during this time. This sets a realistic expectation for both the trader’s behaviour and the performance of the strategy and both of these go a long way to building a great trading psychology very quickly.
Step 4 – Know when the market is most likely to move in your favour and take advantage of this to maximise your profitability.
Having now trained more than 1300 traders in 21 countries, may I suggest that the best time to trade a market is when that market is opening. Market open offers brilliant volatility and as a trader who can trade up and down, this volatility is the key to our profitability.
The best traders I have trained target market open sessions for one or two high probability trades per day then stop trading. This means that they are typically sitting down for less than 60 minutes per day and trading the markets when they are most likely to get paid well and get paid quickly. This approach to trading also allows these traders to get their profitability locked away early, allowing them to avoid the tendency to sit down all day and over trade the markets. This also allows these traders to build their profitability and confidence quickly which once again leads to a positive psychology around trading a given strategy. Trading the market open sessions may be a simple principle, sure, but it is a brilliant foundation for making some great money out of trading.
YTE – Lachy, that is brilliant, thank you! Do you have a parting gift for the YTE Readers?
The gift that I would like to give YTE Readers, globally, is the gift I was given 12 years ago, that being an understanding of market design and how to take advantage of it. I am so passionate about this issue that I have written multiple books on the subject so please get in contact with my team if you would like a copy.
One of the reasons that I am so successful at trading is that I do not trade FOREX or any other market that is openly manipulated by Brokers. I have not traded through a Broker for the last 12 years and as a result I simply love trading. Ironically, every trader globally could take advantage of the same broker free trading environment if they chose to.
As a Futures Trader, I trade direct to and from the Chicago Mercantile Exchange with no one in the way and hence no one to manipulate the markets against me while I am trading. This is clearly of a massive advantage to me, the trader, as I seek to make a lot of money out of trading and build a great psychology around trading at the same time.
May I suggest that Futures trading is one of the only trading disciplines in the world that is devoid of broker-initiated market manipulation. If you want to build a great psychology around trading, and make a lot of money out of trading, may I suggest Futures trading is the best gift you could ever give yourself.
YTE – Lachy this has been brilliant, thank you!
Lachy – Once again, thank you for having me and it is always a pleasure to work with YTE!