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Key Points Covered in This Podcast

  • How simplifying your strategy can pay off
  • Considering the market’s reaction to news flow rather than the news itself
  • Developing a disciplined approach
  • Not all emotion is bad

When looking at how to become a better trader, a key area is identifying weaknesses and turning them into strengths. Just by making tweaks here and there can add to up to a big difference, and fixing a mistake in one area can help remedy a problem in another.

In this instalment of our DailyFX podcast, Trading Global Markets Decoded, our analyst Paul Robinson reveals how he modified his approach after starting in prop trading. He discusses just how much of trading is psychological, how his technical analysis has worked for him over the years, and why not all emotion is bad when learning how to be a better trader.

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Learning from Prop Trading

Paul started off as a proprietary or ‘prop’ trader, trading equities with his firm’s capital. It’s a situation he credits with helping him become a better trader. ‘Having a mentor and being around a lot of different styles of trading, I got to see first hand the mistakes people were making, what the successful traders were doing and what the unsuccessful ones were doing; it was a really fertile ground forlearning,’ he says.

‘[Prop trading] is a pretty cutthroat business,’ he adds. ‘You're not just trading for yourself and so you've always got someone breathing down your neck. They love you when you're doing well and they hate you when you're not, and you're only ever considered as good as your last trade.’

However, when you’re trading on your own,there isn’t the same cutthroat environment, he notes. ‘You certainly don't have to meet certain high-watermarks so there's more freedom in that respect.

How to become a better trader: Psychology, process, discipline

Paul’s approach to trading in the beginning was far-reaching. ‘I tried the gamut, from Elliott Wave to Fibonacci, all the different indicators.’ He found himself with a mountain of information and asked himself what he needed and what he didn’t.

As a result, a major change he made was to simplify his approach.

‘[As a trader] you can start relying too much on indicators as a crutch,’ Paul says. ‘For me, the last crutch to go was the Relative Strength Index (RSI). I'd become married to it, and it was a sloppy divorce because I’d become reliant on the readings, but in the end I found it to be more of a hindrance.

That’s not to say Paul actively discourages certain approaches when it comes to analysis. ‘I’ve seen way too many approaches work, from the simple to the very complex, to do that,’ he says.

Favoring a Technical Analysis

Paul’s approach favors technical analysis, paying attention to the reaction to news flow rather than the news itself. However, he advises traders to be wary of the mistake of looking too much into the impact of single news events. ‘Say there’s something coming out, whether a NonFarm Payrolls Forecast or even something bigger, if you've got a strong bullish market, even if you have a negative outcome to that trend, the trend shouldn't get broken on it,’ he says.

Paying attention to the psychology of the market is crucial, he adds. ‘If you do see that shrugging off of news, that’s a sign that bullish trend wants to continue, and vice versa for a bearish trend.

‘And if you believe in technical analysis, you believe that generally the overall broader news flow will fit the direction of the trend you're trading on.’

The Psychology of Trading and Developing Discipline

Paul says that trading is mostly psychological and lack of discipline when it comes to emotional control is a key mistake traders make.

‘The average person spends about 5 per cent on trading psychology and maybe 95 per cent of what I call the fun stuff – the analysis, the reading, the research,’ he says. ‘The other stuff goes by the wayside, because we don't really want to have to own up to ourselves about our psychological shortcomings.

Paul gives the example of a trader with strong analytical skills and a solid strategy but poor discipline and risk management – someone likely to break their own analysis. ‘However, you'll have another trader, with a so-so strategy and more simplistic analysis who may be just a price action type of trader, but they have a strong mental makeup and are disciplined and good at doing the same thing week after week, and they may be very profitable.

Why not all emotion is bad

While stoic mental strength is important, not all emotion is bad, Paul says, and one example of a positive emotion for traders is conviction.

‘You want to ride conviction,’ he says. ‘If you've got that excited feeling about a trade, that's what allows you to get aggressive on the good setups. ‘With fear and anxiety, your mind's telling you something's not right, and either you're doing the wrong things where you're breaking away from your trading plan or you're trading with too much risk, and that's what causes fear.

‘But having that self awareness and conviction during that process of making decisions, that should be what's driving that decision.’

Be Sure to Check out Paul’s Series on Becoming a Better Trader

Paul Robinson recently recorded a series on how you can prepare your trading for 2019, as well as building up a respected library of webinars and how-to videos on DailyFX that deal with the core tenets of successful trading that you can access here.