by Dr.

Barry Burns

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TRADING PSYCHOLOGY: A REAL-WORLD STRATEGY FOR BECOMING A
SUCCESSFUL TRADER.

Dr. Barry Burns

Copyright 2007
Second Edition Copyright 2011
Wealthstyles LP

IMPORTANT-READ CAREFULLY:

Reproduction, translation, or distribution in any form or by any means, or storage in a data base or retrieval
system, of any part of this work beyond that permitted by Section 107 or 108 of the 1976 United States Copyright
Act without the permission of the copyright holder is unlawful. Requests for permission or further information
should be directed to:

Wealthstyles LP
1534 N. Moorpark Rd, #222
Thousand Oaks, CA 91360-5129
(866) 878-9209

This publication is sold with the understanding that neither the publisher or author are engaged in rendering legal,
accounting, investment or other professional services. Trading and investing involves substantial risk. Financial
loss, even above the amount invested, is possible and common. Seek the services of a competent professional
person before investing or trading with money.

By accepting this trading course you agree that use of the information of this course is entirely at your own risk.
Neither the author nor the publisher is a registered investment advisor or a broker dealer. You understand and
acknowledge that there is a very high degree of risk involved in trading options, futures and securities. Past
results of any individual trader are not indicative of future returns by that trader, and are not indicative of future
returns which may be realized by you. Neither the author nor publisher assume responsibility or liability for your
trading and investment results. This course is provided for informational and educational purposes only and
should not be construed as investment advice. The author and/or publisher may hold positions in the stocks,
futures or industries discussed here. You should not rely solely on this Information in making any investment. The
information in this course should only be used as a starting point for doing additional independent research in
order to allow you to form your own opinion regarding investments and trading strategies.

It should not be assumed that the information in this manual will result in you being a profitable trader or that it will
not result in losses. Past results are not necessarily indicative of future results. You should never trade with
money you cannot afford to lose.

The information in this product is for educational purposes only and in no way a solicitation of any order to buy or
sell. The author and publisher assume no responsibility for your trading results. There is an extremely high risk in
trading.

This course is sold "AS IS," without any implied or express warranty as to its performance or to the results that
may be obtained by using the information.

Factual statements in this course are made as of the date the course was created and are subject to change
without notice.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS.

UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL
TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE
UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS
LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT
THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE
THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE
SHOWN.

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TABLE OF CONTENTS
Trading Psychology 4

The 10 Commandments of Discipline 7

The 7 Deadly Sins 8

Tracking your Business 11

Daily and Weekly Trading Log Explained 12

Daily Trade Log 14

Weekly Trade Log 15

POSTERS 16

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TRADING PSYCHOLOGY

If you’ve had any education in trading at all, you’ve heard that self-discipline is the key to
successful trading and I just want to take a few moments to reinforce that. A book, video,
course or mentor cannot give you self-discipline. That has to come from you. That’s why they
call it SELF-discipline!

In Market Wizards, Jack Schwager interviews some of the world’s most successful traders in
search of a commonality that can lead to success for others. His conclusion after the
interviews:

“What set these traders apart? Most people think that winning in the markets has
something to do with finding the secret formula. The truth is that any common
denominator among the traders I interviewed had more to do with ATTITUDE than
APPROACH.”

In his follow-up book, The New Market Wizards, Jack Schwager wrote:

“’We has met the enemy, and it is us.’ The famous quote from Walt Kelly’s cartoon strip,
“Pogo,” would provide as fitting a one-line summation of the art of trading as any. Time
and time again, those whom I interviewed for this book and its predecessor stressed the
absolutely critical role of psychological elements in trading success. When asked what
was important to success, the Market Wizards never talked about indicators or
techniques, but rather about such things as discipline, emotional control, patience, and
mental attitude toward losing. The message is clear: The key to winning in the markets is
internal, not external.”

By the way, these are EXCELLENT books you should read if you haven’t already. They give
you great insight into the reality of what it takes to be a successful trader.

There are 2 aspects to trading psychology:

1. You must trust your trading methodology.

2. You must trust yourself.

It’s obvious that to be a successful trader, you need a viable trading method with setups,
rules and a plan that works. Without that, no amount of “psychology” is going to help you.

Unfortunately there are many traders who have a viable trading method, who never know it,
because they have never tested the method divorced from their emotions.

For this reason I highly recommend that you PAPER trade any new method you’re trying
(even if you’re a seasoned trader) for at least 3-6 months before you put a single real-money
trade on the line. This paper trading must be done in real-time, not after the fact.

If you’re a day trader, you should not actually do it on paper. Rather, get a good electronic
simulator (such as the one offered by NinjaTrader for free) and actually enter your orders in
real time so you can’t cheat by later saying you would have taken this trade or that trade.

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For the NinjaTrader simulator, go to:
http://www.topdogtrading.com/ninja-trader.html

If you’re a swing trader, you can use real paper, but record your trades in black and white on
the day you would enter them. Don’t allow yourself the benefit of hindsight. You must practice
trading just as you would with real money. Swing traders don’t get as much practice as day
traders, so I recommend you paper trade for at least a year before using real money.

This gives the additional benefit of helping you learn the timing of the entries. Learning to
enter your orders without hesitation is a critical trading behavior for your success. It will also
help you learn whether the methodology fits your personality.

By paper trading for 3-6 months, and keeping track of every trade (using the trading logs in
the back of this manual), you will find that the method works … as long as you trade it without
emotion.

Before you can trade successfully, you need to have confidence in your method. Without the
utmost confidence in your method, you will second-guess the rules, get discouraged during
draw downs, and fearfully stay out of good setups. The ONLY thing that will create that
confidence is success. And the best way to achieve a winning track record is to trade without
emotion … and at the beginning, that means trading without money.

Once you’ve successfully paper traded for an extended amount of time, then you know your
method works and it’s time to start trading with a SMALL AMOUNT of real money. Now if you
start losing, then you know the variable is the emotion of trading with money.

Once we solve the problem of finding a successful trading method, then we have to deal with
the problem of YOU!

Another one of my favorite books is Alan Farley’s The Master Swing Trader. In that book he
writes:

“The markets require a level of discipline that most fail to achieve in the rest of their
lives. So why should it be any different with trading? Stock positions offer endless
opportunities to break rules and ignore danger. Wise participants recognize NON-
MARKET LIMITATIONS and deal with those before proceeding on the path to profit.
Losing weight, quitting smoking, and exercising regularly all improve the odds for trading
longevity. Add stress reduction and watch performance improve faster than taking a
weekend stock course.

SWING TRADING FRUSTRATES THOSE WHO FIND GREAT ACHIEVEMENT IN

OTHER WALKS OF LIFE. Few other disciplines require constant loss to reach their
goals. The pain of losing money stands beside profit throughout the road to success.
Accept this unpleasant fact and prepare for the emotional rollercoaster. Both winning
streaks and drawdowns test rational behavior and trading strategies. Stay focused and
stick to the plan. Participants who lose concentration face a gamblers paradise. And just
like all games of chance, expect to leave the bright lights with very empty pockets.
Greed and fear bring out the extremes in human behavior. But swing traders can control
the impact of emotion with solid rules and strict self-discipline.”

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Read those paragraphs a couple of times. There’s a lot of wisdom there. “The Master Swing
Trader” is also a great book I highly recommend by the way!

The sad truth is that most traders who eventually succeed only find that elusive discipline
after the market has taken their money “one too many times” and the issue becomes so
painful for them that they either have to change their behavior or quit the markets. Most
people quit the markets at this point.

Discipline has everything to do with patience. It means waiting for everything to line up
according to your rules and not taking a trade that violates your rules because it’s “close” or
“looks good anyway.”

That means letting some trades go that made money, but didn’t meet your criteria … and not
feeling bad about missing “a winner.”

Overtrading is one of the biggest challenges to new traders. But one of the hallmarks of
successful traders is that they actually trade very little. They wait for the PERFECT setups
because they know that is the ONLY time that the odds are really with them, and that makes
the difference between trading and gambling.

Even in the gambling world, however, the professionals know this. Profitable poker
players fold on more hands than they play. If they don’t have a strong opening hand
with a high probability of winning, they simply fold and wait for a better one.

“People who are way better educated than me rip my theories from here to Hades and
back. They claim gambling is all math and statistical analysis. They will never grasp the
true meaning of gambling – because they have never been there.

… People who think that a math equation is gonna give them a leg up on winning
ought have that leg whack them in the area where they sit on their brains.

… you absolutely must have money management … Topped off with a healthy
dose of discipline.”

… [The pros] don’t make MISTAKES, and they don’t have tells. Patience is a
virtue, stupidity is a one-way street to disaster, talk is minimal, and mercy is absent.
Make a MISTAKE and seven vultures circle the wagons, waiting to divide the spoils.
When the night is done and you are fortunate enough to escape with a small profit, the
ride home gives you only a short time to count your blessings and your money.”

John Patrick in MONEY MANAGEMENT FOR GAMBLERS

If you’re trading every day of the week and you’re not trading well according to this
methodology, it’s most likely because you are making mistakes.

So is there a way to eliminate mistakes? No one ever becomes a perfect trader, but the first
step to reducing your mistakes is to identify them.

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First, let’s look at 10 Commandments which are general rules. Then we’ll translate them into
specific “mistakes” as they would relate to the rules of our trading methodology.

“The 10 Commandments of Discipline”

1. Thou Shalt Not Chase a Move. If you missed the best risk/reward entry, just let the trade
go. Never chase the market.
2. Thou Shalt Not Trade in Choppy Markets. Trading is not a zero sum game. You lose
money on every trade on both the bid/ask slippage and commissions/fees. Without clear
directional momentum on your side you do not have an “edge” and without an edge you
will not have a profit! Never trade when the 50 MA is flat!
3. Thou Shalt Not Trade “Kamikazes! (shorting Higher Highs or buying Lower Lows).” These
can look SO good, but because momentum is against you it’s like trying to push a Sumo
wrestler out of the ring.
4. Thou Shalt Not Trade Too Many Contracts for your Account Size. If you lose more money
than you are comfortable with, then you will trade badly. Everyone, even the best traders,
go through periods of days, weeks, and occasionally even entire months of losses. You
need to keep your losses per trade and per day small enough that you can financially
survive a major losing streak without having to refund your account, and without causing
you emotional stress.
5. Thou Shalt Not Trade for the “Action.” Trading is a business, not an extreme sport! Like
any good businessperson, your primary objective is to increase your bottom line.
6. Thou Shalt Guard Your Capital; it is your lifeblood. Without it you can’t trade.
7. Thou Shalt Never Try to Recover Losses. When you have a losing trade, that money is
gone and the trade is done. Trying to get the money back by bending your rules will only
result in more losses. Remember, your rules are what make you money. They’re what is
proven to give you the high-probability trades.
8. Thou Shalt Not Worry About “Missing the Boat.” Your goal is not to catch every big move
in the market, in fact you won’t and no one does. Your ONLY objective is to trade your
rules, and take the money the market will give you each week according to those rules.
Even though we talk about “trading the market, in the strictest sense you cannot trade the
market, you can only trade your rules.
9. Thou Shalt Not Place Your Stops Too Close. If you are doing this it’s an excellent
indication that you are not in the right frame of mind for trading and you should not be
trading right now. You can’t trade scared. Stops should be placed where the pattern you
are trading would be broken, and no closer. You must give the market room to wiggle. It
doesn’t move in a straight line. Allow for the bids/asks of individuals to move the market
around messily within your trading setup.
10. Thou Shalt Not Take Profits Too Soon. It’s nearly impossible to make money based on
win/loss ratios alone. Scalping is for the true pros, mostly the floor traders. Your money
will be made by having a respectable win/loss ratio (in the area of 40%-60%) and having
your winning trades be larger than your losing trades. Be patient with the trends and let
them ring up big money for you.

Now lets’ translate those into how they intersect with our trading method in what I call the “7
Deadly Sins.”

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 7 Deadly Sins (“MISTAKES”) Summary:
1. Not exiting 1st position soon enough. Keep EXIT #1 to keep losses small. THIS IS
PRIORITY ONE!
2. Missing Trades. Take ALL trades today. Need to take all trades for the statistics of the
methodology to work, and you don’t want to miss the ONE big winner today. Look to
stop and reverse at end of every trade if there is a valid trade in the other direction.
3. Trading Kamikazes (= trading against a strong trend) You can’t time them well and so end
up getting stopped out 2-3 times before they work.
4. Trading Flat Markets. When the 50 MA is flat or market is going above/below the 50 MA …
stay out!
5. Overtrading. Forget trades that worked if they didn’t meet the setup. Never try to make up
for losses, missed trades, or trade from boredom. YOU WILL LOSE LOTS OF MONEY if
you veer from the method at all Profits come from CONSISTENT AND PERSISTENT
action. Keep your maximum money loss per day stop.
6. Micromanaging trades. Don’t get out unless it hits a stop. Don’t be afraid of setups in the
opposite direction that haven’t yet triggered. Let trades run since that is where your
weekly profits are. Weekly income is made from a couple of big trades per week, so you
must take EVERY trade. Trade size multiples of 4 and use long-term trailing stops .
7. Not Focused like OLYMPIC ATHLETE. Stay in ZONE! Don’t let mind wander or be lazy.
Don’t trade if you’re tired. No emotion. NO FEAR. Most trades are small winners/losers.
Don’t care what happens today. When OUT: constantly analyze & look ahead for next
potential setup & then watch for it. When IN: quick on the draw to protect
self & not let things turn against you. If you’re not in a good emotional state, don’t
trade! Simply implement the rules and let what happens happen.

----------------------------------------------------------------

One of my favorite sayings in trading is:

“Successful Trading is Simply a Matter of NOT MAKING MISTAKES.”

I have found this to be a great truism in my trading life. As long as I don’t make mistakes, I
come out ahead at the end of the week or month.

The “mistakes” I refer to are the 10 Commandments listed above. This is my list and I
encourage you to add or subtract to it. Make it your own. Use this as a springboard for
creating your own list.

Your goal is to trade the method as strictly as possible and without making any of these
mistakes.

Avoiding mistakes is a matter of self-discipline.

Although I can’t give you self-discipline, I will give you an exercise that can help you
tremendously with the issue. You still have to actually stick to it, but if nothing else it can
serve as a mirror as to how out of control your trading may actually be.

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When most people think of getting help with the issue of trading psychology, they think of
being hypnotized or getting counseling. Those things can be useful, but …

What I’m about to share with you has helped me with my own trading psychology
MORE THAN ANYTHING I’ve ever done.

Are you ready for it?

Here it is -

Use a trading log, such as the one I include in this manual and keep track of every trade you
make.

Many trading courses encourage you to do this, but here’s the twist –

On your trading logs you will have a place to enter the mistakes you made (if any)
and a place to write what you were thinking and feeling when you entered the
trade.

THAT IS THE LIFE-CHANGING KEY!

This gives does 2 things:

FIRST:

It gives you a record of your mistakes. which you will then transfer to your Weekly Log.
After several weeks, you will be able to look at the Weekly Log and see patterns of your
behavior. This is the key.

The trading log is like a mirror, revealing your bad habits! On the trading logs you will
also keep track of how much money you would have made if you DIDN’T’ make any
mistakes. That’s the killer!

When you see how much money you could have made by avoiding mistakes, compared
with how much money you did make with the mistakes … it makes a real impression on
your mind! Especially when you do this week after week, month after month. The
repetition really works on your mind.

For example, if you make an average of $500/week, but your trading log shows that if you
didn’t make any mistakes you would have made $5,000/week … it has a way of getting
your attention! That’s a powerful motivator to change your behavior because it ties
together 2 things: The fact that your method works, and the fact that big profits are right
at your fingertips if you just change your behavior.

SECOND:

By entering your thoughts and feelings on each trade, you have an instant bio-feedback
mechanism. As you review how trades worked (or didn’t work) that you felt good about,
that you just “knew” were going to be winners … it will most likely reveal to you that you
can’t trust your own opinions and feelings!

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 This is a good thing. Most people aren’t aware of the extent to which they continue to do
the exact same (wrong) things. By keeping a disciplined record of your thoughts and
feelings when you take trades, over time it will prove to you that your own thoughts and
opinions are not to be trusted when it comes to trading.

Why is this so important? It will reduce, and eventually eliminate impulsive trading and
the bending and breaking of your trading rules because of how you feel about any given
trade.

To help avoid overtrading, only print out enough sheets each day to log 6 trades (you may
even want to just print out 1 sheet per day and limit yourself to 3 trades per day). This is a
way of telling yourself that you will only allow yourself to take 6 trades the entire day so you
better wait for the best setups, otherwise you’ll waste your trades on sub-par setups and not
be able to take the good ones should they come along later in the day.

Another practical technique for avoiding overtrading is to get a timer (I like to have it on a
wristwatch so it will be with me wherever I go) and the alarm to go off every 27 minutes. Go
and pay bills, watch TV, play video games, or do whatever you need to do. When the alarm
goes off, then go back to your computer and look at the charts. This will get you in front of
your charts every 3 bars on a 9 minute chart (obviously this works better if you’re using
minute charts than if you’re using tick charts).

If you see a good setup beginning to develop, then stay and watch to see if it triggers.
Otherwise, just leave and return to your other tasks until the alarm goes off again in ½ hour
(3 bars later).

The idea is the same one used in dieting where you remove all the junk food from the house.
It’s the same in trading: If you have a serious overtrading problem, it is best to remove the
temptation. You only need to check in with the charts every 27 minutes to see if anything is
developing. If the long-term and short-term charts are in complete conflict, the markets are
badly bifurcated, the 50 SMA is totally flat, or there is nothing close to a good setup
developing, then remove yourself from the temptation! There is nothing useful for you to do in
front of the charts, so go do something else that IS useful.

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TRACKING YOUR BUSINESS

Trading is a business and like any business, you need to track your results so you can
reinforce what you are doing right and change what you are doing wrong. There is NO
excuse for not taking the time to do this is. Trading is not just about placing trades during
market hours, it’s about managing your business. MAKE THE TIME!

There’s a basic principle of success:

“Successful people do what unsuccessful people are unwilling to do.”

Notice that it doesn’t say …what unsuccessful people “can’t” do, but rather what they are
“unwilling” to do.

What most traders are unwilling to do is keep an accurate trading log day in and day out,
monitoring the things I’m sharing with you in this report, and analyzing the data. Most are
also unwilling to do this for a long enough period of time (minimum of 3 months) to ride
through market ups and downs in order to get meaningful statistics and develop ingrained
habits.

This is what would actually turn a person into a profitable trader.

But it isn’t glamorous. It’s hard, tedious work, so instead most traders would rather spend
their time taking more courses, looking for more charting patterns, seeking out more gurus,
subscribing to more newsletters, doing more back testing, playing with more indicators … all
the stuff that all the other losers are doing.

So right now, as you read this, you have an opportunity to make yourself stand out from the
crowd – and believe me, to succeed in trading you will have to do things the crowd is not
doing.

You have the opportunity to commit to doing what the amateurs, the losers, are not willing to
do. You can commit to this process for the next 90+ days, or you can go back to the same
old vain search for the holy grail – looking for love in all the wrong places!

Most people think that successful trading is about finding the right indicator, formula or price
pattern.

WRONG!

Successful trading is more like a competitive sport than mathematics (refer back to John
Patrick’s quote above). Trading is performance based.

It’s about developing good habits, and good habits are developed through perfect repetition,
which is why the exercise I’m sharing with you is so effective.

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DAILY TRADING LOG

Complete this log for EVERY trade you take as you take it. If you feel you’re too busy to
complete this form for every trade, then YOU ARE OVERTRADING!

SUCCESSFUL TRADING IS SIMPLY A MATTER OF NOT MAKING MISTAKES

That is ALL that separates the pro who makes money from the educated amateur who loses
money.

The WAY that we evolve from an “educated amateur” to a “profitable pro” is through a
DISCIPLINE of continually eliminating our mistakes. It is not a process of adding, but of
subtracting!

But “HOW” do we do that? The best tool is your Daily Trading Log. I’ve included a copy of the
exact trading log I use. You’ll notice that there is a yellow section for recording any mistakes
you made on each and every trade. This is the most important part of the log and of your
trading process!

How do you know what you did wrong? All mistakes come from violating something in the “7
Deadly Sins” or the “Method” lists (as found on the Trading Plan).

Keep these records in a binder and review them at these intervals:

Every night, review that day’s trading on the charts. Go through them on the
computer bar-by-bar and review where you got in and out, and compare that with
where your rules indicated you should have gotten in and out.
In addition to reviewing your trades on the computer, also PRINT OUT YOUR
CHARTS AND REVIEW THEM ON PAPER. Reviewing the charts on paper gives
you a different view than going through them on the computer screen. The reason is
that you can see your trading pattern at one glance when you mark your trades on a
paper chart. Attach the chart to that day’s trading log.
Every morning, review yesterday’s Trading Log and printed charts before trading
today.
Every weekend, review the entire week’s worth of trading logs and printed charts.

By doing these disciplines, you will see patterns develop. You will find that you are making
the same mistakes over and over and be able to correct them. Again, this is not something
anyone can do for you, but you MUST do for yourself. You will neglect this to your own
financial peril!

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WEEKLY TRADING LOG

This log gives you the big picture of your trading. Daily results are not very meaningful, but
weekly and monthly results are very meaningful.

Review your Weekly Trading Logs every day before you begin trading because on them
you can see the big picture at a glance and they remind you of good and bad patterns you’ve
had.

This is where you will also be able to track your actual win/loss ratio and your actual
risk/reward ratio, the key numbers to your trading success. Finally, a lot of people are very
surprised to see how large a percentage of their winnings are reduced by commissions. Be
sure to record them on your log as well.

The exact way to use these trading logs is explained in the videos that accompany this
manual.

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 POSTERS

The following pages contain some posters that I personally have hanging by my monitors.
They remind me of the most important psychological trading principles.

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