Patrick Stockhausen: The truth will set you free and make you rich
Here’s the thing. If you’re not making money in the forex markets, it’s very likely that it is not because of your trading system, though that could be a factor, or the markets. It’s most likely that it’s down to you.
At first that statement might seem accusing or even confrontational – but it’s actually very empowering as is explained in this interview. It basically says that anyone who is struggling with their trading has the power to turn it around.
This brings us to Patrick Stockhausen, who specialises in the psychology of trading. He’s spent over 20 years studying behavioural patterns, the psychology of wealth and human peak performance.
He’s spent years helping poorly performing traders and investors rise to the top of their game.
It’s on that basis that MahiFX approached Patrick for some tips on how traders can improve their performance.
In this interview he talks about the most common factors, which hold most traders back. Crucially, he explains some of the measures that struggling traders can take towards becoming more profitable.
Patrick has a website dedicated to helping traders improve their performance with a wealth of free material, which can be found at: millionairetradersmindset.com
One of his big goals in life is to make 1 million people financially independent and as he explains in this interview empowering goals are one of the keys to becoming a successful trader.
PS: The problem is that they don’t love financial trading and investing, yet this is one of the key traits of successful traders. Most successful traders love what they do. It’s the game that they love to play. The money is just about keeping the score.
JP: The implication being that many new traders come into the market to make money and that’s basically it?
PS: Most people come to the markets with a consumer mind set. Money therefore has a meaning, such as a pair of trainers, the rent, getting out of a boring job. It’s therefore not about how well they’re playing the game.
So they learn some technical analysis and this is where it starts going wrong. They see a pattern in the market and they view it a bit like a slot machine: this is my signal, my trade should work.
But there’s a difference between a slot machine and trading. With a slot machine, you put your money in first and hope the ‘winning’ pattern shows up. In trading, the pattern shows up, we place the trade and we think we’re going to win.
However, technical analysis-driven trading is not designed to tell you what is going to happen next.
It is designed to put the odds in your favour over a series of trades. So they’re thinking about individual trades rather than blocks trades (say 20,30… of them). Professional traders accept the random outcome of each individual trade.
So novices are putting the emphasis on a particular trade and they attached meaning to an individual trade. And when it doesn’t work – they start calling themselves a loser or say their system doesn’t work.
JP: So the difference between the person who trades just for money and the one that trades for the love of it is that former is more short term in their thinking whilst the latter takes a longer term view of their trading?
PS: Absolutely. It’s about gratification and the more you want instant gratification, the more short-term you’ll be in your trading. If you are able to delay gratification the more you’re likely to accumulate wealth and play the game for the sake of the game.
A lot of people come to trading with the wrong set of beliefs. They don’t understand the five fundamental beliefs that they must have to succeed. Here are the five mistaken beliefs they typically come to the market with:
1/ The outcome of any individual trade and how it should move is known. It’s possible to predict the market.
2/ They think you need to know what will happen next to make consistent money in trading.
3/ They believe winning and losing trades happen in some sort of sequence. In other words they’re not anticipating the randomness of the market where you get a series of losers and winners.
It’s a bit like a casino owner. They have no idea, which bets by punters are going to win or lose. All they’re concerned with is ensuring that their edge is intact, that it is consistent and that no one is going to mess it up, because they know that over the long run they will win. And they just need a small edge to do so (on roulette the casino’s edge is estimated to be just 1.35-2.70% – but it’s enough to make a casino a lot of money over the long run).
In fact in Las Vegas the casinos even sell books at the entrance about how to win at casino games. But they know that the odds are on their side.
4/ They think when their entry signal appears from their trading system, they believe they should make money on the trade they’re about to take.
5/ They think market patterns are consistent and reliable. For that to happen, you have to have exactly the same people, in exactly the same circumstances doing exactly the same thing. But tomorrow that same pattern could appear, but one of the big participants who made it work today, may be off sick for example – so that’s why patterns don’t always work in the same way consistent. So yes there are patterns in the markets, but they’re not hard rules. Those are the five common mistakes, which trip most traders up.
So here are the 5 beliefs traders must have to win:
1/ Understand that anything can happen in the market and with any individual trade.
2/ Once you realise that anything can happen on any one particular trade – you focus on what happens over a block of trades instead and capture your edge in that way.
The trader Richard Dennis started out with $200 and ended up with $200 million. His system only made money 35% of the time (his trading system relied on a few big wins to compensate for the smaller losing trades and still make a profit). But he had a probabilistic mindset.
3/ An edge is just a higher probability one thing happening instead of another. So you can lose 65% of the time (like Richard Dennis), but if you pyramid your winners you can still make a lot of money.
4/ There is a random distribution between winners and losers for any trading system
5/ Every moment in the market is unique.
You also have to accept responsibility for the outcome of your trading.
PS: Yes. You have personal power to change your environment.
But when it comes to trading, when you take a position and it is profitable, it is because other traders, mostly institutions, have to come into the market and move it in your favour. It takes someone else to make you a winner. So in a way it’s nothing to do with you, it’s somebody else. Your job is to recognise the opportunity where you believe others will come in and make you a winner.
JP: So basically those 5 beliefs are a way removing the emotional attachment people have to individual trades and avoid actions such as ignoring stop losses and doubling up on a losing trade etc…?
PS: Yes that’s correct. There are a sequence of events, which determine if you become financially free, whether you’re going to be a successful trader or not and this is it:
Where you end up financially is going to be based on your consistent results.
Not one result. So that’s not down to what happens on one trade, but blocks of trades. With someone like Richard Dennis you have to think in terms of blocks of a 100 trades, because not many of them were winners (35%).
Your decisions (whether it be flawless execution or poor execution, such as entering trades late or holding on after stop losses have been hit etc…) are based on your emotional state.
JP: Can you explain the bit about emotional state?
PS: There are 4 fears that mess up people’s trading: 1/ Fear of losing 2/ Fear of being wrong 3/ Fear of missing out 4/ Fear of leaving money on the table.
People are more motivated to take action based on fear rather than greed. So you see that markets move faster on the way down than on the way up because of fear
So for example when a market is going up, people are often sceptical and don’t believe it. But when it keeps going up people become worried about losing out on potential profits and jump in.
So you can see that these emotions mess up traders. And the reason you get these emotions is down to what you focus on and how you interpret events, which determines your emotional state and your actions.
In turn what determines that is your beliefs and what you think you deserve, what you think is possible and what you think you’re capable of doing.
Then you’ve got your beliefs about money, and most people have terrible beliefs about money.
And you’ve got your reason for wanting to build wealth. And the bigger the reason, the bigger the wealth. If someone says they want to build wealth to pay their bills…
JP: Yeah building wealth to pay bills is not particularly inspiring.
PS: Exactly. There’s someone who said: “if you want to make a difference to your family, then make a difference to your community. If you want to make a difference to your community, then make a difference to your city and if you want to make a difference to your city, then make a difference to your country and so on.
It’s the difference between wanting to create wealth to pay your bills versus wanting to do it to feed, say 500 starving people every year, for example.
That drive, and as long as it is aligned to your real emotional values, will push you a lot further.
Now you’ve got your identity. And I want to say this: You don’t get what you want in this world, you only get more of who you are.
JP: Can you talk me through that one.
PS: It’s like someone who genuinely gives up smoking. Rather than saying I haven’t smoked for 10 weeks they’ll say I’m a non-smoker.
Once someone really stops smoking they see themselves as not being that type of person (a smoker). In other words they’ve divorced themselves from the behaviour and taken on a new identity.
It’s a case of: “I am a non-smoker” versus “I haven’t smoked for 10 weeks.”
To be a millionaire for example, you have to do certain things consistently in order to get the result you desire.
So if I see myself, my identity, as a successful trader I will act according to my perception of myself.
By contrast, if you come into this game thinking you’re a poor person, and suddenly make some money, your brain doesn’t want to make you a liar, it wants you to be congruent. It will therefore find a way to realign you with your perception of yourself and you’ll lose money on your trading.
That is why about 75% of people who win the National Lottery are broke within 5-7 years.
On the other hand you have people like Donald Trump who go broke, but he makes his billions back within a number of years because of his perception of himself.
Your values will also determine what you will do with any money you make as well.
PS: You’ve got Ed Seykota, probably one of the best traders ever, who made a staggering 250,000% return over 16 years said that trading is: 60% psychology, 30% money management and only 10% the trading system, which is what most people think about.
You’ve got Warren Buffett who said that unless you can manage your mind and emotions you shouldn’t expect to be able to manage money.
What all these people and those like them have in common is their values. They will determine what they see in this world, what they act upon and what decisions they make.
JP: So values direct your focus?
PS: Yes, so people’s values will determine whether they spend or acquire money.
So some people place a value on learning about money, but they don’t make a penny. They confuse it with creating wealth.
JP: Yes there are lot of traders who’ve read every book about trading and still aren’t making money – what’s going wrong there?
PS: It’s because they don’t have a mindset for building wealth. Your values determine what you see in the world. So you must place a value on saving money, which most people don’t. You also need to value investing and growing that money and also having some cause for doing that and the bigger the cause the better.
Most people have a value on consuming or life style. As soon as they get some money, they’ll blow it on what they truly want the money for.
For someone who places a high value on creating and building wealth, as soon as they get money, they will spend it on assets.
Poor or middle class people, most of whom are in debt, think rich people spend money to feel wealthy. So when they see a person with money not spending it, they think they’re tight.
Rich people think that rich people earn more money in order to feel wealthy and therefore invest it. So what poor and middle class people do when they get money is to spend it to feel wealthy.
JP: So this is where the love of trading comes in versus just seeing it as a means of making money to consumer more?
PS: Yes that’s right. It’s only the person who loves managing money, owning assets and who loves the maths of doing it who ends up rich and financially free. They love the process for the sake of it while everyone else just wants the money to buy stuff.
JP: Just going back a bit on what we were talking about earlier in terms of having a ‘poverty mindset’ how can that mentality be adjusted to a wealth mentality?
PS: People mess up their self-worth by setting goals that are not congruent with their true self and their values, which in turn means they’re not going to be reliable, consistent, focused and energised working on their goals.
And then when they don’t achieve their goals, they beat themselves up, they lower their perception of themselves. Basically, making the situation worse.
You need to align your goals with your true values and realise that self-worth and net worth tend to be aligned. So you must place a value on saving, a value on yourself and a value on serving others, which equals massive wealth.
JP: So how can you identify your true values, because I suspect a lot people don’t really know what they are?
PS: Your values are often unconscious and reside in the sub-conscious mind. But goals are made in the conscious mind.
So when ever there is a conflict between your conscious and sub-conscious mind, the latter will win out every time.
So a series of questions you can ask yourself to find your true values include:
What is truly most important to me in this world?
Or if you’ve got an income of £5,000 a month and ask yourself what would you do if you had a guaranteed income of £10,000 for the rest of your life — what would you do then?
Or what are the top five to seven things you love to experience on your holiday?
Or there’s the Demartini process (https://drdemartini.com/), which is a way of figuring out your values.
What do you think about, talk about most, what are the top things your money goes on, the top three things you have the most energy for etc… ?
You can compile a list from all these questions and rank the responses and get a clear idea of your true values. It’s about finding consistent patterns in your answers.
Here’s the thing: 90-97% of people have creating wealth exceptionally low on their values.
Hundreds of years ago in Tibet they decided to gather all the wealth and re-distribute it equally among the population Within three months the poor went back to being poor and the rich to being rich again. They did this three times and every time the result was the same.
Nothing has changed. If you gave people a large sum of money, it will be spent on their values. If you value creating wealth, investing and saving you will accumulate wealth.
PS: A first step is being aware of what you believe. People believe all kinds of things, such as “money is the root of all evil” or that “rich people must have done something bad or dishonest to make their money” and so on.
Second step, ask yourself about your beliefs whether they’re true or not? Because all beliefs are either useful or not in a particular context. So you have to recognise the beliefs that are holding you back. You have to attach pain to those beliefs that are not supporting you and pleasure to the ones that do.
So if you have negative beliefs about money, then you come to trading what are you dealing with? Money!
So if you have a belief like “money is the root of all evil” then you are setting yourself up to lose. Your brain does not want you to be evil, so it will guide you towards making poor trading decisions so that you remain aligned to the belief that money is basically evil.
Beliefs create behaviours, which is why it is so important to identify them.
One of the reasons why many top hedge fund managers and traders have psychologists working for them is because they recognise that psychology is one of the most powerful edges they can have in their trading.
Mentally rehearsing your trading system rules in your mind, over and over again, is very important as well in helping condition the mind.
JP: So just to wrap up, someone trading for the first time – what should they do?
PS: People traditionally come to trading along the lines of “give me a trading system.” Then they think about testing it and then they come to money management and finally psychology.
It will take them something like 10 years to master trading if they do it that way.
If you have the right mindset and work on that first, when it comes to building wealth it becomes a thousand times easier. So make sure that you are the right person to trade the system.
Work on your psychology first and change those variables first and the rest becomes easy.