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0:00 This graphic explains the secret emotional algorithm that's at play in every single trader trading the financial markets and how the banks use that emotional algorithm to create consistent profits. In this video, I'm going to be breaking down this entire thing for you. Welcome to lesson four of my 12-part master class. This is level one, understanding market psychology. My name is Wade Guth. I run a software company called Trade ATS. It's used by thousands of traders all over the world. I've been trading and studying market behavior for over a decade. So, what you're about to learn is something most traders have no idea it even exists. This isn't another traditional traders mindset you need to be more disciplined type video. You're about to learn the emotional and behavioral algorithm that
0:46 causes traders to lose money mechanically. You're also going to learn how the banks and market makers systematically take advantage of it. In this lesson, you'll learn why fear and greed are just symptoms and why pain and pleasure are the real drivers of market behavior. You're going to learn how these emotions force bad decisions at predictable price levels and how to stop being on the wrong side of that process. Let's get into it. Have you ever walked away from a trading session completely confused, thinking, "How did I lose money today? I took 15, 20, maybe 30 trades and I'm down. You're thinking the market goes up and down most of the time. I should have won at least half of them by sheer probability
1:32 alone. But instead, almost every trade was red. About 12 years ago, this was exactly what I was thinking after trying to trade Euro USD on a big non-farm payroll news day. As I sat there in disbelief, that confusion led me to ask a different question. Not how do I win more trades, but why do traders lose? I'm talking about what really causes the predictable 95% losing rate in the industry. After about a year of deep study, what I found was there's something much, much deeper at play with every trader. Something they're not even conscious of, but is secretly guiding every decision they make and is ultimately responsible for most all losses taken in the market. Once you understand exactly how money is lost, the winning strategy becomes obvious.
2:17 You simply do the opposite. That's what pain and pleasure theory is built on. As humans, we respond instinctively to two core sensations. Pain and pleasure. Touch a hot stove, you don't analyze it. You don't hesitate. You react instantly. Pain demands action. Now, think about pleasure. A massage, a great meal, a winning trade. You don't want it to stop. Pleasure makes us passive, relaxed, resistant to action. No one taught you this. It's hardwired into your brain and the market is designed to exploit it. Now, when it comes to trading, losses equal pain. Profits equal pleasure. When a trade goes against you, your brain wants the discomfort to stop. So, you have a very strong pull to close the trade when it's
3:03 out of the money. That action makes it very easy to lock in losses. When a trade's in profit, your brain wants the feeling to continue, so you don't act. But unrealized profits aren't real profits. And markets range a good majority of the time. This means that if you're in profit and feeling good about your trade, it's usually just a matter of time before you're losing your profit or completely back in the negative again. This imbalance destroys traders. Nobel Prize winning psychologist Daniel Conorman proved that humans feel losses about twice as strongly as gains. That means traders panic quickly, hesitate to take profits, and act at exactly the wrong time. Think about every major crypto or meme stock run. Everyone looked rich. Screenshots everywhere. But
3:49 when the correction came, and it always does, most people give it all back. Why? Because pleasure convinced them it would never end. Here's a really simple way for you to think about the cycles of pain and pleasure as traders trade and what to look for also. So in this situation right here, we have an example of a market that's basically just kind of funneling out sideways, which is what it's doing most of the time on any given time frame. So, but traders are looking for breakouts. They want confirmation. They want to jump in on something. So, in this situation, we get the market breaking down a little bit. Some traders would sell in right here, right? they just jump in because it's going down. As the market goes down and their sell positions are getting more and more in the money, that increases the pleasure
4:34 that they feel. And that pleasure creates complacency. Why? Cuz they don't want it to end. They want to see just how far the market's going to go. But the nature of markets is that they are constantly ranging. So what has been given is likely going to be taken away. It's just a matter of time. So, as the market comes back up, it starts sucking up all those paper profits back to break even. And eventually, they're going to close out here at their break even point because they're experiencing all the pain from losing their paper profit or maybe even beyond as it hits their stop-loss and now they're just booking the uh further losses. Same thing right here. We have the market breaking out to the long side. We can see that this would cause some buying activity to come into the market. All good. They go up.
5:20 They feel max pleasure here at the top. I made a really good decision. But guess what? The cycle of the market hasn't changed. It's still stuck in this sideways action. And what has been given is again going to be taken away the moment it gets back to their threshold right here, their pain threshold. They're going to start to feel max pain. Not only from giving back these paper profits that they thought they had in the bag, but as it goes down again, maybe they get out right here or maybe they get get out down here. uh as the market really stretches against them, it's all pain and that pain creates certain action when it becomes intense enough and that creates certain liquidity for the banks. Now we need to talk about why this is meaningful to banks and large institutions. One of their biggest concerns is having enough
6:06 liquidity to get in and out of the market. They are so concerned about it that they never want to leave it to chance. They want to make it certain. So the question is how can liquidity be a certainty? The answer is pain. Pain forces action. Action creates liquidity. Stop losses cluster around obvious levels. Those levels represent maximum pain. Banks don't chase price. They harvest liquidity. And liquidity comes from forced decisions. Pain is predictable and predictable pain is exploitable. So, here's a really simple way to help you get your head around how the banks use pain to harvest liquidity so that they could generate the profits that they need to generate. I call it the pain cycle. Okay, so we have our
6:53 three market phases here. We're only going to be looking at contraction and expansion for this particular example. So, right here in contraction, we could assume that the market's in an uptrend overall. We have a contraction and we see that the market breaks out. So, as the market is breaking out right here, you're going to get some traders that are trying to buy the continuation of the trend. With that buying activity is going to come their pain threshold or their action threshold. That's going to go right here below these localized lows. So, if they bought right here, basically what that means is if the price comes back down like it does later, they're going to be uncomfortable or in pain when their position is underwater. So, as a market goes up and it comes back down, those traders get
7:39 stopped out right here. That's the stop-loss. That pain equals an accumulation area for the banks. There's certain liquidity down below this level. That's why the market whipsaws all the time. It's seeking out that liquidity. So, as the market drives down, the banks harvest or accumulate that certain liquidity based off of the stop-loss pain that is down there. they are able to easily buy into this uptrend. Now, as it goes up, what else is happening here? You have traders that have started to sell the market as it went down. Where is their pain threshold? Well, if you sold anywhere down this, you would be looking at that high right there as your potential stop-loss placement. And I
8:24 don't even care if you don't use stop. Sometimes people will give us that argument. They'll say, "Well, what if I don't use a stop?" It doesn't matter. If you sold right here and price is up here, you're not going to feel great about it. Stop loss or not, you're probably going to want to close the trade. That's just the way it is. So, as traders sell down here, we can calculate that their pain threshold in mass is going to be above that high. That also creates certain liquidity for distribution. So, we're starting to see the bank's cycle here and the mechanics in place for them to do what they need to do. They have pain for accumulation and then that automatically setups pain above here for distribution. If people sold down here, then they have to buy up
9:11 here to get out of their trade. What does the bank and the market maker want to do up here? They want people to buy. Why? So they can sell. They can sell that which they bought down here from these sell stops. It's always the opposite side and this model explains that full pain cycle that creates a very predictable profit generating situation for the banks. Now your job is to understand that this exists. Understand that you have your own pain threshold to worry about. But more importantly, the real secret here is mapping out other people's pain thresholds so that you can get a read on the architecture of the market. That's the real magic here. Now let's talk about emotions. When it comes to trading, a lot of traders are trying
9:58 to just completely eliminate all emotion from their trading decisions. Not only should you not try to do this, but it's near impossible. Your emotions can be your biggest helpers when it comes to trading if you know how to work with them. Pain keeps you alive. Pleasure makes life worth living. The goal isn't elimination. The goal is awareness. When you feel pleasure, ask yourself, "What should I be doing right now? Are other traders in this market feeling good, too? I know everyone can't win. Should I take my profit now while it's available? When you feel pain, ask, "Is this emotion forcing a bad decision? Is there anything I could do to ease the pain? Maybe lighten my position size so I could stay in and observe the market." When you are aware of your emotions, you can remember to ask quality questions
10:44 like these. They'll help guide you to much better decision-making in the long run. Now, let's go a little deeper on the dynamics of pain when it comes to trading. Inside trade ATS, we frequently talk about a trader's pain threshold or action threshold. In fact, that's what ATS stands for, action threshold software. A trader's pain or action threshold is the dividing price on the chart where a trader will start to feel pain. This area starts as soon as the trader is out of the money and increases in pain as the market tests prominent highs or lows where the trader may have their stop-loss. Pain intensity is ultimately tied to position size and overall draw down. The bigger your size and draw down, the closer your pain threshold will be. Here's a simple way to think about it. Big position sizes
11:30 lead to tight pain thresholds, which leads to corresponding tight stop losses, which leads to constant stopouts. This is the retail way. Professionals use smaller positions, place stops outside obvious liquidity zones, and look to build in and out of positions over time. In fact, this is the way the banks need to trade the size that they do. And they're the ones who move the market. So, if we want to understand why the market moves the way it does, it would only make sense that we study the ones who control it. Here's the core truth. Fear and greed are surface level. Pain and pleasure are the root. Pleasure creates complacency. Pain forces action. Markets exploit this relentlessly. If you understand where
12:16 traders feel pain, you understand where the market is likely to move. That's the real market psychology that you need to care about. And that wraps up lesson four of this 12-part master class. Hey, if you like what you're learning here, make sure to like and subscribe. That way, you get notified the next time we drop another lesson. If you want to learn more about what we do at Trade ATS and how we help traders, make sure to check out the links in the description. Until next time, we'll see you later.
