TRADING PSYCHOLOGY PART ONE OF TWO

One of the most important components for successful trading is most definitely psychology. Psychology refers to the state of mind any salted trader should have while they are trading. 

Trader psychology deals with the following:

• The control of a trader’s fears
• The control of a trader’s greed
• Trader’s discipline.

Why Do We Trade?

Trading is a very exciting activity but without the right mindset it can be extremely stressful. The problem then is that it is almost never possible to feel excited and make money at the same time! Think of a casino where amateurs celebrate over free drinks, while professional card counters coldly play game after game, folding most of the time and pressing their advantage when the card count gives them a slight edge over the house.

To be a successful trader, it is critical that you develop iron discipline.

Psychological Trading Issues and What Causes Them

Fear of being stopped out or fear of taking a loss: The most common reason for this is that traders fear losing too much and feel that they can’t take another loss. The trader’s ego is therefor at stake;

Getting out of trades too early: Anxiety plays a big role here and it is relieved by closing a position. Fear of trades turning and as a result, feeling let down. This ties in with the human need for instant gratification;

Adding on to a losing position (averaging down): Unwilling to admit that a trade is not correct and hoping that it will turn in your favor. Again, the ego is at stake here;

Wishing and hoping: Not wanting to take control or be responsible for the trade. Inability to accept the current market conditions;

Compulsive trading: Drawn to the excitement of the markets being in a favourable condition. Presence of addiction and gambling issues. Needing to feel you are in the game;

Excessive joy after a winning trade: Relating your self-worth to the markets. Feeling unrealistically “in control” of the markets;

Limiting profits: Feeling that you don’t deserve to be successful, to have money, or to make profits. Usually, psychological issues such as poor self-esteem;

Not following your proven trading system: you don’t really believe it works. You did not test it well. It doesn’t match your personality. You want more excitement in trading. You don’t trust your ability to choose a successful system;

Over-thinking your trade, second-guessing your trading signals: fear of loss or being wrong. Wanting a sure thing where sure things don’t exist. Not understanding the fact that loss is part of trading and the outcome of each trade is unknown. Not accepting the fact that trading imposes risks. Not accepting the unknown;

Not trading the correct position size: dreaming that the trade will only be profitable. Not fully recognizing the risk and not understanding the importance of money management. Refusing to take responsibility for managing your risk;

Trading in excess: need to conquer the market. Greed. Trying to get even with the market for a previous loss. The excitement of trading (similar to compulsive trading);

Being afraid to trade: no trading system in place. Not comfortable with risk and the unknown. Fear of total loss. Fear of ridicule. Need for control;

Irritable after the trading day: emotional roller coaster caused by anger, fear, and greed. Giving too much attention to trading results and not enough attention to the process itself and to learning the skills of trading. Focusing too much on money. Unrealistic trading expectations;

When trading with money you can’t afford to lose, or trading with borrowed money: last hope for success. Trying to be successful at something. Fear of losing your chance for the opportunity. No discipline. Greed. Desperation.

These are by no means all the psychological issues – but they are the most common. They usually center on the fact that, for one reason or another, the trader is not following his chosen trading approach or system but wings it, or trades his own emotions, which is a no go. As you see, psychology in trading is vital.

In terms of psychology, your goal is to be on an even keel, so to speak. Your winning and losing trades should not affect you. Of course, we all trade better when we win, but we should strive to maintain an emotional balance that is independent of any gains or losses.

In the next post, we will continue, starting with Accepting Losses