Markets reflect investors’
mentality by making certain psychological patterns existing in human thinking
patterns too. Most traders perform poorly in the markets because they do not
have self confidence and their self confidence is even more negatively affected
when they see losses on a regular basis. If you do not trust yourself you will
surely never have stable profits. Even an average system is ok if you trade
with confidence. However, if you are ever in doubt you’d better do something to
gain the lost trust or you stop trading at all. This article will cover some of
the key aspect of trading psychology that affects our results in our
trading.
Opportunity based or problem based thinking
This is the first key aspect
we should deal with. It shows our orientation towards success or failure. It is
often on subconscious level and we often do not understand why we think the way
we think. We do have to make self analysis and define why we think in such a
way and if we tend to be negative we have to find ways and means to change
those negative thinking patterns. Do you wait, expect and believe in
opportunities and you subconsciously dread that you will fail again. If you dwell
on problems you will tend to gravitate towards them.
You can break negative
thinking patterns and start basing your thinking on opportunities. It involves
intentional concentration on opportunities, forgiving yourself past mistakes in
trading and positive self talk. Those traders that base their thinking on
problems remember only their past mistakes and forget how many good predictions
they have made. They should start concentrating more on the latter rather than
on the former.
Fear of loss and fear to miss opportunities
Fear is a prevailing
negative emotion that stops most traders from achieving the best results and
causing them to experience what they dread most – losses. Fear is often a
double edge sword. On the one hand we fear losses, on the other – we fear to
miss opportunities. We are afraid to lose a good trade and we get out of the
market too early, especially if the trend has just begun. That is one of the
biggest mistakes a trader can make.
We know that we need to have positive
profit loss ratio in order to have long term success. If you lose every second
trade, but your profit is usually ten percent bigger than your average loss you
will be a very good trader. However, this is only possible if you let your
profits run as long as the market goes in the direction of trend. That’s why
fear of loss is such a big enemy of a trader. If market is going in the
direction you expected, give time for it to exhaust itself and only then lock
in your profits.
On the other hand, we fear
to miss opportunities and this causes us to get into a market too early. We
usually get too impatient to wait for opportunities and to let them present
themselves to us. We start searching for them and pick out the wrong trades. Do
not go out seeking for opportunities. They will arise and be clear. Just be
patient waiting.
Greed – staying in the market for too long
You will have to take
profits at some point. Unless you are a Warren Buffet type of investor you will
have to close your position and if you manage to enter a market of your choice
at the right time you have to watch for signals to exit at the right time too.
In my trading career I have had a dozen situations where I had very good
profit, but I wanted to have even more and I waited till market reversed and
came back to where I initially entered it and in some cases I would even close
a position with loss. That is wanting too much too fast.
What is the cure for that?
You will never be able to rightly guess the exact top or bottom. You will not
know when the market reverses. You simply have to make your profits larger than
losses. So, when you see that your profit is bigger than your initial stop you
start moving your stop loss order closer to current price. At some point market
will move against you and close your order. But…it will be in the profit zone!
So, do not try to make all possible money at once.
Thrill based trading is nothing else than gambling
The biggest majority have
the same attitude to trading they have to gambling in casinos. They have
neither strategy, nor money management rules. They expect to win the same way
they expect to win in the game of roulette. No wonder they lose the same way
gamblers do at the casinos.
Stop chasing thrills and
start following logic that is based on serious analysis, pattern and tendency
recognition and development of personal character features such as patience and
self control. This will take you out of the gambling league.
Trying to recoup losses will increase your losses
This works not only in
trading but in many other areas of life. A sportsman having made a mistake will
try to repair it at once and he will usually make another one in the process.
This is not the way losses have to be handled.
You have to admit to
yourself that you have made a mistake. This does not mean blaming yourself for
that. Just admitting! Take some time off and do not trade. Rethink your
positions and mistakes and see how you could have traded differently. If you
followed your system and it was simply bad luck, go on doing what you know you
have to do. If not, tell yourself you will do better next time and be more
attentive in the areas where you are the weakest. If it is overtrading, watch
your emotions and avoid giving in to thrills of trading. If it’s impatience
tell yourself that you are here for doing business, not for entertainment and
gambling. When you open your charts you can tell yourself that you do not have
to trade today, but you have to wait for opportunities. This may help. It helps
to me!
Fighting the market is like trying to push the Everest
with bare hands
Traders often do this. It is
especially true when huge trends start. Somehow they expect to see a reversal
any minute. And they take a position. And they losses keep on growing (if they
do not place stops). Do not fight the market and do not tell it what it has to
do. It will not listen to you. And the bad news is… it is stronger than you. So
why fight with it? It is pointless. You will prove nothing to nobody.
It is better to go in the
same direction market goes. And move your stops. If it goes against you, close
your position. Be smart! Save your capital for better times. They will come.
Blaming others will keep you in self deception and
habit of repeating the same mistakes
Traders blame market
regulators, politicians, bad news, bad days, other traders and a lot of other
things and people, but by doing this they fail to improve their trading results
and continue making the same mistakes. Nobody is guilty if you make a bad
trade, except yourself. So, take responsibility for your mistakes and continue
learning and changing what has to be changed.
There are reasons why some
traders succeed and others fail. If you took an interest in the topic you would
find out that successful traders do not blame others. They learn from their
mistakes and go on to become great traders that generations of newbie traders
learn from. Do not waste your time by searching for reasons of your poor
trading results somewhere outside yourself. The sooner you do it the faster you
can become a ‘dream team trader’.
Final thoughts
You see how many
psychological things impact our trading results. One has to work on the issues
to improve one’s profit/loss ratio and it does not happen fast. As any trade
this business involves a lot of learning, practice, experience and will power
to stay when things get tough. A lot of traders quit and never see real success
and money. Only those that continue can expect to become real pros in the
field.
Hope the article was helpful. If it was
I would be grateful if you tweeted it, liked on Facebook or any other social
media. Thanks for reading.
Disclaimer
Trading
financial markets carries a high level of risk, and may not be suitable for all
investors. All information on the blog http://trend0.blogspot.com/ is of educational
nature and cannot be considered as advice, recommendation or signals to trade
in any financial markets.