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Wednesday, August 29, 2012

7 key areas of trading psychology

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. 

Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.