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. 

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.

Top 8 stock trading tips

My experience of stock trading began in 2003. I read some small book on the topic and got fascinated by the opportunities that were there for me in trading stocks. I started trading on my native (Lithuanian) stock exchange by buying and selling stocks that seemed to be cheap. Unfortunately, they got even cheaper and having reached the ‘then’ bottom stagnated for a long time. I understood that something was wrong with my approach as I saw other stocks going higher and higher. 

One day a friend of mine introduced me to his brother who had been investing in the same market for a few years. And he did have tremendous results. I looked at his portfolio and saw around 5 stocks all of which had risen more than 100 hundred percent from the time he had bought them. I was surprised to see that as 3 of the stocks were agricultural companies. For me, it seemed not a very intelligent decision to invest in those. 

When I asked him about his choice, he took out some three pages full of pros (his why’s) for investing in the companies. This shocked me even more. I was very naïve at the time. I believed I could just look at the prices of stocks, read a little about them and pick up the one stock that will make me a lot of money. I was wrong and results confirmed that. Understanding the market and fundamentals was necessary for profitable investing. This was confirmed again when I started trading Forex and lost my initial balance of 500 bucks in a few months. Yea, it takes some time and painful experience for dummies to become wise. 

Understanding of investing principles as well as fundamentals of a given market is a must for one to become a successful investor in any market. You will soon learn too, whether it is day trading or long term trading the statistics remains the same: 99 percent of those who trade finally fail. Why? There are a lot of reasons for that, but most fail to look at investing as a business and this light attitude causes them to fail. 

In the article I am intending to present some of the most general stock trading tips that would help one understand what one should and should not do when one starts investing. This is the first article of the series that I am going to publish once a week. Hope the posts will be useful both for newbies and for more experienced ones. So, let me start.



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1. Do not try to predict market tops and bottoms

Some rephrase it by saying that you should not try to catch falling daggers. Those that try to guess where the market will make a bottom can start buying too early and in a severe downtrend they will experience severe losses. They same will happen if one tries to predict a possible market top and start selling too early. The top maybe formed after a year or two or even ten years. What will you do then? Keep to a losing position? So, do not try to make these predictions in the first place. Let market give signs about a possible reversal: ranges to start (prices fail to make new highs or new lows). 

I remember how in 2004 eur/usd (Forex market) pair was in range of 500 points. Finally it broke out and started running up. I used to spend a lot of time in various Forex forums at that time. I remember one trader who was always recommending selling eur/usd at the time. All on the way to the top he was opening selling positions. He used to say that all sound traders had already left ‘this insane uptrend’. However, market did not pay attention to his ramblings and continued upwards. Market does not care about your opinion. You should learn to listen to what market ‘says’ and follow it faithfully. 

2. Do not follow too many stocks, concentrate on a few

I initially learned about the principle in the book “Reminiscences of a stock operator” that is full of insights of one of the best speculators of all times – Jesse Livermore. The problem with following a lot of stocks is that you can never know everything about each stock and if you divide your focus on two many stocks you will know enough about each one of them. You need to focus and invest all of your attention on a few stocks.

You can initially start analyzing indexes by sectors, then selecting one which you understand best and from that index choose three, maximum four stocks which you follow and trade them when opportunities occur. You will also find out that this is how professional investors and analysts study markets and pick out the best stocks for investment. 

3. Cut losses and let your profits grow

It does not matter how great you are as a trader you will still be making mistakes and most probably half of your trades will be good and half of them will be bad. The same is valid for real professionals. They do make mistakes, but they know how to take advantage of opportunities and to maximize their profits in these situations. Cutting your losses is simply admitting that you have made a mistake and now you are ready to wait for better opportunities. 

It is pretty difficult as most traders see their losses as something personal, so they tend to sit and wait for their losing positions to turn profitable. In this way you can hold a stack of losing trades and continue closing good trades. It should be the other way round. Close the bad ones and continue holding the good ones. 

Before one opens a position one also has to decide how much he is going to risk. For some it may be 2 percent, for others 10. It depends on the nature of trading. Those who day trade should not risk more than 2 percent of their equity. Those who invest can make it as large as 20 percent. The less your risk the better! And your potential profit target should always be bigger than your potential loss.

4. Buy the rumor and sell the fact

That is another famous axiom of Wall Street. Those who are experienced often predict that the upcoming fundamental news will be positive and they buy the stock in advance. When the news comes out they sell the stock as the positive news that comes out is already ‘priced in’. And if the news is bad they might take a ‘short position’ in the stock. 

What kind of news we are talking about? Any fundamental news connected with the company: merging, introducing new product to the market, closing some department or quarterly financial results.

However, one should also be aware of the multitude of rumors that circulate in the market daily and one should rely more on his own fundamental analysis and not on some unreliable information coming from ‘God knows where’. 

5. Do not follow amateur tips

There is a saying in Wall Street that ‘when taxi drivers start giving tips it is time to sell shares’. Tips are abundant in financial markets. You can get a lot of those on various financial TV programs. But those people usually retell what they have heard others saying or even worse they help somebody to get rid of the shares that have exhausted their potential and are ready to fall. This also applies to the so called ‘market gurus’ that give out their tips right and left. Do not trust them. Become a pro analyst yourself. 

It is in their nature of people to tips. Most probably, it comes from our unwillingness to do serious analysis by ourselves and trust somebody else’s opinion. We also avoid personal responsibility by doing so and place it on the shoulders of others. 

6. Take profits when the stock is still rising

We know that no stock goes up all the time. The same can be said about stock indexes and all the rest securities. Times for correction do come. And not only for correction! Companies do get into trouble and their shares collapse. So, if you want to make profits in the market learn to take get out of your position while the stocks are still going up. 

It might be difficult to do as traders often ‘fall in love with their stock’ that is doing well. If you are not simply playing for fun, but intend to make money from your trades it is better to untie yourself emotionally from the trades you make and close your most profitable positions when they show you decent profits.

7. Get out when everybody is bullish and get in when everybody is bearish

You should always distrust the crowd. When any market becomes ‘one sided’ (everybody is a bull, or everybody is a bear) you should take the opposite direction than the majority of people take. If all newspapers, newsletters and ‘experts’ start telling that this stock, or commodity or currency will rise for years to come the days of the bullish move are counted. The same is true about bears. When everybody is bearish the days of bulls are about to start. 

8. Buy in October and sell in May

This can be modified slightly and buying can start at the end of summer. Why is this so? Nobody could tell you exactly why this is so, but it simply works. Most money in the stock market is made from November till May. Then stocks usually start going down. Summer is often for corrections, but at the end of summer you might start looking for cheap and prospective stocks and start buying them bit by bit. 

You do not want to buy at inflated prices as this is contradicts the main rule of investing ‘buy low and sell high’. Investors do take profits and end of spring has become a traditional time to do it. You should have in mind the rule when thinking about the place of exit for your trades.

Final thoughts

Investing in stocks is not gambling. There are rules that you have to follow and important things that you have to know. The article covered some of the points that had to be in mind before one decides to take a position in stocks. Nobody becomes a profitable stock trader over a night in the same fashion as nobody becomes a good doctor over a night. Good things have a good price tag on them. Look at this occupation as a business and then decide whether it is for you to get into it. Next week I will continue the topic. 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. 

Read my previous posts:

Why buy gold

Best Forex trading system
How to make money trading

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.