It is said that trading is only 10% methodology and 90% psychology. While the figures are debatable, I do agree that trading is more about psychology than anything else.
The thing about trading is that normal human behaviour has to be turned on it’s head – and this is a huge paradigm shift for most people.
What do I mean by this? Well, starting from school, all the way through to university and our adult working life, we are conditioned to believe that the harder we work the more money or rewards we deserve. Ironically, never has this been more true than during the time I worked as an IT consultant in Investment Banking. Putting in extended hours at my desk, even if I had nothing to do meant I was being “productive”.
The trader who tries to apply this principle to the trading screen is in for a hard time. Treating trading like a regular day job will lead to the need to be productive at all times. There will be periods of the day which are not conducive to your trading setups and entering the market during those times will only lose money. It is our job at these times to sit on our hands and do nothing.
Learn to love losses
We are conditioned as human beings to want to win. Winning means success in life – we therefore find it very hard to take losses when trading, even though the best thing that can be done with a losing trade is cutting it quickly. What tends to happen is the trader will hold a losing position in the hope that it turns around and becomes a winner. As the trade goes further and further into the red, hope takes over, but as they say… “hoping and praying was never a winning trading strategy”. And of course, the trader sits there like a rabbit in the headlights, not knowing what to do.
The problem is compounded when the trader starts adding to losing positions (Martingaling) convinced that he/she is getting a better price.
Bad trades are perfectly natural and part of the business. However a bad trade can become a huge problem when a trader starts adding to losing positions (Martingaling) unwilling to accept the loss and convinced that he/she is getting a better price. There is an exception where making multiple entries are acceptable, but only when it is done in a controlled manner and is an intrinsic part of the trading strategy.
Who is to blame?
When you last had a bad trading day, who’s fault was it? The market? your broker? maybe it was your trading platform or family distractions.
It’s easy to focus on an external source to account for our poor performance, but the bottom line is that we are responsible for our trading results. After the market closes, did you analyse all the trades you took? What could you do differently next time? How were you feeling before, during and after the trade? Have you backtested your setups to the n’th degree? A process of self evaluation and self feedback is key to be able to improve one’s trading performance. You have to be, in effect, your own psychotherapist.
Trading can bring out the gambling habits in all of us. If you’ve had a bad day, the temptation is very strong to make the money back immediately. This will inevitably result in revenge trading and you will take one bad trade after another. It can also create longer term problems by ingraining bad habits in our psyche. Our brain’s neural pathways rewire themselves the more we repeat an action – whether good or bad. The best thing you can do after a losing trade is take some time out and come back with a better state of mind.
It’s easy to focus on an external source to account for our poor performance, but the bottom line is that we are responsible for our trading results.
Another problem that will greatly affect trading performance is the need to make money. If you are trading to pay the bills without another income stream, this puts huge pressure on you to perform. It is almost impossible to act rationally in the markets with money pressures. My advice is to ensure that you have multiple income streams before attempting to trade for a living. This could be from property, investments, consulting in your specialist business field or online digital businesses.
Of course, none of this advice is any good if you don’t have a strategy with an edge. You can read as many psychology books and do all the visualisation you want, but if your strategy doesn’t have a proven edge then none of this is going to help you! Find a strategy that has a proven edge (Big hint: you just might be in the right place on this blog!). Make sure your strategy’s win rate and risk/reward ratio provide a positive expectancy, and prove to yourself the strategy works – don’t expect anyone to hand you the path to riches on a plate.
A word about Twitter and other social media… just like drinking and driving, social media and trading do not mix! I don’t look at Twitter or any other social media when I am trading as I don’t want to be influenced by other people’s opinions. Even opinions from very credible people out there can have a negative effect on your trading. For a start, the time horizon they are trading may be different, their profit and loss objectives may not match yours and even the very best traders are often wrong.
With that said, trading in silence can be just as bad for some people and because of this I#’ll sometimes listen to a news service (squawk). It’s provides a bit of background noise and alerts me to upcoming news or unexpected events that may move the market. The trick is to tune out the irrelevant information and hear the important things – this comes with experience.
Mastering your own trading psychology really is the difference between succeeding or failing in this business. The best trading psychology book I have ever read is High Performance Trading by Steve Ward. I still have a paper copy on on my desk to this day as the advice contained within was literally the turning point of my trading career.
This book goes into performance psychology, cognitive behaviour and developing a winning mindset.
Steve has coached elite level performers including Olympic athletes, sports teams and financial institutions, and it’s very apparent from reading this book that he is an expert on this subject.
This book is a must read!
Whilst not as good as the former, I’m still going to recommend the classic book Trading In The Zone by Mark Douglas.
In this, Mark Douglas’s third book, he uncovers the reasons for lack of consistency and helps traders overcome those emotions and mental habits that cost us money.
He explains how to look beyond the randomness of individual events, think in terms of risk and probabilities and adopt the core beliefs necessary for a winner’s mindset.
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