We’re going to take a dive into the psychology of trading. There are countless articles, blogs and forums from all sectors of the industry. Some written by traders, some not.
Can You Hear Me Now?
Reading, and learning about trading psychology can be a bit dry, and I don’t disagree. Our goal is to communicate this information, so it can be understood, and addressed on a personal level. Considering that trading psychology IS the most important pillar of the three (trading psychology, money management, technical analysis) in your trader’s toolbox, it warrants a closer, more serious look. Never disregard your state of mind – it can make all the difference in your success.
From Here to There
We’ll cover the positive and negative range of emotions which you will encounter as a trader. A future psychological trading blog will cover other concepts that tend to keep traders from finding the success they seek. We’ll also keep it short and to the point. This blog is a bit longer than others, but given the breadth of topics discussed, our effort to gather it into one place only serves to provide you with helpful information. After all, nobody wants to read a long, boring blog.
Negative Emotions – Trade Killers
This is the biggest profit killer. It usually rears its ugly head when you’re in a winning trade. You think, I’ll ride this to the moon, and you completely disregard your own trading rules. It’s fine to want the maximum out of a trade, but once you deviate from your system’s rules and conditions, you’ve now created an allowable condition that WILL come back to bite you, hard.
Greed typically leads to fear. Many times, a trader fails to take money off the table and wait so long that their trade begins to retrace. The fear of losing those profits can be so overwhelming that you suffer a type of paralysis, where you actually don’t know where or when to close your trade…so you wait, and watch. Never, ever, let a winning trade become a loser. Another great example is one who gets into a trade, it retraces, and the trader immediately closes the position, only to reverse their position…then it too changes direction and the traders closes that one out for yet another loss. The biggest sin is to move your stop loss. You think, “If I don’t close the trade, it isn’t a loss…maybe it will turn around.” See the pattern here?
Fear generally leads to anger. “Why didn’t I close my trade?” “Why is the market doing this to me?” Your failure to close a trade according to your system can create this emotion, causing further irrational behavior such as doubling trade size, taking irresponsible risks, and even going “all in” to try and get back to zero.
Without patience, trading can become a losing battle, rather quickly. Rushing into a trade with the expectation that a signal is “just around the corner” so you try to grab a few extra pips at a better price, also known as a “discount”, can get you into trades where you begin to cheat. And, once that starts, you’re going to find yourself in more trouble than you expect. Just relax, let the trade come to you. The market is going to do what it does. Trust your system to do its thing, then stay out of the way.
After a series of losing trades, also known as a losing streak due to the lack of whatever you did/didn’t do, can give you the sense that nothing will work and send you spiraling down into the abyss. It’s okay. It’s natural. Take a break from it. Nothing works better than putting it all aside for a few days. Let your mind and emotional state recover. You’d be surprised at how powerful coming back to the table with a fresh sense of purpose can be.
Usually an aftereffect to many of the negative attributes discussed. It is probably one of the least helpful emotions. It serves no beneficial purpose and only results in self-pity, certainly no place for an ambitious trader finding their way, right? Leave whining to children.
Many consider the feeling of euphoria, or joy, as a positive emotion. Closing a trade in profit is a strong motivational force which gives rise to an overwhelming sense of righteousness. In truth, euphoria is an emotional state of delusion, leading to clouded judgement, creating a belief that their senses are at peak sensitivity and maximum operational capacity.
It can also result in a sense of elevated happiness, joy and elation, and that all things are possible, blurring the surrounding reality. It can also develop into an addictive frame of mind where you want to repeat actions to recreate, and repeat that euphoric state because it feels so good. Of course, it’s a very pleasant mindset, but in reality, it creates an illusion, which can ultimately lead to a doomed trading environment.
FOMO – FEAR OF MISSING OUT
The fear of missing anything where you had a chance to benefit can create a dreadful state of mind. All of your training, common sense and efforts quickly become clouded and ignored. Right up there with fear and greed, it happens to of us at some point. An example: A perfect signal appears on the chart, but it was a few days ago. You wrestle with the decision to open a position and hope that it continues in your direction, or just let it go. The problem with this should be obvious. Let’s say you get in, and it turns against you. Now what? Take the loss? Move your stops? Change your rules? See how it just goes from bad to worse? Maybe it does go your way.
Consider yourself fortunate…but remember, deviating from your rules negates having rules at all. The solution is simple, follow your rules and let it go. The market will continually gift you with opportunities. If you do succumb to FOMO, you might as well throw darts with your eyes closed to make your trading decisions.
Worse, is a FOMO trade that works out, and you profit. You begin to feel indestructable, taking more risks and deviating from your system…until you blow up your account.
On the heels of FOMO, lives invincibility, false bravado, over-confidence. An underlying, but powerful emotion, confidence can take on a double identity. Ever heard of the phrase; “Fortune favors the bold”? A weak or timid approach to trading won’t get you anywhere, but one who disregards sensibility in favor of courage, fearlessness and unmitigated bravery is also heading into troubled times.
Of course, you must take chances to find success in anything, but ignoring your educational insight will create more problems down the road than you can imagine.
Positive Emotions – Stay in the Game
Not all emotions are negative. Trading can also give rise to those which make it pleasurable, gratifying and enjoyable.
An admirable characteristic, this is what keeps you in the game. Even after suffering losses, you are determined to press on and figure out what can be tweaked to create a better system. Returning to basics and examining your system is the best thing you can do if things aren’t working out. Setbacks come with trading, and they are only temporary. Those who persist, can ultimately find success…and how sweet it is!
A close cousin to persistence, hope can provide you the extra lift to stay positive when things look bleak. It feeds your desire to find success and creates an environment of expectation for a positive outcome, which you need when developing and implementing your system. Hope is a powerful emotion. It has kept people alive in the most dire of conditions. Without hope, even the minuscule achievements have no effect on you.
Eagerly approaching an endeavor is akin to a trend with strong momentum. It can carry you through negative setbacks such as booking a loss, missing an opportunity, or not realizing the profit you’re anticipating on a position. You pause for a moment, reflect on what happened, review what could have been done differently, learn from it, and move on a stronger trader.
Especially as a new trader, developing a spark for the craft will serve you in the future as you master your emotions. Ultimately, trading should become a series of decisions, without emotion. However, by not having enthusiasm in the beginning, negative emotions may dissuade you from finding success.
There have been many books written on trading psychology over the decades. Some are excellent, some are okay, some dated, and many are trash. Below are three picks which definitely deserve a place in your trader’s library. Do yourself a favor. Like a trading journal (you have one, right?), keep notes of points which are important to you.
Trading in the Zone by Mark Douglas
This is probably one of, if not the best books on trading psychology out there. Advanced warning. It’s not an easy read. I had to read it with a highlighter and make notes in the margins, but it is exceptionally enlightening and to the point. I have referred back to this book on many occasions when my own psychological needs required it. Click HERE to be taken to Amazon, where you can purchase it.
Discipline Equals Freedom Field Manual, by, Jocko Willink
Our second recommended reading takes a different direction. An inspiring read; this book covers all aspects of discipline, including strategies and tactics for conquering weakness, procrastination, and fear. It has nothing to do with trading, but the raw emotional components he discusses will nevertheless result in your taking personal stock of who you are and what you can do to change your shortcomings. This book can be purchased HERE.
No Nonsense Forex Trading Psychology by Patrick Victor
The third and final suggested reading is written by none other than VP himself, the architect of the No Nonsense Forex methodology. Written for the NNFX trader, his style of writing draws the reader in and examines what goes on in a trader’s head, and how to deal with it. Definitely a must-read. You can take it with you and read on the go. It can be bought HERE.
As mentioned at the beginning, we only discussed the positive and negative emotions associated with trading. The next psychological blog will cover emotional “systems” that we’ve all been subjected to, yours truly included. As we expand our coverage on trading psychology, we will address each of the emotions more deeply and how you can combat their effects. Naturally, getting on top of your emotional state is an ongoing process and should never be ignored. We’ll do our best to keep the message clear, concise and “doable” so you can not only become the trader you want to be, but enjoy what you do at the same time.
More to Come
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