- Mental Approach
- Human Mind
- Fear and Greed
- The need to be Right
- Creating a Plan
Trader Psychology
- Trading psychology and the correct mental approach are key components of successful trading
- Trader psychology is the control of the trader’s fear
- Trader psychology is the control of the trader’s greed
- In general, it’s the discipline to follow your method and stick to your money management
The Human Mind
The Human Mind
- Our subconscious mind is the part of the brain that stores the majority of our thoughts, feelings, and habits
- “Bad” habits are formed through repetition and are printed in the subconscious mind
- These thoughts occur on a subconscious level, where the trader does not even realize this is happening
Trading Habits
Fear & Greed – The Problem
- Fear in trading primarily takes one of two forms
- the fear of loss and
- the fear of missing out
- The fear of losing can make someone hesitate to trade or to hang on to losing trades on the prospects of a loss
- The fear of missing out compels people to enter the market before they get the right signal from their system
- Greed is the motivation for over-confidence – Dreams of “making it big very fast” can cloud a trader’s mind
- Fear and greed are causing traders not to follow their method and money management
Fear & Greed – The Reason
- Fear is a chain reaction in the brain that starts with a stressful stimulus – the fight-or-flight response
- The process of creating fear takes place in the subconscious brain and is entirely unconscious
- They would play a tone and at the same time apply a shock to the metal floor of the rats’ cage – classical conditioning
- Then began the process of fear-extinction training, in which they made the sound but did not apply the shock
- After hearing the sound very often without the shock,the rats stopped fearing the noise
Fear & Greed - The Solution
STOP TRADING FOR A DAY
- Learn about the thing you fear: Loss? missing out? ridicule? Uncertainty is a big component of fear
TRADE SMALLER AMOUNTS
- Practice. If there’s something you’re afraid to try because it seems scary or difficult, start small and work in steps
FIND A MENTOR
- Find someone who is not afraid – find someone who is not afraid of that thing and spend time with that person
ADMIT IT
- Talk about it – sharing your fear out loud can make it seem much less daunting – admit you are afraid or greedy
ONE DAY AT A TIME
- Stop looking at the grand scheme – think only about each successive step
Not Accepting Losses – The Problem
- The mind is conditioned to strive to be correct in any way it can – being wrong is considered extremely bad
- E.g. a trader holding onto a losing position hoping that the market turns around so he doesn’t realize his loss
- If the market turns in the trader’s direction, then the trader obviously made the right decision
- Alternatively, when a position starts running in profit, they are fast to take their profits and close the position
- By closing the position in profit, they can feel they have made the correct decision
Not Accepting Losses – The Reason
- From our education system, we become accustomed to the habit of being rewarded when we do things correctly
- People become conditioned to know that they are doing something right when they get the right answer
- This conditioning creates the need to be always right and an inability to accept loss, as loss means you are wrong
- In trading the reward system of the market goes against this need to be always right causing traders to fail
- Loss generates powerful emotions such as fear, uncertainty, apprehension, and self-doubt
Accepting Losses – The Solution
- Successful trading is not dependent on being accurate – profitable trading is based on balancing risk and reward
- It is about allowing profits to run and closing losers early, not allowing them to get bigger
- Being right and being profitable are two different things when it comes to trading
- The first step in handling them is identifying the psychological barriers, and then changing our habits
- We have seen many traders go from big losses and stressful days to steady profits with consistency
- You are in a market where you can do everything right as per your method and still you can lose
- Take a reality check. Losing is part of the game. The possibility to lose is always there – traders do lose
- You can learn how to accept losses by re-defining the meaning of loss. Don’t equate it with failure but learning
- Consider losing as positive in the sense that it will improve your next trades. Find something new
- If you prefer consider losses as business expenses – like a restaurant throws away unsold food but is still profitable
No Trading plan – The Problem
- Everyone needs a trading plan and is a MUST for all traders regardless of their trading experience
- Having a trading plan before starting to trade is much like having a map before starting to travel
- If you are not doing well, it is because there is a problem with your trading plan or worse, you don’t have one
- If you are trading without a plan, you cannot know what you are doing wrong and how to fix it
- A trading plan outlines instructions of how to react under different possible scenarios
No Trading plan – The Reason
- There is only one rational reason to trade — to make money
- Money attracts traders to the markets, but in the excitement of a new game one can lose sight of the goal
- Trading without a plan takes the responsibility away from the trader and leaves it to chance
- Trading without a plan and with unlimited variables, it’s easy to take credit for trades that turn out to our liking
- it’s also very easy to avoid taking responsibility for the trades that didn’t turn out the way we wanted
No Trading plan – The Solution
- The solution is to have a trading plan and follow it
- Entry Signals : These are the conditions that need to be met in order to enter into a trade
- Exit Signals: These are the reasons for closing a trade, either because a target was reached or a stop loss hit
- Money Management : Is the amount to risk on every trade
- Using a trading plan is what makes all the difference as it makes enforcing discipline so much easier
