• 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
    1. the fear of loss and
    2. 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