It is said that trading is only 10% methodology and 90% psychology. Whilst 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 my IT career in Investment Banking, where looking away from the screen for too long meant I was not 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”. The trader is sat 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.
The problem is compounded when the trader starts adding to losing positions (Martingaling) 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 close, 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. This will inevitably result in revenge trading and taking one bad trade after another. It can also create longer term problems by ingraining bad habits in our psyche. The best thing you can do after a losing trade is take some time out and come back with a better mental state.
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.
Of course, none of this advice is any good without having a strategy with an edge. You can read as many psychology books and do all the visualisation you want, but if your strategy does not have a proven edge, then none of this is going to help. Make sure your strategy’s win rate and risk/reward ratio provide a positive expectancy.
A word about Twitter and other social media… it is very distracting! When trading, I tend to close twitter as I do not want to be influenced by other people’s opinions.However, trading in silence can be just as bad for some people, so because of this I 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.
I hope this article has helped you. One of the best trading psychology books I have ever read is High Performance Trading by Steve Ward. Two other great psychology books are Trading In The Zone by Mark Douglas and The Psychology of Trading by Brett N. Steenbarger which is a very entertaining read.