Despite their knowledge of trading, the vast majority of traders experience fear on a level that compromises their capacity to trade effectively. This problem eventually comes to a boiling point somewhere in the evolution of a trader. At this turning point they either leave trading, continue to suffer losses, or begin to take a closer look at themselves. They recognize that the Holy Grail is not “out there” in their system or methodology. The trouble lies within them. And the culprit is fear. The solution also lies within them.
So much energy is then focused on mastering fear in trading (rightfully so) that another question is never raised. What then? The battle has never “been out there” in the markets. When you learn how to manage...
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Articles
I have previously alluded to the importance of trading psychology by discussing two types of trading errors: Decision Making Error and Data Error. Some readers have indicated their desire to learn more about it. In this article, I will dive deeper into the topic of option trading and trading psychology.
Trading options and trading psychology are closely interrelated. The goal of this article is to show some of those close connections between the two. Let us start by describing what option trading really is. One of the easiest ways to describe option trading is by simply comparing it to equity trading. Most people are more familiar with equity trading so I will use that as a bench mark. Equity trading involves physically owning a...
As a trader you must have three pieces working in synch. Your equipment, your trading tools, and your mind. The Art of War by Sun Tzu is a book that has been applied to every facet of human experience. While originally meant to be a book that taught war strategies the lessons it imparts can and will change your life.
Students of the market are constantly battling between the emotions of fear and greed. The Art of War can help you cut a path between these two emotions and lead you to a mental place that will constantly help you put your best foot forward. In this series I will address various poor trading habits by excerpting and interpreting various passages. While my interpretations are not meant to be definitive by any stretch of the...
When you begin trading, the one thing you want most is success. You are trying something new. Most traders first starting out feel unsure, a bit uneasy. You're taking a chance with your hard-earned money; there is big risk involved. I don't know of any beginning trader who plans on failing, yet the possibility is there, and it is beyond your imagination to consider what you'll do next in the event you fail. It has been our experience here at Trading Educators, that many beginning traders never even consider failure as a possible outcome of their attempt at trading. In fact, it is often just the opposite. Apart from being a bit apprehensive, most feel impervious to failure, if they think of it at all. I have never met a beginner who had...
How focusing on the prize can leave you feeling frustrated
My wife and I can't help ourselves. When the Olympics are on, summer or winter, we spend an inordinate amount of time in front of the television, often watching the games late into the night. I'm not sure if we watch with the same motivation. My wife loves to comment on the scenery, the clothing and the colors. I watch with a sense of awe and inspiration at the athletes' level of skill and commitment. Years and years of training and preparation oftentimes boil down to a brief moment of competition; a series of dives, a downhill run, a few laps around the track. Gold, silver, bronze, or a conciliatory pat on the back all hang in the balance.
A common sight at the Olympics...
Integrating Left Brain and Right Brain Thinking for Balanced Trading
Trading seems so easy on the surface. Traders, while learning a methodology, are told (and believe), "Just follow the rules of your methodology and trading plan and you are on your way to achieving your dreams. Oh, and by the way, keep your emotions in check."
This little add-on after-thought, "just keep your emotions in check", comes to haunt nearly every trader until they learn to master and learn from their emotions. Curiously the highly left brained orientation (logical problem solving skill sets) of trader educational systems blind both educators and traders to the influence that our right brain (our emotional brain) has over a trader's capacity to think...
Learning to trade is much more than just learning a strategy and applying it. In my classes I try to emphasize how important the psychological side of trading is to your trading success. This is why we could give 10 traders a completely mechanical trading system with very specific rules, and at the end of the month, there will most likely be 10 different results. Even though everybody was given the exact same rules to follow, human nature will cause people to override the rules because of the different psychological make-ups we all have.
Here are some of the things that could impact the results of this study:
Some traders will not accept losses and move their stops or worse, not have one in the market
Some traders will place their...
I recently went to watch my 13 year old nephew, Joey, play in a baseball tournament. Every parent / grandparent / uncle is quick to brag about their son / grandson / nephew's athletic ability. I am no different. Joey is an exceptional baseball player. He is exceptional in that he is a switch hitter with power from both sides of the plate. Besides that, he has an amazing ability to draw walks because is so patient at bat. He has roughly 150 at bats with 40 walks and an on base percentage of 600. When I asked him how he was able to be so patient and draw so many walks, he said with a profound simplicity, "I don't swing at crap. It's not that hard." (I could write an entire article about that as it pertains trading).
Joey's...
Trading Psychology - Learn from Tennis Champions to Develop Mental Toughness
Occasionally, we get to 'look' inside the mind of a great performer. This year's programming for the Wimbledon Tennis Championships offered such an opportunity. What many consider the greatest tie-break in tennis history - the completion of the fourth set of the 1980 Wimbledon Men's Final between John McEnroe and Bjorn Borg - was replayed point-by-point with both McEnroe and Borg providing commentary. We got to see and hear what was going on in the minds of two great tennis champions.
Momentum Shift
McEnroe won the tie-break, 18-16, bringing the match to dead-even with one set left to play. Although the match was even, momentum had clearly shifted to...
Debra looked at the candle on the daily chart. It was yesterday's candle and it was red just like several before it; and it looked good. You see, it represented a pull-back from a high several days ago on the YM E-mini. The high was the latest in several higher highs and higher lows that stretched back a few months representing a strong upward trend. What looked attractive to her was the fact that the price action had bounced off a 10-period and a 15-period exponential moving average several times, and as well the highs pulled back off significant resistance levels several times. On this day, the price action's pull-back was hitting a significant support level, which also happened to be coinciding with an upward cross-over of the two...
In my top 3 books about trading rests Trading in the Zone by Mark Douglas. I found this book to be the most helpful trading book in my earlier days of learning to trade. I find it interesting that one of my favorite books on trading doesn't have 1 chart, indicator, setup, or any full methodology within its pages. It is almost entirely about individual trader psychology, and I have learned that this is the crux of the trader's issue. The traders mind, both friend and enemy, both roadblock and engine.
Mark Douglas, in this book, was the first to introduce me to trading in samples. I had heard about it in passing, but never paid any real attention to it as it seemed to me an obscure way to deal with trader psychology. Why not just focus...
FALLING IN LOVE WITH A TRADE
How Loss Aversion and Regret Impact Trading Performance
In his book, Blink, Malcome Gladwell describes an event where the experts from the J. Paul Getty Museum in California encouraged the museum's purchase of a marble statue purported to be from the sixth century B.C. The statue was an amazingly rare piece with an estimated value of just under $10 million dollars. There was only one problem. The experts from the Getty museum failed to detect what outside experts had suspected and then later confirmed; the statue was a fake. So why were the Getty museum's experts not able to confirm what outside experts suspected at first glance? Because the Getty museum's curators desperately wanted the statue to be...
In college, I was on the track team, and I distinctly remember a very powerful experience during a conference track meet. It was the end of a long day, the last call for the mile relay, with a slight chill in the spring air and overcast skies. In the stands, a radio played a very loud rendition of "Ain't No Stoppin' Us Now." We were neck and neck for winning the conference meet with a rival. You can imagine how motivated we were to bring our "A" game for the win.
The mile relay was the final meet event and our last chance. My teammate, Steve, and I were making our way to the starting line when the coach told us that Jim, our best quarter miler, was sick and the order of the relay would be changed. Steve, a strong competitor, was picked...
My wife and I are Olympic junkies. There are only a couple of television shows that we will watch together during the week. But when the Olympics are on, there is a lot of family TV time.
Having played hockey in my youth, I was of course glued to the TV for the men's USA vs. Canada gold medal hockey game.
The game was as spectacular as we all hoped it would be; clean checking, great play-making, fast action. What more could you ask for? Well, I suppose I could have asked for the US to score in overtime to win the game. But Canada did seem to out-play the US just a bit, so I was not terribly surprised at the outcome. Nor was I terribly surprised at the look of despondency on the US players? faces as they received their silver medals...
The Australian Open Tennis Championship is now over and there is a lot we as traders can learn about trading psychology from the men's final between Roger Federer and Andy Murray.
Federer, arguably the best player to ever have swung a tennis racquet, beat Andy Murray, the British hopeful, in three straight sets. Federer has won more grand slam titles (sixteen in total) than any other male player in the history of the sport. Despite this incredible record, Andy Murray has played Federer better than any other player on the tour. In fact, Murray has won more matches against Federer than he has lost (6-5). So, what might have contributed to this loss and what lesson can we, as traders, learn?
A Lack of Drive?
It certainly wasn't a lack...
In the 1970s, I grew up with the Bradys. Bobby, Cindy, Marsha, Jan, Greg, Peter, they were all my friends. Not only did we all spend 30 minutes together every day, but I'm more than a little embarrassed to admit that we shared quite a bit of the same fashions.
It's not difficult for me to recall an entire Brady Bunch story line after just a few seconds into a rerun. And I have to admit, I still get hooked whenever I see the Brady kids perform their songs with those unmistakable dance moves.
In my top 10 favorites is the episode where Peter Brady's voice begins to crackle under the pressures of teenage adolescence. Because of this, the Brady children wrestle with dropping Peter from their upcoming singing performance. The family is in...
Back when John Belushi and Dan Aykroyd were regulars on Saturday Night Live (SNL), a younger and wilder Steve Martin frequently joined that outrageous cast during guest-appearances. A relatively new face in comedy, Steve Martin fitted in perfectly. I remember some absolutely hilarious SNL moments from those days.
One particular skit that Steve Martin did stands out in my mind. It was called, "How to be a millionaire and not pay taxes." Standing all alone on stage wearing his trademark white suit and black tie, Steve Martin looked into the camera and carried on like a cheesy investment guru trying to rustle up clients with a ploy that went something like this:
"Yes, you too can be a millionaire and not pay taxes. How, you ask...
Many traders seem to know that a trading journal can be important to their success, but when asked why this is so, they draw a blank. Many traders do not understand how a trading journal can be a vital tool for self-development. This may be one of the reasons why many traders don't bother with one. Failure to keep a trading journal, however, is a disservice to the trader and may be an important factor in why traders continue to struggle with trading.
The Compounding Effect of Keeping a Daily Trading Journal
The trading journal is one of the best ways to improve your trading every day. If you were able to improve just a little each day, can you imagine how skilled you would be after, say, 90 days? What about a year? The effects...
A Christian Traders' Dilemma
I recently heard a story about a Texas hold'em poker player trying to reconcile the apparent contradiction between his Christian faith, which opposes gambling, and his desire to be a professional card player. With a bit of humility, he explained, When I sit down at that table, Jesus tells me, 'Son, you're on your own'.
As a Christian, my role as a steward of God's resources gives me pause about gambling. And as a trading coach, I continue to receive phone calls and emails from suffering traders who equate their trading with gambling. They ask me, Bill, do you think it's because God is against trading that I'm continually losing money? Does the Bible forbid trading?
Generally speaking, gambling is the...
Three Trading Psychology Tips to Better Handle Losses
Recently, I was asked by a trader if there was a medication available to help to keep the trader's mood up after a loss. This trader takes losses hard; he was looking for a way to not feel so bad when the inevitable losses occurred.
This is not the first time I've been asked this. As both a psychologist and a trader, I hear it more than others might. Often, the trader says it as a joke, Hey, if only there was a pill ". Yeah, if only there was a pill. I know that behind the supposed levity there is a serious request there, How can I feel good in the face of a loss" or, maybe more to the point, how can I not feel so terrible when I lose money in trading?
Medication is not a...
Trading psychology is a subject most books and so-called professionals keep separate from the mechanics and strategies of trading and investing. A reality largely misunderstood is that the underlying mechanics and strategies within trading and investing are a direct function of your psychological belief system. At any given time in the stock market, there are buy and sell invitations sent out in the form of news events, technical indicators, earnings reports, company announcements, brokerage upgrades and downgrades, and much more. These invitations are then received by the belief systems of tens of millions of traders and investors worldwide. What separates the consistently profitable market player from everyone else is a psychological...
It is time to revisit an ever important topic. I have been in the trading and trading education world for many years. This has allowed me to watch traders grow at different levels and reach different levels of success and failure. I have often wondered and speculated on the difference between those who achieve success and those who fail. For me, the answer lies in the proper definition of success when it comes to trading, or any occupation for that matter.
Let me explain a scenario that I have experienced hundreds of times with individuals going through trading education. There was a gentleman back in 1999 whom I met at a trading seminar. He walked up to me before it started and introduced himself. He had been reading my daily trading...
I was driving in my car the other night with my twin daughters when the conversation somehow turned to what they wanted to do when they grow up.
Naturally, being only nine years old, they had many ideas. There were those that I was very happy with - an astronomer, a veterinarian, a professional soccer player, or a guitarist in a rock band. And there were some suggestions that I just didn't like at all. Not that it's my decision! I'll naturally support them in whichever path they chose for their life; however let's just say a nine year old should not know what a Forensic Scientist does.
I asked if either were interested in trading, to which Caitlin replied, "But isn't trading just guessing?"
That was unexpected! I was a little taken...
At the core of any significant economic, political, scientific, social, medical, psychological or cultural theory lies a quest to understand and quantify the forces of change, action, or energy. The theories that attempt to quantify "force" that have stood the test of time, date back centuries and are extremely simple. In 1686, noted physicist Isaac Newton suggested in his laws of motion that an object will remain in motion until it is met with an equal or greater force. Noted economist Adam Smith suggested hundreds of years ago that when supply exceeds demand at a price level in a given market, price will decline. Smith and Newton didn't create or invent the laws and principles for which they are famous. Supply, demand, motion, and the...
The following situation happens quite often to many traders. Look it over and see if it has been happening to you:
You have been faithfully following your trading plan and the rules you've set for trading. By following them you are now in a trade that doesn't look so good. At the same time, by following your trading plan, you see that you've missed a beautiful move in a different market, one that could have made you a lot of money.
You are in a bad trade and you've missed out on a great trade. You become disgruntled. You think to yourself that your trading plan must not be so great. You think there must be a better methodology that you should use that will prevent this from happening. You think to yourself, "Yes! That's it, I'll...
While traders constantly search for new and improved methods on their quest for the "holy grail" trading system, they often overlook the most significant element that dictates their success. This inherent element is pacing. Proper pacing means you flow with the market. When the market is running fast out of the gate, so should you. When the market slows to a crawl, so should you.
In a nutshell, have you ever made nice profits in the first hour of the trading day only to give it all back gradually throughout the day? Uh huh.
Before I delve too far into this, let's first start off understanding why pacing is overlooked. Traders tend to believe that a method should be working in all market conditions at all times. When the method doesn't...
Three losses in a row are tough. That's about the most consecutive losses that novice traders are psychologically prepared to accept before they feel compelled to take action and 'correct' the situation.
If you're anything but a total newbie, I'm sure you'll recognize the symptoms:
Frustration - Why me? I've worked so hard. Everyone else in the forum appears to be getting good results with this strategy? Nothing ever works out for me.
Anger - That strategy developer is a liar and a crook. My broker is running my stops. Someone should be held accountable for this.
Doubt - What if the strategy doesn't work? What if I can't trade? How am I going to support my family?
Fear - I can't lose more money, what will everyone say about me when...
There are an unlimited number of ways to skin a cat and trading is no different. Despite your strategy, risk tolerance or trading capital, having a plan is one of the most important components of achieving success in these treacherous markets. However, perhaps the most important characteristic of a profitable trader is the ability to adapt to ever-changing market conditions. Knowing this, it seems logical to assume that a trading plan should be established but just as rules are meant to be broken, trading plans should be flexible to accommodate altering environments and new events.
The premise of a trading plan is similar in nature to a business plan. It is a relatively detailed outline of the structure of the trade and the...
If we consider that the two key variables to achieving trading profitability are having a trading strategy with edge and a positive expectancy combined with the ability to consistently execute that strategy, then assuming a trader has the first one (and developing this is a primary concern) then it is the consistency of execution that becomes the key focus.
Trading Success Formula
Trading Strategy With Edge + Ability To Be Able To Execute It Consistently
/Positive Expectancy
In my work with traders I have seen many traders who do not have the first ingredient in place and this is the primary cause of their lack of trading success and also the emotional challenges that they have experienced. Of the traders...
One fascinating realization I have come across during my years as a private trading coach and instructor is how different female and male traders can approach, analyze and trade the markets. Without offering outrageous generalizations, it has been my experience that women possess a particularly logical mindset that can give them a substantial advantage in market speculating. Simply, the trading method I developed and use quantifies the supply/demand and human behavior relationship that ultimately determines price in any market. It is based on a very objective and mechanical set of criteria. In other words, the goal is to learn the method and then simply follow the rules. The female mind has a much easier time doing this than the male...