The Psychology of Trading

[accendotraders]

Lou Holtz is attributed as saying:

Ability is what you're capable of doing
Motivation determines what you do
Attitude determines how well you do it

Many people have the ability to trade and certainly have the motivation. However, most have not developed the right mind-set for trading and thus never do it really well.

They Psychology of Trading is one of the most overlook facets of trading. To many traders believe acquiring more market knowledge is what they need to be a successful trader. Yet what they often find is they enter a state of analysis paralysis because all that they have learned is in conflict with each other. Or a trader may jump from Guru to Guru or Investment Vehicle to Investment vehicle (forex, futures, options, etc.) looking for the next edge (almost like a junkie).

In the end, the ability to be a successful trader lies within. Until you recognize that and develop the right attitude for trading. Your doomed to world of frustration and possibly failure.

 

[Henryatkin]

Emotions are a double edged sword. You need them to excite you with an optimism to take a trade with an expectation of winning or making a profit. When your trade moves into losing territory negative emotions start to build up to varying degrees and cast doubt on your ability to trade sucessfully. Those doubts can be overcome by knowing in advance that your trading system or history will give you a certain risk:reward ratio. In other words you don't start the trade with an expectation of a win but with the expectation of a probability that it will win. So if you are using a mechanical system with a win: lose ratio of 70%, you enter each trade accepting that one trade in every four will lose. Every losing trade is just part of the overall plan. Every losing trade is just a part of the average that makes up for an overall winning strategy. You can't trade without losing some trades. Key to this is knowing in advance what is likey to happen. You need to have statistics on your trading (assuming you already have a strategy and discipline). You need to know from records of actual trades or paper trades what is your risk:reward(trades), risk:reward(points), average points won per winning trade, average points lost per losing trade, number of winning days : losing days, biggest winning trade, biggist losing trade. With this information you are left in no doubt that you enter each trade with an expectation that it may lose. If you do lose it is simply a part of the bigger picture - no big deal. I update my records at the end of each trading day and print them off. I also know that I personally get emotionally upset if I hit more than three consecutive losing trades, so I have an emotional stoploss of three losing trades and I pack up for the day. The good news is when this happens I make up my daily records and realise the three losses were just a blip on my long term averages.