Many books written on the psychology of a successful trader come up with a common theme: Traders tend to lose position while waiting for trend trends to change, often to the point of deletion.
Successful traders adhere strictly to trading systems that are proven to work over time. They do not accept loss as a personal confession of failure, but as an inevitable feature of business.
This is one of the exploration themes Dola: The irresistible pull of irrational behavior, By Ari and Rom Brafman. Professional pilots, like professional traders, have a tendency to abandon years or even decades of training in times of stress. “A growing body of research reveals that our behavior and decision-making are influenced by this type of psychological undercurrent array and that they are far more powerful and pervasive than most of us realize,” according to Braffman.
“We feel the pain associated with loss much more clearly than the joy of the experience of gain.”
About 100 years ago, successful businessman Jesse Livermore wrote about his experience in a book.Stock operator reminiscences, Written in 1923.
“I sometimes think that speculation must be an unnatural business, because I see that the average speculator has set himself up against his own nature. Makes a choice or that he defends himself especially against other ventures where they are not nearly as dangerous as when he is trading in stocks or commodities. “
Livermore adds, fear keeps you from making as much money as you should. When the market goes your way, you fear that your profits will be taken away the next day. When the market goes against you, you hold on to the hope that it will be the opposite.
The psychology of successful traders has been extensively explored by online broking firm QuickTrade. CEO Hardas van Plattsen said: “We have spent a lot of time looking at the habits and routines of successful traders and comparing them to those who have lost in trading and it is quite interesting.
“Successful businessmen consider their capital as a vital and valuable asset, not wasted. They’re not going to go all in one trade.
“They will wait days, often weeks, for the right trade set-up, then commit a small percentage of their capital. If the trade goes against them, many of them will add to their position at a lower price, if they stay for a long time, making sure that their market reading is correct and the trade will pay off in the end. If it continues to decline, they will exit their pre-determined stop-loss level. “
This is similar to what you described in Livermore.Memoirs of a stock operator. One of his most successful strategies in the cotton business was to add small positions every time the price dropped from his initial long entry. When the trade moved towards him, he had enough control over his fear to run the trend until the market was swallowed up by greed, which is usually a sign of market top out.
Van Platsen says losing traders will question their trading strategy when the market goes against them. They will be too committed to a trade, and then double down when the market goes against them.
“In reality, they belong to a casino,” he says. “It’s like they’re betting red or black on the roulette table.”
Van Platsen provides the following pointers for traders trying to master the psychology of trading.
- Control your emotions. Legendary investor Warren Buffett commented: “Others are afraid when they are greedy, and others are greedy when they are afraid.” Think of trading as a business and your capital as a valuable asset. Capital protection comes first, so make it mandatory to exit a lost trade before losing pre-determined capital, say 5%.
- Create a trading system that works. There are many tools available on the QuickTrade website to help you improve your skills. Stick to your system and don’t start suspecting it because you have a lost trade. This is very important to avoid getting caught up in the emotions of trading.
- Don’t take tips from social media sites. Following a trend is generally accepted as a successful trading strategy, since a progressive trend is more likely to continue than a reversal. When the fear and greed indicator (shown below) is in extreme fear or extreme greed, fine tune your entries and avoid jumping into the trend.
Source: Corporate Finance Institute
- Keep a log of your business. It’s a successful move that has made Livermore one of the most successful businesses in the world He was able to go back through his records and re-evaluate his lost trades and strengthen his winning business. It helps build confidence in your system.
- Wait for the correct trade set up. Don’t fall into the trap of believing that you must make a trade because you have opened your laptop and your charting system has loaded up. Fate has been ruined due to excessive transactions. Be patient and wait for your ideal entry price to come on the market.
- Don’t panic at the market news. Many traders begin to doubt their initial assumptions about a trade as soon as they receive bad news and then suspend their position – only to see later that the market is moving towards them. You need to establish a trade with stop-loss and take-profit level and move away from computer. Don’t spend hours and days looking at a screen. Walk away from it.
Brought to you by QuickTrade.
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