Trading Psychology

Many traders are aware that trading psychology is the most crucial piece of the puzzle in learning how to become a profitable trader. However, most traders avoid taking the steps that are necessary to correct or improve their response to market behavior and end up paying a hefty price in the end.

There are some specific steps you can take to improve your reaction to market action and strengthen your trading psychology.

When people first start out trading they have nothing with which to compare the markets. Since they have never experienced markets they can't compare or contrast it with anything else. Once someone begins trading and experiences losses the mind begins to record these experiences and begins to associate future trading experiences with what happened in the past.

Since most people start out losing money in the markets and don't achieve success with their first trade, the mind begins to associate the financial market with negative emotions. This causes variety of reactions in most people ranging from headaches to severe panic attacks.

Moreover, these thoughts could occur on an unconscious level and you may not even realize that this is happening till someone points it out to you or you are able to make the connection yourself. Unfortunately, it can take years to make that connection and most of the time it's too late. The negative can cause severe impairment in your judgment and your trading abilities.

I know one trader who became so nervous at the thought of trading that he kept opening and closing accounts at different brokerage firms just to avoid trading. He would find faults with every brokerage house with which he opened an account, just so he could avoid trading. He didn't realize why he was behaving this way till he got over his fear and was able to analyze his behavior in retrospect.

I compare this behavior to someone who had a traumatic experience in the past, and avoids behavior that consciously or subconsciously reminds them of the trauma that was suffered.

I've dealt with dozens of traders who were experiencing fear of the markets on a subconscious level. The best way to deal with this issue is head on. You have to reprogram your mind to see the market objectively instead of thinking the market is out to get you or jeopardize you somehow. In reality the market is completely neutral and doesn't care what you do or how you react. There are no hidden motives or agendas against you personally.

The way to get over your negativity towards the market is by decreasing your position size to a few shares or a mini contract if you trade futures or currency contracts. Little by little as you begin to trade without much risk your mind will begin to reprogram and begin to respond to the markets in a positive way.

I spoke to some trader psychologists about this topic and they explained to me that losing money can be traumatic for some people and these experiences are similar to someone who is suffering from Post-Traumatic Stress Disorder. The only way to deal with this type of issue is head on.

Exposure therapy works with traumatized war veterans and people who experienced terrible events in their life. For some people losing money can be as traumatizing as suffering from a physical injury and exposure therapy can help bring everything back in line.

The second major trading psychology issue I frequently notice is based on simple human nature principles. People are naturally wired to behave a certain way from the time they are born. People are used to being rewarded when they do things correctly and schools reinforce this behavior by giving grades that correspond to how often you are correct. Our society conditions people so that when they get the right answer they know they are doing something right and when they get the wrong answer they are conditioned to believe that they are doing something wrong.

This basic human behavior that we begin learning from a very young age works very well for adjusting people to live in society and become productive. This same behavior is one of the leading reasons why beginners cut their winners quickly and ride out their losers.

The mind believes that by holding on to a losing position there is a chance that the position could come back. If the position comes back, then the traders obviously made the correct decision and therefore he is a good trader. Conversely, when traders are in a winning position they quickly take profits so that they can feel like they made the correct decision.

You notice that in both situations the underlying concern is being correct. Unfortunately, trading has nothing to do with being correct. Most professional traders are correct less than 50% of the time. Profitable trading is based on risking winners so that they become bigger and liquidating losers quickly so that they don't become bigger. Being right is the last thing professional traders worry about.

I know many traders who take dozens of small losers in a row and come out ahead at the end because their winners are 20 times the size of their losers. Being right and making money are not related when it comes to trading as they are in most other things in life.

These two issues psychological issues account for 90 percent of all the trading psychology issues that exist today. The first step is realizing that you suffer from one or both of these issues and then taking the right approach to resolving these issues. I have seen traders go from big losers to consistently positive winners after resolving these 2 psychological barriers and with time so can you.