Oct 28, 2022 17:15
One of the most rewarding personal undertakings a person may engage in is trading, according to many. This is mostly due to how difficult and time-consuming it may sometimes be. Even yet, despite the challenges, there may be significant benefits – not simply financial ones. One of the rare occupations where one's identity and self-perception are linked to achievement. And for this reason, trading psychology is crucial.
We'll go over many areas of trading psychology and show you how adopting a positive outlook may result in more earnings throughout this post.
New traders often don't know where to begin. Most people begin by consuming whatever information they can. You may get this knowledge in the form of stock recommendations, books, seminars, trade coaches, gurus, and much more. The knowledge will then be assimilated by your own values, upbringing, and personality qualities into what you may refer to as your trading foundation.
The next step is to attempt to use your newly discovered knowledge in the market. This may be both thrilling and little terrifying. If you're fortunate, you'll put on a few transactions, and everything will go without a hitch. Money will suddenly start flowing. If you're unfortunate, you'll see why 90% of traders lose money within the first few years.
You will certainly experience a loss that will hurt you in the stomach, regardless of how you begin. This loss will be similar to the first time someone shattered your heart or the shock you felt when you learned at school that Santa Claus didn't really exist after believing in him for years.
Your trading universe will come crashing down far more quickly than it took for you to build it up, leaving you with a sensation of complete imbalance. You typically start to understand the significance of trade psychology at this time.
Get Past the Difficult Part
Any firm must analyze its success in order to spur future expansion. Trading is the same. The main issue is that you must determine whether to adjust your model and when outcomes are just market noise.
Consider this. You've just finished hours, weeks, even months of system investigation. 60% of the time, it seems that this strategy will provide you a competitive advantage over the market. It also gives you a 2-to-1 advantage in terms of the size of winners and losers in addition to this edge. By all accounts, this technology would be deemed worthy of being tested in the actual world.
Of course, because the market is unpredictable, let's imagine that just one of your first six transactions is successful. A seasoned trader will be aware that it only requires making a sufficiently big sample set of deals for things to work out. Without a certain, the novice trader or the trader who is experiencing analytical paralysis will alter this method before it has a chance to mature.
You must at some point in your development let time and chance to work in your favor. However, your initial response is to evaluate and make corrections when it's your hard-earned money at stake. Self-defense is such a natural human response. However, it is this kind of conduct that keeps us as traders in a rut and prevents us from ever reaching our full potential.
Even though it may seem trite, less is sometimes better. We're not saying you should cease "learning," per per. Learn all you can, but organize the techniques you discover into groups that suit your needs, your personality, and your timetable. This is covered in further detail in a recent essay on finding your edge.
One of the fundamental principles of getting successful is realizing that the market is random.
You may use any method to anticipate the market's next move, including Elliott Wave analysis, harmonic trading, point and figure analysis, traditional breakout predictions, etc. On occasion, the market will follow your analysis, giving you a sensation of control. However, the market will pass through your plans and important levels just as often as if they didn't exist.
The more you play this game, the more you'll come to understand that your analysis just exists in your brain. Only if the other active traders who may affect the movement of your stock are in agreement with you will the market react to your insight.
It Takes Just One Trader
With enough wealth, one trader may utterly invalidate your research. It doesn't require thousands of online transactions or a crowd of people shouting and screaming on the floor. Keep in mind that it just takes one individual anywhere on the world to determine whether the stock should rise or fall.
Where does it leave you, then? Don't assume for a moment that we're trying to stop you from undertaking technical analysis. In reality, the reverse is true. The key message is to let go of any connection to what the market may or might not do in the future. You must have faith in the market's ability and willingness to act.
Successful trading psychology and mentality are considerably simpler to adopt once you realize that everything is a game of probability with random results.
Junior traders analyze each of their profitable and unsuccessful deals in detail in an effort to get some form of knowledge that will aid them in breaking the code. In retrospect, maybe using a different moving average or limiting losses sooner might have been beneficial. All of them are beneficial for gaining an advantage, but how would they affect your trading psychology?
Have you really used the same system long enough to consider how little changes can be beneficial?
Although reviewing individual transactions is vital, examining your equity curve comes in second. This gives you a bird's-eye perspective of your trading activity. Up to that moment, if you plot your equity curve, you'll see some of the same trends in price charts.
The Circular Process
The shape of your equity curve, please. Is the trend pleasant and steady up? Or does it resemble a trip on a roller coaster?
It's likely that you're having trouble with risk management if your equity curve isn't steadily rising. Every time you have a huge victory, you take a large loss and increase your risk.
After a few healthy losses, you start to worry that you'll lose money in some other way and start trading so cautiously that you gradually eliminate whatever profits you would have made when it was appropriate to trade aggressively. You pause before you press the trigger out of fear. Your uncertainty sets in.
In other words, you become caught up in a boom-and-bust cycle until you become too terrified to act. This shouldn't be the case, of course.
In this new piece, we go into further detail about this and provide some fantastic advice for breaking the cycle of overtrading. It should be clear that the answer to this question heavily depends on your level of system confidence. Anytime your edge is available, you must take use of it, as Mark Douglas recommends in his groundbreaking book Trading in the Zone.
There are several market analyses and viewpoints available online. There are literally hundreds of websites that can forecast the future of the industry. We are educator-neutral here at Tradingsim. Since every person's system is unique, we prefer to present information that is more generic in nature. We can never predict what the market will do next.
You may follow as many gurus or systems as you want, but you should be aware that they all tell the same tale, although somewhat differently. You must learn to survive on your own in the marketplace.
Even some of the most successful gurus would caution you against "following" them into the markets.
There are times when learning, studying, and following are crucial. There is nothing wrong with choosing the ideas that appeal to you the most from all the influences you respect. But eventually, you have to come up with your own concepts, have faith in your own judgment, and have confidence in yourself.
It's definitely time to assess your existing trading strategy if you often find yourself perplexed in the markets. Consider if you're letting other market players influence your choices. Make some adjustments if the answer to that question is affirmative. Set clear objectives and adhere to your own plans. If necessary, mute certain Twitter users.
When did you last sell your investment before the stock reached your stop loss level? If so, why did you first set your stop loss order?
You could think that the stock isn't "behaving" correctly as a result. Sure enough, at some time, you make the prudent choice to exit the trade just as the market begins to soar. One of the most upsetting things that may happen in the market is what you experienced.
Your research was accurate; the market ultimately provided what you had anticipated. Nevertheless, you were unable to accept the market's irrationality and the possibility that you may lose money.
You will see market noise as a possible danger until you actually learn to accept the risk, and you will find a method to convince yourself that you need to close the transaction right away.
What sets off your winning trade exit for you? How precisely are earnings recorded?
Although this idea seems straightforward, it becomes nearly tough to implement since most traders anticipate what the market will do next. For instance, my business partner and I had long put options on the DIAs back in March 2003. We made roughly $200,000 in revenue. Up until this time, we had successfully carried out our trading strategy.
We anticipated that the Dow would reach the 6k–7k level at the time, which it did in 2009, but the bears lacked the strength to win this battle. We hung on for what we anticipated happening rather than paying attention to what the market was telling us about the correction's end.
Due to this significant error, we lost the 200k rather of winning more than 1M. Following this horrific event, we were talking about it and both of us felt that it was time to take gains. However, as neither of us had a specific trigger, we chose to wait and see what the market would do next.
Do you often find yourself waiting to see what the market does next based on your analysis? You must learn when to leave a deal with the money in hand so that you may go on to your next victim.
If you don't grab your earnings, someone else will, as the adage goes.
Recall that the market is utterly unpredictable. You must define what it means to recognize when you are mistaken. You will save a ton of time and money if you acknowledge that you won't always do it correctly.
Some people just need to consider a certain number of risk to reward units. Stick with it if you wish to use a risk/reward approach of 1/3 for a certain arrangement. You'll often hit that one danger unit. But as long as your winners achieve the anticipated 3R reward unit, everything will be OK.
It is this methodical approach to formulating your plans and possibilities that will enable you to accept failure rather than "hoping"
More significantly, you'll start to consider averages while analyzing the market. You will have an equal number of winners and losers (x%). This reality cannot be denied. If you show me a trader who must always be correct, I'll show you a negative equity curve.
This reinforces the notion that trading is a game of probability. As we previously covered, when you experience losses, you could experience trauma. You didn't adequately manage your risk or you broke your rules, which is why you're in this painful position of indecision in the first place.
The market doesn't care whether you just suffered a significant loss. When it wishes, it will give possibilities. You must have the ability to restart and choose the next deal that meets your A+ criterion in order to be successful at trading.
You never know when the next significant deal may occur. And the market often confuses the most people the most of the time. Recall this when you lick your wounds.
There is no advantage to additional stock analysis if your system delivers opportunities that fall inside your trading parameters, thus you must act on a first-in, first-out basis. Otherwise, you'll put yourself in a stressful scenario where you can't decide.
Making a check list is a smart method to reduce some of the anxiety. These might act as a reminder of your aptitude. Here is an example of a checklist we developed to aid traders who are nervous or hesitant before a trade. Create your own if you want!
You may trade in sync with the market and avoid overthinking the deal by taking advantage of every chance as it arises. This indicates that you are trading in the present and not attempting to anticipate or outwit the market's next move.
Please read the Market Wizards books if you haven't already; the first one in particular is a masterpiece. You'll note as you read these accounts of successful traders that they have generated large profits over time. Many made hundreds of millions of dollars off just a few thousand dollars. In addition to the amount of their profits, their winning streaks are so consistent that it nearly appears impossible.
Because these elite traders don't think in terms of annual objectives, their profits have no upper limit.
They follow their strategy and accept whatever the market offers. They don't try to explain the market's moves or abandon the deal too soon if this guarantees a windfall profit. They only adhere to their guidelines and let the market develop as it will.
In the same way, they wait until the system starts providing purchase signals if it isn't. Patience. You will ultimately discover the advantages you want if you are confident in the effectiveness of your approach and do not place restrictions on it. In summary, a lot of the mystery surrounding trading psychology is eliminated by having the discipline to stick to what works and eliminate the unpredictability.
Never be so arrogant as to be reluctant to acknowledge your shortcomings. Examining your trading errors may be beneficial. Additionally, it makes you recognize that your problems are more a result of the way you think about the market than they are with your system. To put it another way, it enables you to recognize and control your own trading psyche.
When things go wrong, reviewing your equity curve and maintaining a trading log can help you get back on track.
Losses cease to be a danger if we can turn them into opportunities to better understand our game and refine our procedures. We learn from them.
On the other hand, you will experience financial loss if you see the market negatively or are too harsh on yourself. No of how your trades turn out, always give yourself a high five before you begin.
Making a run of profitable transactions has a profound psychological impact. The finest feeling in the world is when you are in the zone. It seems as if you are completely linked to the market, and the money just appears in your account.
Only if you approach the market with a positive, upbeat attitude will you be able to reach this mental state. This does not imply that you enter the market with a sense of superiority, but rather that you accept without reservation the fact that you will get whatever the market is prepared to provide. You open yourself up to those prospects even more by being optimistic.
Recognize that your trading method, trading tools, and internet speed don't really matter if you want to succeed. It all boils down to your ability to take full responsibility for your trading outcomes. Do you acknowledge that you get what the market will allow you to have? Do you accept the idea of probability and the idea that not all trades will be profitable?
Finding the trade zone and remaining there is a never-ending task. So keep in mind to enjoy yourself as you go.