advanced trading psychology

How does Psychology relate to Trading?

There is a tremendous correlation between Psychology and Trading. Since trading is attached to money, many emotions are in play. In particular, emotions such as Greed and Fear are intimately associated with trading. These emotions often operate very subtly in the background, often without the trader realizing it. In addition, Anger, and Hate also operate against the trader in the form of Revenge Trading. Elation and Ecstasy operate in the form of “I can’t do anything wrong” and we start taking unnecessary risks and violate all our pre-established rules These are all things we need to guard against as we trade.

How Do I Protect Against Emotional Trading?

The first and most important admonition to protect against emotional trading is:

“Know Thyself”

Quoted by Plato (400ish BC), who ascribed it to his teacher Socrates, who made it obvious that it was ancient wisdom in HIS time. Most historians date this back to Luxor in Ancient Egypt (1400ish BC.) The wisdom of this carries through to us today. We have to know what motivates us, know what demotivates us and most especially, know-how and when to overcome these things.

This is not a religion or philosophy class, but you have to be able to honestly analyze your motives each time you deal with a trade. Are you trading from fear? I believe I personally have been trading from fear for a couple of weeks without even realizing it.

Are you trading from Elation or Ecstasy? Have you had a good run and now you’re taking an uneducated risk because you think you can do no wrong?

Are you revenge trading? You took a loss and you’re not going to let the market get the best of you, so you take a bunch more losses - loading on the size?

Are you going overboard trying to “make back that money you lost”?

Ideas to Help Avoid Emotional Trading

  • Stop Losses are meant to protect your account NOT your trade. Once you’ve drawn your “line in the sand” don’t deviate from it just to give the trade “a little more chance of turning” unless your rules allow for it.
  • Your strategy rules are meant to help you make decisions that are not “in the heat of the moment.” Battle plans and contingencies should be decided before the battle, so you don’t have to think too hard during the battle. Thinking “in the heat of battle” can cause emotional decisions.
  • As you enter a trade, ask yourself why you are taking this trade. Be sure to be honest with yourself.
  • Be sure your trade entry or exit follows your strategy rules. Professional traders don’t deviate from their rules.
  • Be sure you trade entry or exit follows your money management rules. As I said before, professional traders don’t deviate from their rules.
  • Have trading maxims (sayings, mantras)  that help you remember what you are supposed to be accomplishing and that help you avoid doing stupid things. Repeat your maxims as they apply to your current situation.
  • Keep your trade size small if you are having “panic” attacks while you’re trading. Trading should be a bit mundane and boring. If you’re looking for excitement - go hang from a cliff or jump out of an airplane.

Important things to Remember While Trading

Here’s a bit of necessary “tough love”.

  • There is no “Holy Grail”. There is no strategy out there that wins every single time. If someone tells you that, they’re lying to you - or just totally deluded themselves.
  • Taking losses is part of the “job” of trading. If you can’t take losses, you’re in the wrong business. Do something else.
  • When a trade meets the entry criteria of your chosen strategy - take the bloomin’ trade. Don’t second guess the strategy, just do it.
  • Before you enter a trade, be sure it meets the entry criteria. Don’t take a trade that’s “close”. Don’t enter a trade just because it makes you happy to be in a trade. Act like a professional.
  • If you’re having a “bad day” for whatever reason, either get over it or take the day off. Having the wrong mental attitude is a bad way to enter a trading day.
  • The market doesn’t “owe you” anything. The market does what it does and if you want to be profitable, you ride along and don’t whine about it.

My Trading Maxims

I’m nothing special. I’m just a guy who has some success at trading and I want to help others do the same. If you’ve been in our trading room for at least a few days, you’ve heard me prattle on about my Trading Maxims. This is the way I keep important things in mind. Without explanation, the maxims may not mean very much, but once you understand the psychology behind them, they can help you keep the Main Thing the Main Thing - and that’s the Main Thing, right? (My apologies to those for whom English is not your primary language.)
So, here are my Trading Maxims with a short explanation of each - these are not my own, most of them I’ve taken from others:

  • Would you rather be in a trade wishing you were out or out of a trade wishing you were in? Anyone who has been in a trade that was going very badly understands this one. If you haven’t, you will.
  • There will always be another trade. Don't stick around in a bad trade, or enter a trade that doesn’t meet your criteria just so you can be in a trade. If you’ll be patient (the foremost virtue a trader can have), you will find the perfect setup.
  • Never bet the farm. No trade is a 100% slam dunk. Do Not Ever Bet Your Whole Account on anything!! Always maintain your risk parameters.
  • The time to get pie is when the pie is passed. I learned this in business school in the late 70s. Take your opportunity when the opportunity presents itself. Don’t wait around or you will miss the “pie”.
  • A line is never just a line, it's always a zone. Support/Resistance levels, trend lines, pivots, Fibonacci levels, these are never exactly to the tick/pip. Price will often turn ahead of the line or push through it and retreat. Never bet on a line to the pip, always give it breathing room.
  • There's no such thing as too much coffee. I think this is self-explanatory. You can substitute Tea for Coffee if you are British. 🙂
  • Your first job is protecting your trading account. If you allow a single trade to blow your trading account, you’ll be walking. Protect your trading account - even if you have to take a humongous loss to do it.
  • Better to bank the pips you have than to wish on the ones you don't. (Joseph) Take profit when it’s there - don’t let it evaporate.
  • Don't worry if you left money on the table. It's not worth the ulcers. If you left money on the table, what can you do about it now? This is sort of like the admonition to “not cry over spilled milk.”
  • Don't practice until you get it right, practice until you can't get it wrong. I had a real whip cracker for a music teacher when I was young. This was one of her maxims. I have successfully applied to many areas of my life.
  • You can only take what the market will give. (Mike) As I’ve said before, the market is going to do what the market is going to do. Ride along or walk.
  • A closed candle tells a story. Sometimes it lies. I confess adding the second part to this. I’ve known the first part for many years.
  • To paraphrase Hippocrates, "First, lose no money." Wait for the right setup. Waiting is free. (Mike C) Doctors take the Hippocratic Oath which includes the line First, do no harm.
  • Picard: "Data, it is possible to commit no mistakes and still lose, that is not a weakness, that is life!" This is a nod to the Trekkies and SciFi geeks in the audience. I’m definitely not one. 😉 Just kidding. I’m the biggest one of the bunch.

Stay tuned for our next Advanced Training where we’ll discuss Market Psychology.

Thank you for reading!

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