Trading psychology, and trading psychology related issues, are given as the predominant reasons for why most traders lose BUT is trading psychology the 'real' reason?
Trading psychology has become so widely discussed and promoted through books and consultants that it has become a very convenient rationalization and excuse for losing. Why take the responsibility for a lack of work ethic and trading without any concept of plan, an honest assessment which would be a ‘hit’ on the trader’s self-esteem – when you can just blame it on trading psychology instead? Trading psychology is ‘something’ that a trader creates from existing personality traits that are not initially related to trading, but surface from trading without method understanding. The outcome of course is fear, but wouldn’t this be the case when doing anything that was perceived as ‘dangerous’, and which was being done without the necessary understanding and skills? Trading, with its inherent characteristic of accepting financial risk while participating in unknown outcomes, is certainly ‘dangerous’, and thus the more preparation and understanding that is needed.
No discussion about trading, or the consideration to begin trading, can be done without a harsh realization - the vast majority of all traders lose. It is said that the reason that most traders lose is because they are not psychologically prepared to trade, that is they are not prepared to accept financial risk for something of which they have no control over the outcome. Trading is much more of a psychological problem then a methodological one, only the traders who have first accepted this have a chance of being consistently successful traders. Without an understanding of trading psychology and the various issues that circumvent method, there will be virtually no chance to overcome the fear, confusion, and despair that can be inherent in trading. Ultimately, after a series of consecutive losses, method becomes replaced with a feeling that it is impossible to do anything right; if for no other reason than this situation, trading psychology is more critical than trading method
It is said that trading is 90% psychological and 10% methodological. Does this then imply that regardless of trading method, a trader that has control over their emotional issues will thus be a profitable trader, or will it be impossible to ever control emotions without the proficient implementation of method? The trading method viewpoint will suggest that not only are these statistics not the case - trading psychology does not exist. Trading method will be the determinant of profitability, and this will be done through: (1) the ability to understand the method's inherent strengths and weaknesses (2) the ability to maximize these strengths and minimize the weaknesses. Trading psychology has become so widely discussed and promoted through books and consultants that it has become a very convenient rationalization and excuse for losing. Why take the responsibility for a lack of work ethic and trading without any concept of plan, an honest assessment which would be a ‘hit’ on the trader’s self-esteem – when you can just blame it on trading psychology instead? Trading psychology is ‘something’ that a trader creates from existing personality traits that are not initially related to trading, but surface from trading without method understanding. The outcome of course is fear, but wouldn’t this be the case when doing anything that was perceived as ‘dangerous’, and which was being done without the necessary understanding and skills? Trading, with its inherent characteristic of accepting financial risk while participating in unknown outcomes, is certainly ‘dangerous’, and thus the more preparation and understanding that is needed
You go long and the market immediately goes down - you go short and the market immediately goes up. That's 2 consecutive losses AND you are getting a little 'anxious' so you don't take the 'next' trade and it of course works. BUT to make the situation worse you then 'chase' the entry and it immediately reverses - another loss AND this is 3 in a row. Ok 1 more try - this can't happen on every trade can it - pray mode? This time though you will be real clever. You have at least noticed that the market is in a range AND it's the bounce from the low/retrace from the high that is causing all the problems. So this time the next trade you take will be a range extreme fade AND the hell with your trading method. The market is at the range low AND per your new ‘on the fly’ plan you go long AND the range immediately breaks out giving you consecutive loser #4 - trading against a method trade that is going far enough to pay for the previous 3 losers and make you net ahead. Now what are you supposed to do – QUIT? AND to be sure that there is no more temptation – your throw your computer out the window and dive out right behind it. You are in a trading psychology spiral.
We continue to discuss the importance of trading AND planning saying that: (1) you can't trade without a plan that first defines a trading methodology (2) the plan should then further defines the components of the trading methodology that can be turned into trading setups (3) the specific setups and trade quantity needs to 'match' the trader's personality. The objective is to have created a plan that includes core repetitive setups with a positive expectancy that you can recognize realtime AND that you have accepted the implications of in terms of related risk reward - BUT this might not be enough - there still may be issues as related to emotion AND fear that circumvent the implementation of the plan. So what about a trading psychology plan? A plan that includes a series of steps that start where method implementation 'hangs-up'. The objective of this plan would be to take the trader's action - give an honest assessment/understanding of the action - define a 'setup' for replacing the action.
When I use the phrase bad trade, I am not simply referring to the results of a trade; a losing trade that is a base method trade is not a bad trade. It's also not a trade that should be a trading psychology problem, the risk of loss from 'some' percentage of method trades has been accepted. I am also not referring to a misread of a trade setup, for instance a trade that was right side base BUT where a left side 'reason' for not taking the trade was missed. To call a trade a bad trade, I am referring to knowingly taking a non-method trade, probably as result of chasing a missed trade, or because of fear of missing a trade. I am calling a trade bad IF: (1) the trade does not have method components that setup-trigger the trade (2) the trade is done at a 'filter point' specifically established to eliminate a trade at that given time.
Trading Mind Software - Studies show that 90% of our mind's power is housed in the subconscious mind and is responsible for our behaviors, habits, and performance. Trading Stress Management - Trading is a mind game with mental and physical consequences brought on by stress; learning to control your mind is necessary if you are going to come to control the stress. Mind Method Market - What are your beliefs, and how do they affect your decision process. Overcome your personal characteristics and learn to "hard-wire" proper response to emotionally driven situations.
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