TRADING PSYCHOLOGY:

This is an area that many traders ignore or pay lip service to. Emotion in trading is something that we all have to acknowledge exists.

Despite how detached we can try to become when there is RISK ($$$) involved with a live trade, our brains take on a role that some of us find difficult to deal with. We become emotionally attached to our trades, it is how you deal with this emotion which is crucial to how you develop as a trader.

It is so easy to say do NOT get emotionally involved. Many traders find this impossible and drift over to trading with automation (algorithms) purely and simply in an attempt to remove emotion. Algorithmic trading is a whole separate subject that will not be discussed here but suffice to say the classic phrase of “The grass is always greener on the other side” applies here, in my opinion that is. Some traders who cannot control emotion in trading often state going to algorithmic trading can be like “Going from the frying pan to the fire”. This all comes back to control; If this is an issue for you trading is not your bag.

Moving on...

There are many people to refer to that can give you hints on how to control and manage emotional attachment to trading. For me is quite simple and straightforward in definition it all falls under mindset.

Trading psychology basically all stems from belief, positivity, your mindset.

Having a positive mindset goes a long way to being successful as a trader. As soon as you allow doubt to creep in vis-à-vis a set up you have in play, you are then watching over the trade like a hawk and you question your abilities. This affects a lot of traders because they trade with too big a position size. The RISK attached to a trade is just too high, based upon the size of their trading account. This is called GAMBLING.

If all trades just went into profit as soon as they triggered, it would be so easy as a trader. Unfortunately, many trades, probably more than we would like to admit go negative first. It is how you deal with the negative trades that is the key.

As traders we need to detach ourselves from trades, detach ourselves from the $$$ value at RISK. This can be difficult but applying good RISK MANAGEMENT and a proven TRADE PLAN to trading is a great start to help you overcome the emotion in trading.

It’s really quite simple trading within your RISK TOLERANCE improves your mental capacity and therefore your mindset.

Having a plan in life, in my opinion, is crucial to your success.

I have a routine every day that I follow vis-à-vis getting set up for my day at my trading screens. In addition to this, from a personal macro view I have a daily routine a discipline that I follow each day, mostly starting the night before my next day’s trading, when I review upcoming events: -

1. GOAL SETTING: – I have my annual objectives in place already. I also have my yearlong TRADE PLAN in place to support my trading activities. However, in addition, I have some shorter-term goals maybe specific to the effects of news events with a particular currency pair that I have identified.I get these in place – I often refer to this as my SHORT-TERM TRADING PLAN.
2. PLANNING & ORGANISING: - I note, in my diary with an alarm, when I need to be active in the markets to carry out my SHORT-TERM TRADE PLAN and I allocate sufficient time to further research (if required) and clarify my proposed approach.
3. PRIORITY SETTING: - This is a pure TIME MANAGEMENT skill that is essential to create my optimum performance.
4. CONCENTRATION: - I will not allow myself to be sidetracked if I have prepared for a particular news event and have my PLAN ready to initiate.

The above routine helps me to ensure that I trade at my optimum level. This is in addition to checking my LEAD INDICATORS (section 5) when I first sit down at my screens.

You must remember FX Trading is a lonely affair – it is you versus the market. You must prepare and be ready. Treat every day as you versus the world!

Why bring stress upon yourself when, with a positive and well managed approach you can go a really long way to controlling the mental side of trading.

If you over-trade, too big a position size for the balance of your broker trading account, you run the RISK of a margin call, you sweat on moves that would NOT normally provoke such a response. This is GAMBLING.

Mental strength is huge in trading, and the resilience one requires as a trader to sudden market news events requires a strength. If a positive structural mindset approach is adopted at the outset it will help you not to over-react to sudden market events. You want to get to a point where you are no longer at the effect of external triggers where you lose focus in the moment rather than remaining calm and logically accessing the situation.

The more research to a trade that is done the greater belief there is in the trade set up. I believe in the view that you should get all your levels in place and be patient for the trade to come to your prices rather than chase the trade.

It’s all about lowering the RISK and being consistent in your trading approach.

THE PSYCHOLOGY OF TRADER MISJUDGEMENT:

A trader’s emotions, ego, and thinking can become very distorted when real money is at risk in the markets. Hormones like serotonin, dopamine, and adrenaline can cause impulses and emotions to drown out thinking and decision-making skills.

Emotional intelligence is one of the most important skills a trader can possess, this is the ability to think at a higher level than your emotional reactions to circumstances. A trader must have the abilities of self-awareness, self-control, and be able to express emotions in a positive way. It helps with performance for a trader’s self-talk to remain positive and constructive, dealing with facts and reality and not become negative or catastrophizing circumstances.

The price action and volatility of the markets can be difficult enough without adding personal issues and weaknesses into a trading system. You will never be able to control or predict the market, the best you can do is control your own actions and predict what you will do in response to price action.

Here are the primary factors that cause the psychology of trader misjudgement: -

1. Traders start trading by seeing everything through the lens of making money.Take profits too soon / Let losing trades gather.
2. Psychological Denial.Maybe not seeing a trend because the belief is that it is NOT happening.
3. Ownership Bias.A trader can identify as a habitual bull or bear, a 100% bias in trading.
4. Misjudging the past correlation of professional success as a reliable basis for trading success.Prior business success could lead to an ego in trading. Creating a system with an edge is what leads to a trading success not success in past careers.
5. Misjudgment based on ego.Once a trade is established, maybe announced publicly. Traders can become entrenched defending the position taken and abandon logic.
6. It can be bad judgement to be bullish or bearish simply because the majority of people are.FOMO (Fear of Missing Out). Establishing trades when market has already shifted. Entering trades too late because the market appears either bullish or bearish. This can manifest itself by trying to buy at highs or trying to sell at the lows.

 

 

Scott Pickering
The Pip Accumulator
December 2021