One of the most important aspects in any trader or investors journey is trading psychology. If you have been trading for any length of time, you'll more than likely have experienced the highest of highs and lowest of lows.
But is this conjusive of good trading behavior ?
Trading psychology is a massive part of your success in trading and investing, yet so many people pay little to no attention to it. Why ? Because very few recognize the significance of it.
What exactly am I talking about ?
Well, have you ever entered into a trade only for it to go against you straight away and stop you out ? And then get angry when it immediately goes in the direction you initially figured it would do ?
Now imagine this happens a couple of times, you start to get angry and revenge trade. This is trading psychology 101 causing you to make dumb decisions based solely off your emotions.
Don't be too hard on yourself, we have all done it and it can occasionally slip in even with veteran successful traders and investors.
So how on earth can we fix this ?
Well, first things first, we must identify it is a problem. A lot of people aren't willing to accept it, therefore everything they do is wrong. But once you figured out your issues, you can work on fixing them.
*Before we get started, I am in no way a specialist or have any skills in psychology, I am simply outlining what has happened to me on my journey and how I continue to improve the issues we all face as traders.
Simply put, in terms of trading, your psychology framework is made up of 4 parts. Fear, Greed, Hope & Anger.
Have you ever wondered why if you give 4 traders the exact same trading strategy, there will be 4 different results ?
Look at the turtle trader experiment. They all traded the same strategy yet were widely different in their overall returns.
Why is this ?
Simply put, our psychological profile.
If we are honest, most of us have experienced some if not all of these emotions outlined above at some stage in our trading journeys. When I started out, I think I would experience all of these emotions in a given day but that's another story :)
Here is an absolutely great tweet by millionaire trader Mark Minervini.
So let's dive into the individual parts of our psychology in trading.
Picture this. You see a stock breaking out and you missed your initial entry. What do you end up doing ? You chase that entry because you just don't want to miss the move.
If we are honest, we have all done this. Fear of missing out (FOMO) is one of the most deadly aspects of your psychology that can really play havoc to your underlying returns.
If you have a valid strategy, chasing trades can really effect the end results. Even a few cents difference in the price you enter can skew risk and reward and over time this will take away profits.
And who want's to earn less ?
Obviously no one.
Imagine you change the question around to something more basic.
Ask yourself, Would I like to give away some of my profits due to chasing trades ?
You see when you look at it this simple, this is exactly what we are doing. When we trade based off FOMO, we are essentially saying, yes we would like to give away some profits chasing trades.
That's obviously a very basic understanding but us humans are very emotional beings (some more than others) no matter how hard we try.
Once you can accept you have this issue, what can we do to improve it ? Don't be too hard on yourself at the start. It takes time to essentially rewire your brain. You've identified the problem. Looked at your stats and realized that FOMO is causing you to lose X amount of dollars on average per trade.
So now, armed with hard statistics that cannot be denied, you can go about sorting yourself out.
There is no magic pill or solution. Just hard work. In my own stats early on, I figured out I was leaking 1% of trading profits on FOMO. This was either because I skewed my risk reward to much and that affected my underlying returns or I would just be pissed off I missed an entry and chase it to death.
Some of you might be thinking, 1% is nothing. But TRUST ME, over the course of a year, this adds up massively. So much so that it could be the difference between a profitable and losing trader.
What did I do ?
The most simple changes usually can have the biggest changes. Instead of chasing an entry I may have missed. I set up all the alerts for setups I wanted. It's embarrassing to think I hadn't done this prior but I was new and needed to make these mistakes to learn.
I swore to myself that if I didn't get the price I wanted, so what ! There are plenty more opportunities out there.
Sure ! I'd have missed out on some big winners but the overall returns were much much better from this one adjustment. When you really know your statistics inside and out, making these psychological changes in trading becomes a lot easier.
When we trade based off FOMO, we are essentially telling ourselves, yes market, I don't wan to make as much profit as long as I get this entry.
We can't argue with our stats, it's right there in front of us so yes, it really is that simple. We don't want to make as much.
You are in a trade and are up nicely and almost at the area you plan on taking your profits. But then you decide, I'll move my profit point even more. Then the price hits your original planned area and then retraces.
Even writing this, I recall times this happened to me and made my blood boil.
How could I be so stupid I think to myself
Well, this is greed is full swing. Annoyingly, this too was a common early trait in my trading career that needed to be ironed out.
Again, I looked at the maths. It was losing me money in the long run and I always simply asked myself, do i want to make less money by doing this ?
I flipped greed on it's head and reversed it. Instead of wanting to make more money by moving targets, i was actually losing more money long term so now I just stuck to my pre made plan and took it from there.
If I moved my targets while in a trade for no reason, I simply said to myself, okay I'm accepting I want to make less money overall by doing this.
Don't get me wrong, there are times when you will need to make take profit adjustments depending on your strategy, e.g a new announcement in a stock you're holding causing an unexpected move in the price.
You may notice a pattern by now, my absolute reliance on my statistics to make decisions.
It's soooo important you keep a trading journal. You need to know all there is about yourself. Otherwise, you won't know what changes to make.
Ah yes, my good old friend hope. There have been times when I questioned my own sanity and hoped for trades to come back after I left it get out of hand. I would say I made every mistake in the book when I started the this was another psychological issue that needed to be addressed.
Don't believe me, just look at my trading story. Tough times to overcome indeed !
Hope is another dangerous thing in the world of trading. Why ? Because you can really screw yourself over.
How many times have you been in a trade that got out of hand and found yourself hoping it would come back to your original planned stop area or breakeven point?
If you are honest with yourself, probably a lot. I know I did this a lot.
How can this be fixed ?
Again, it all boils down to your statistics. I might sound like a broken record constantly referring to my trading stats but it really is that important.
So how much is my good friend hope making me ? Well, no surprise, zero ! So why continue this relationship I thought. She had a good hold on me but after reviewing over and over again, i realized I had to let her go. One of my tougher break ups it must be said :)
Finally, anger. Probably the most destructive of all trading psychology issues I faced. I'm embarrassed to say it but my anger did get the better of me at the start.
One too many keyboards suffered as a result of my anger at a particular trade.
So what happened ?
Picture the scenario. You enter a trade, get stopped out. Enter another trade and get stopped out. Try this 10 times in a row. Obviously, you are going to get angry. it's human nature.
So how can you fix this ?
I joke but you guessed it, diving into my trading statistics helped me realized that it wasn't making me any money. Sounds common but as Ed Seykota said.
"Everyone gets what they want out of the market"
Can you see what he means now ?
If we are angry and start revenge trading, we get what we want and that is revenge. Unfortunately this usually comes at a price, usually a very costly one.
Right, now we know what not to do. What do the good traders do ? Well, they focus on always improving. Standing still in this game is really going backwards and we don't want that.
To summarize this. Top discretionary traders have common traits that they learned the hard way.
Every part of the psychological framework would not be fixed without absolute control and discipline. It is very tough to simply say, follow your statistics and don't be greedy or fearful.
But it is one of the challenging parts of trading that needs to be fixed.
Obviously you sometimes might not be able to do this alone. And that is okay. There are some great educational resources to help guide you in the right direction.
So where can you get started with finding help ?
Don't worry, I'm not trying to sell you some course I have an affiliation with. On the contrary. I'm simply outlining some places that helped me on my journey. First up, we need to outline the best and most well known trading psychology coaches out there today.
There are tons more but these are the most well known and common. Some offer great workshops and courses to help improve. When I was working in a prop firm, we regularly had sessions with trading psychologists (not the ones outlined above) but it is obviously important.
Van Tharp has a great trader test where if you can answer it without bias, you will receive a report through email on what type of trader you are and a comparison to a successful trader or investor who has similar traits
This report offers areas you need to focus on going forward so this can be helpful. Again, the tricky part is answering this test honestly. Otherwise, you won't get accurate results.
Here's a video of Van Tharp teaching . The quality isn't great but its the best I could find.
Tharp also has a few books where you can learn from him if you couldn't afford to attend a workshop he does. Keep in mind that in the list of workshops on his site, they are not all delivered by him.
Another really great guy for learning how to work on your trading psychology is Brett. He has many great posts about it to help guide you in the right direction.
Here is a great webinar to help gain insight into the man and what he has to offer.
There are lots of trading books out there tailored to addressing your psychological issues. My favorites are :
Again, you might have your own preferences but these we very helpful trading books for me.
I could go on and on with what all these different coaches have to offer but honestly, it is down to your own preference. Some people will say that you don't need help with psychology. I personally believe you do. Well, I did ! Maybe you can overcome your issues and that's great if you can go it alone but I preferred to get a helping hand along the way.
It doesn't matter if you want day trading psychology tips or long term investor psychology tips, it is all the same. As long as you are human, we all suffer the same re occurring issues all the time, it doesn't matter what style of trading you do.
Fear, Greed, Hope & Anger are very real issues that need to be addressed. The best way of dealing with them as we have seen is through discipline. The trading coaches mentioned offer help in improving this too and the books can be very useful in guiding you on the right path.
The very best of luck in your trading and I hope you all get the discipline you deserve !