Understanding Your Trading Psychology: Let's Take Control! Part 1
June 30, 2009
I'd like to take this month's article into the often avoided topic of Trading Psychology. This is the area most traders don't pay much attention to. It is sometimes considered boring by traders who would much rather spend their time learning about a brand new strategy, a whiz-bang adjustment or even options pricing than delve into the depths of their own mind
So what is Trading Psychology?
In the world of trading, our psychology is a collection of our thoughts, feelings, emotions, reactions, knowledge, goals, beliefs, fears and more - all working together to influence the choices we make. The question that comes up here for the trader is: why is it that all these 'internal' and 'mental' factors are the more influencing ones?
The answer is this: it's because of the nature of the Trading game itself. Think about your job for a moment. You have a boss who you have to report to, who outlines your role. You stick to your role and the tasks you have to achieve as there other positions in the company for other jobs needed to be done. Essentially week to week, your work is relatively the same, you have short and long term goals to achieve and you report to your manager on your progress and on completion, and you earn the same amount of money week to week, month to month - there isn't (normally) a way for you to take a gamble and risk some of the company's assets for you to make more for your own paycheck that month.
Now, in the Trading game, you don't have a boss, or any employees for that matter, so there's no one you need be accountable to. You don't have a set of tasks laid out for you, or any particular role. You may have been to a trading course where you learnt a system and a set of rules, but no one is making you accountable after the event to stick to those rules, or even use the system. Your work hours may be zero, or you may choose to spent 6 hours a day trading. Because of the easy nature of trading, that being you can just open up your laptop and get into your account, it is very tempting sometimes after a lovely night out to dinner, or even after a few drinks at the pub to come home and just "check to see if your positions are okay". If we were ever intoxicated in our day job, we would be asked not to work (and probably not come back!) - but no one is there to tell us not to trade when we return home from a few drinks with friends and the US market is open
Regarding goals, many traders don't have them - how much money they need to make for the month, how they're going to manage that money, or how much they want to make by the end of the year. They may just open up the broker platform and say "Well, I haven't done any credit spreads for a while, I should get back into those", or "People seem to be trading calendars at the moment, maybe that's the way to go", or "I don't really have many trades for this month, so I'll just put ¾'s of my account into one trade - less to manage, less commissions, and less time to spend". Dangerous!
The monthly paycheck is probably one of the biggest drivers of our decisions - the dollar signs, the "k-ching" of the cash register. Greed. Imagine this: if our monthly paycheck from trading was always going to be the same, and we had no influence on the outcome, no opportunity to hit a home run, no chance of getting the market to pay for our new car or kitchen, then our trading would probably almost be stress free. We would just do what we had to do. It would probably become boring after a while, and we would place the trades and turn off the computer. But that's not the case.
The Trading Game is lonesome, and because we're not operating inside a world of bosses, managers, work policies, tasks, goals, teams, regular income and working hours etc, we are left to create this environment for ourselves. We become our own bosses, we don't have any one to report to (though we may have a spouse who just wants to see the account higher than it was a year ago!), there are no rules we have to follow, no one (including the market) is really going to care. It's up to us whether we have goals or not, and there is no regular income at all. Yes, this is a profession where our monthly paycheck may be negative one month! Naturally we're not aiming for this, but it is a possibility" and we have all had losing months
So what is left? If there is nothing around to influence us, what does drive us to make the decisions we make? The answer is, our emotions - sometimes our egos and perhaps peer pressure - but in a nutshell we can sum this up with our emotions. The two primary emotions that drive us to do what we do are fear and greed. These two emotions, which drive the market as well, are what influence prices to go up and down.
In this new series of articles we will delve a lot deeper into understanding your trading psychology, and help you gain control!
Be in control!
Matt Baker
Trading Tutors
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