The Psychology of Trading

Show Me the Money

Many beginning traders think that they should concentrate on making money. Usually this doesn’t work. There is a money management module later in the course which will go into detail of how you should behave and treat your funds. For now, start thinking in terms of preserving your capital, as this is the most difficult task ahead of you. If you trade appropriately and concentrate on not losing too much, then you will find that you make profits. It’s when you go hell for leather to make money that you usually find yourself losing.

It sounds silly, I know, but it usually works out best that way. Consider – if you lose your money then all your trading knowledge is worthless. You must preserve your capital as well as you can so that you can keep on trading, earning and learning.

Trading Psychology: Emotions, Intuition and Gut Feeling

The Psychology of It All

Again, we’ll talk about it later, but we have to get straight right now that you will be challenged, more than you currently realize, when you start trading in earnest. Trading is very difficult psychologically, and you must be prepared to be disciplined in your actions.

Fear and greed are usually named as the dominant emotions that will attack your trading discipline, and you will find your feelings working against you, particularly when your money is on the line. Most people think that they can be in control of themselves if they really want to, but you will be experiencing forces that may be outside your previous experience. At least, that is the finding of many novice traders.

What you need to do and how to do it will be reinforced by the modules, the videos and webinars. Don’t try and second-guess your next move when trading, and make sure that you always stick with sound principles regardless of whether you are winning or losing. If you are winning a lot, it is easy to think that you have “got it” and that everything you touch will be golden, which will tempt you to trade more than you should and take on additional risks. If you have a losing streak, you may be determined to double up on your trades to ‘catch up’, which again can lead to ruin. Steady and consistent application of established principles is the recipe for long-term survival and growth. You can earn a great income on your own terms with trading, and this course will lead you the right way to make it a long term career.

Psychology

Being successful as a stock market trader is no different to being successful at other things in life. It requires the right mindset to cultivate the set of core habits that lead to success.

Here are 10 habits all successful traders share (by Kamil . Schumann) -:

1. Discipline

Highly successful traders write down their set of rules and follow them with military style precision down to the last detail, at all times and for every trade.  They do not let emotions interfere with their trading decisions.  They never second guess themselves and promptly take action on market signals according to their rules.  They never trade outside their trading system because they have learned that doing so will just mean reducing their chance of success, risking not only the loss of more capital, but a loss of their winning edge and the ability to recognize other potential market opportunities.

2. Passion

Traders who become successful in the stockmarket are passionate about what they do!  They are usually driven by other things than just making the money.  They trade because they love trading!  They want to be the best possible traders they can become.

3. Desire to Learn

Great traders never stop learning and improving at their game.  They stay open minded to new ideas and concepts because they know that in order to keep winning, they have to stay ahead of the crowd and keep up with market changes and new emerging trends.

4. Confidence

Traders who reach the top of their game have enormous faith in their own abilities as traders.  They are confident about their trading system and rules and their ability to continue to win in the markets. They know that they will win over the long term and therefore are confident taking small losses quickly by following their trading rules because they understand that their wins will far outweigh the losses they kept small.

5. Patience

Successful traders will patiently wait until a suitable opportunity arises before entering the market.  They have long learned that they do not need to be in the market and trade all the time.  After having entered a trade, they will exercise patience to give it enough time to work out in their favor, according to their trading rules.  They know that profits take time to grow and therefore have learned how to stay with a winning position to maximize their returns.

6. Persistence

Top traders stick at what they do and trade the rules that they find work best for them and keep applying these to the market consistently.

7. Willingness to Lose

Traders who achieve any level of success have learnt that losing is a part of winning the game.  If a loss presents itself, traders who are successful take it quickly and move on because they know that cutting their losses fast will restore their objectivity.  If their trade does not work out as originally planned, the pros do not hang about hoping for things to work out – THEY GET OUT IMMEDIATELY!.

8. Balance

Successful traders have no problem with taking time off from the market.  They keep their trading in perspective and maintain a balance because they know there is a lot more to life than the market.  Besides, it will always be there to trade when they come back.

9. Always use Stops!

The primary objective of a professional stockmarket trader is capital preservation.  Cash preservation is King!  It is so important that it takes preference over making money.  A stop loss is the safety net that allows the trader to keep their losses small.  Every trader who has achieved any level of success in the stockmarket has done so because they have learned to use a stop loss in their trading in the following two ways:

1    To protect their capital and limit losses when wrong.
2    To manage their profits on a winning position.

Stops should be placed with your broker at the time of placing an order for the trade. They should be automatic orders rather than mental stops because even if you’re the most disciplined person in the world, anything can happen in the market and you need to protect your trading capital whenever you put it at risk.

10. Always Trade with a Plan!
Successful traders meticulously plan every aspect of each trade that their system shows as a potential opportunity.  A trading plan is a combination of each trader’s personal trading method with specific money management and position sizing rules, precise entry timings and absolute stops.  It tells when to cut your losses short if a trade does not work out as originally planned.  It addresses how to raise your stoploss to protect your position and profits on a trade that moves in your favor, shows when to take your profits, how to add to a winning position and how to re-enter a trade should you be stopped out prematurely.  It should also have rules for staying with a winning position in order to maximize your profits when a trend unfolds.

Goals & Objectives

Just as having an objective target price for each trade you enter helps you to stay disciplined to your trading plan, setting personal goals of what you want to achieve helps to cultivates focus and maintain a clear vision of where you’re going. Having written goals to aim for allows you to measure and make improvements to your performance and stay on track.

Decide on the returns you want to achieve in the timeframes that suits you. For example, if you hold positions for long term growth, set yourself yearly goals to aim towards. If you’re a short term trader, have monthly or quarterly targets to aim towards.

One of the best books I’ve read about how to set and achieve your trading goals is ‘Trading in the Zone’ by Ari Kiev.

General Note

To make it sound less awkward, throughout the course I have referred to ‘he’ and ‘him’ rather than always trying to include both genders, and probably missing one or two instances. This is not intended in any way to offend or exclude female traders taking the course. Please understand that it just sounds easier, and is intended to be all-inclusive.

Also, I use ‘I’ and “we” throughout the text. When I say ‘I’, I’m expressing a personal opinion or experience. I use ‘we’ when referring to things that we will do together, such as ‘we will study indicators in module 7’. I hope this is not confusing to you, but it seems the most natural way to present the course.

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