Trading: An Inside Look. Module 8: Psychology in Trading.
Module Plan
1. Introduction
2. Physiology
3. Against Your Own Nature
4. Stress and Trading
5. Obstacles to Stability
6. Practical Methods for Solving Problems
7. Psychological Correction
8. Recommended Literature
1. Introduction
You can master a multitude of trading methods, buy the most expensive indicators, subscribe to a signal channel, but as soon as you enter a trade, someone else comes on stage and makes decisions for you.
There are nuances on the chart that may speak in favor of an idea, but we can never be sure what will happen next. For example, liquidity may be taken away soon, or it may be ignored by the price.
We find the solution to the problem in the consistency of trades and risk management. We cannot stop the wind, redirect it, but we strive to control ourselves. The market is an element. And we cannot control the other side, the one behind the monitor screen. But we can control this side — ourselves. That is why all known profitable professional traders talk so much about psychology. Calmness in the trading process is achieved only through self-control, and self-control comes from a written system, planning, understanding your steps and what they lead to.
So, in this lesson, the conversation will not be about the market. The conversation will be about the observer of market movement — the trader.
There are many emotional states that a trader experiences. Not only negative emotions, but also positive ones have an impact on the trader.
Self-doubt and doubt in your trading strategy can visit a trader during a series of losing trades. Panic can set in when a trade is made for a very large, unusual volume. Despair can visit a trader when he hopes that the price will return to the level of opening a losing trade so that the trade can be closed at least at 0. Greed is born when a person wants more than he can take. Fear of entering new trades comes after fixing losses. Strong enthusiasm and the joy of victories after fixing a series of profitable trades can also play a cruel joke on an experienced trader. Self-confidence, a sense of superiority, a feeling of being smarter than other market participants — all this affects the trader’s deposit.
Of all the emotional states that every trader will go through sooner or later, the most obvious are fear and greed (FOMO — fear of missing out). It is these two traits that you will have to identify in yourself, acknowledge and start working on yourself.
2. Physiology
From a physiological point of view, it is useful to know the mechanisms that arise when you feel danger. In the field of trading, the danger to the Ego is precisely the losing position, or the one that begins to go in the opposite direction. One of the most striking patterns is the “Fight or Flight” pattern. The ego senses danger — “I’m wrong” or “I’m a loser” or “I’m losing” etc. each personality will have its own individual form and depth of such experiences, it is important for us to outline the essence itself.
During a losing trade or when everything is going according to plan, but the price starts to reverse, the trader feels a symbolic threat that damages self-esteem and self-worth. These experiences activate processes in the body, the body prepares to fight or retreat quickly. It is this mechanism that forces the trader to close profitable positions during small corrective movements or to close a trade before the price reaches the stop loss order. Often, it is after such actions that the price continues its path to the intended goals.
A feature of the above process is the narrowing of perception and focus on danger, so the trader ceases to see the big picture and focuses only on a specific price movement.
The practical solution to the problem is to work within specific time cycles with clearly defined rules for entering and exiting a trade. This is exactly the point that most losing traders do not want to admit. Remember that to succeed you need to do what those who are not successful do not want to do. Do what is not interesting, boring and sometimes painful. Also, look around you: your everyday life will say a lot about your personality. Disorder, chaos, lack of goals and records — all this will be reflected in the trading process. The mess will be revealed during trading, which will lead to losses.
3. Against Your Own Nature
Another psychological pattern is the “Loss Aversion” pattern. It has been proven that the pain a person feels when losing 25 is 2.5 times stronger than the joy of receiving 25. In other words, if the amount of stops is equal to a loss of -25, then to compensate, to reach a state of equilibrium, the psyche needs at least +60 of realized profit. The desire to cover past losses distorts the trader’s reality and leads to new mistakes.
Historically, the human brain is aimed at preserving resources, which is why it is so difficult to understand and accept the phenomenon of stop loss orders and recognize their obvious importance. The brain does not want to lose, it is formed to survive and preserve. Beginners often get the impression that correct trading is trading without stop loss orders. But this is nothing more than a delusion. Stop loss orders are an integral part of trading, and it is with properly constructed risk management that a solid foundation for professional activity is created.
Loss brings pain and acts as a trigger for impulsive actions — this is where the danger lies. It is important to learn how to work with the pain of loss.
Lack of system and the pain of loss, working in tandem, are the reason for the loss of the deposit.
Therefore, you will first have to recognize your behavioral patterns, and then begin to work them out. Going against your nature means trading a specific situation in the market, and not trading your deposit and constantly looking at your trading balance. Often a trader seeks to end the day at breakeven and closes successful trades precisely because he is looking at his deposit instead of looking at the chart and the facts.
4. Stress and Trading
Under what circumstances does a trader most often experience stress? It’s losses. Losses from ignorance or inexperience. In general, losses are part of trading activity, they will always be there. This is an integral part of the job. But their number can and should be limited and controlled. Accordingly, no matter how paradoxical it may sound, you should not fight stress: you need to go through it and get out of the situation with dignity. Moreover, stress can be a catalyst for more productive further activities.
If the cause of stress is not the pain of loss, then you need to determine the source of stress. If it’s family matters, then spend less time trading and more time with your family. If you are haunted by stops, then it is worth switching from practice to theory and devoting more time to backtests, analysis of trades. If the cause of stress is the realization that you lack knowledge, it is better to repeat the material covered or clarify the existing trading strategy.
If you have problems with time management and you do not have time for anything, keep records throughout the day, week. You will have to systematize all areas of your life. You need to constantly work on yourself, analyze mistakes and draw conclusions, write down all this analysis, keep a log of your states, thoughts, experiences. This applies not only to trading, but in general to all aspects of your life.
It may seem to you that the market or the exchange is unfair to you: “Again, the price took away the stop loss and went in the right direction!” or “Why do I see only profits in chats, and I have only stops? What’s the matter? Maybe I’m a loser?”
It is important to understand that trading is about working with probabilities.
No one knows how your idea will work, no one knows where the price will go tomorrow, no one even has any idea how much assets will cost in a year.
There is only the probability of working out certain instruments. Therefore, you need to change your attitude towards failures and losses. Collect information on the development of setups, know exactly the percentage of working out the instruments that you use. Didn’t the deal work out? It’s okay if you have statistical data on hand, preceded by backtests. There should be clear answers to these questions before starting trading. If you analyze your failures and understand that you are solely responsible, then you should not worry. Any business is supported by the responsibility of the entrepreneur.
If you suffered losses only because Elon Musk tweeted something there — that’s one thing. If the stop loss worked because the trend was determined incorrectly, in a hurry — this is completely different. With failures, as with stress, you should not fight. You will lose. You just need to draw conclusions and refine the system.
Perhaps the following will help some of you: try to change your initial attitude towards the deposit. This is your working tool, nothing more. Do you think a car mechanic gets very upset if a crack appears on his tool? I don’t think so. Most likely, he will conclude that the tool is simply not of high quality, and next time the mechanic will simply take another set of keys.
This is how you should treat your deposit. Like a set of keys. Only in our case, if everything is bursting at the seams, you can no longer shift the responsibility to the manufacturer. It’s only up to us. Full responsibility.
5. Obstacles to Stability
If you are an extremely gambling person, you like arguments, you get adrenaline from the process itself, then in this case it is worth thinking about how you will cope with gambling during trading. Gambling and professional trading are antonymous in their essence and lead to different results.
Have you noticed that you are very sensitive to money? Perhaps you need to work on your attitude towards money? Maybe you shouldn’t overestimate their role? Over time, this can be detrimental to emotional health.
Money in trading is a working tool, but at the first stages of a trader’s development, money will still be perceived as a means of payment. For example, when you close a deal, thoughts may come to mind that in 10 minutes your trading account has been replenished with an amount equal to someone’s monthly salary. Or that for the cost of the stop loss that you just caught, you could buy something significant for you. The transition from a standard way of thinking to a professional one takes time. The fact is that in reality, funds in a trading account should only have a percentage value. Both profits and losses. If you perceive trading activity through the prism of familiar money, then the numbers on the balance sheet can become a trigger for all your psychological, long-standing patterns that will fall out of the old closet as soon as you make a deal.
• A number of unresolved psychological problems
Trading will take you to such a distance of your subconscious, where you have never been and did not know yourself that inside you there is something that you can discover. But with the right approach and thanks to the understanding of the processes, trading can be turned into a means of self-awareness and self-improvement.
Therefore, take an A4 sheet and write down all the qualities that, in your opinion, can hinder your success. Write until the list seems complete. Save it: you will still need it.
6. Practical Methods for Solving Problems
• The influence of time.
You should not sit 24/7 behind the charts and follow every candle: apart from overwork, you will get nothing (you will definitely not earn more money). Therefore, set a work schedule for yourself. Either you work all day and rest in the evening, or during the day you occasionally monitor the price, having previously analyzed the charts in the morning and placed limit orders. Yes, it will be difficult to choose the right time for yourself right away. This will come when you decide on the type of trading, be it scalping, swing, intraday, etc.
• Pay attention to the chart.
Adjust the comfortable contrast and color of the TradingView tools and on the exchange itself.
• Get a notebook.
First, write down everything there. All observations, all trades, all emotions, all shortcomings. Write absolutely everything there every day.
• Create a checklist, add to it everything that hinders and helps you work, and hang it in front of the monitor. Every morning, before you sit down at the chart, see if everything is taken into account. For example: excellent mood, no headache or other pain, slept well, focused. All urgent matters have been completed so that nothing distracts you, etc. And most importantly, keep discipline.
• Calculate profits and losses ONLY in percentages.
Your deposit is 100, the only important thing is how much % it increases every month.
• Create and refine your trading system. A trading system is the most important element of trading that helps to cope with stress, see the big picture, and know your goals. But creating a trading strategy is one thing, and it’s quite another to follow the rules that you came up with yourself. TS makes it possible to neutralize all kinds of anxieties. And anxieties arise when a trader violates his own rules.
• Backtests.
The most important element of trading activity. Know exactly when to enter a trade, know the percentage of instruments working out. Print out the data about your personal business. Keep records. Stop playing on the stock exchange — trade professionally.
7. Psychological Correction
Rest is also an important component of success. You decide how to relax. I would like to tell you when to take a break for a while:
• Several stops in a row.
Determine for yourself the critical level of losses (percentage drawdown of the trading account) per day, week, or month, again, it depends on your trading style. For example, for me this is a critical point of 1% during the day. Then I turn off the computer and no longer approach either the charts or the terminal.
• Don’t try to recoup losses!
Know that you can only make things worse by trying to get back the money you’ve already spent. The money is gone, losses are part of any business. Reached a critical point? Turned off the computer, spent time with family, went to the gym, did your hobby. Understand: the market will not go anywhere, it will be tomorrow, the day after tomorrow, and even in 5 years.
• Profitable trades.
It is also worth taking a break: either after a deal with a large profit, or after a series of successful deals. Why? Because you are filled with euphoria, it seems to you that here it is, a bright streak in trading, because of this your attention is scattered, you become less responsible, you can overestimate the risk or neglect the stop. I think you get the logic.
Is everything going well? Take the money you earn, spend it on yourself, give yourself or your loved ones a gift. You just need to do this, you must feel that you are earning. As long as the money is on the exchange, it is 100%, as soon as you withdraw the funds from the exchange, it is already .
• Freedom.
Trading can give you the most important thing — freedom. Financial freedom, independence from the workplace, freedom to manage your own time.
BUT: only when you can accept this freedom. If you sit at the computer around the clock, try to increase your deposit thinking quot;I #x27;ll have 100,000, then I’ll rest”, deny yourself pleasures: “It’s better to buy a coin with this money and it will grow in price”, etc. — in this case, you yourself cancel your freedom and become a prisoner of the situation. Don’t look for an entry into a trade within each zone of interest on the 5M timeframe. In the end, you will simply stop enjoying trading. And if you live only by the exchange and you do not have emotional diversification, then you may find yourself in a difficult situation. Harmonize work and rest — then you will feel the pleasure of the process.
I would like to recommend you to read or listen to the following books. They are not all about trading, but they will help you one way or another in shaping the personality of a “trader”:
1. Darren Hardy: The Compound Effect. Jumpstart Your Income, Your Life, Your Success.
2. Stephen Covey: The 7 Habits of Highly Effective People.
3. Robert Greene: The 48 Laws of Power.
4. Mark Douglas: Trading in the Zone.
5. Brett Steenbarger: The Psychology of Trading.
6. Nassim Taleb: The Black Swan.
7. Lance Beggs: The First Book.
8. Lance Beggs: Adapting Strategy to Lower Timeframes.
9. Mark Douglas: The Disciplined Trader.
10. Morgan Housel: The Psychology of Money.