Every trader knows fear and greed and the negative impact it has on trading. Most traders treat the problem as a personal issue – A preexisting psychological attribute that eventually permeates into our trading habits. The reality is that almost everyone, regardless of their individual personalities, fall prey to the same psychological triggers that cause them to deviate from their trading method.
For example, if you are long on crude oil futures (or Emini S&P or gold) and you are up $5,000 on your positions, it is only natural to imagine how much higher you can go. $7,000? $8,000? At this point, our mind starts to overwork and elements such as hope replace fear and caution. Most of the times, they have no basis what so ever in real life, and yet traders are “glued” to this hope, completely ignoring the very foundation that allowed them to be up $5,000 in the first place.
On the other extreme, fear is an equally, if not worse, paralyzing force when traders face a financial loss. The effect of Confirmation Bias cause traders to stay in trades much longer than they would under normal circumstances. This is the stage where traders gather opinions from various outlets – trading forums, news articles, and/or even their own technical driven charts in order to give more weight to their own biased views.
Once you experience the mental state that comes with facing large losses, you will do anything to avoid it again. This is possibly a prevalent behavior among both long term investors and short term day traders. Beginner traders have a really hard time understanding the idea of positive expectancy, where a system can take big hits, yet still be positive if all signals are followed. Instead, losses that are “normal” turn into larger losses. This fear of loss also makes us over ride money management rules that cut our gains short. Many traders think that it is their short comings that cause them to misbehave. Instead, it is a rather common trait to the entire population of traders.
Is it possible to overcome inherent psychological difficulties when someone trades? Yes, it is. But, it will take an objective approach and the conscious ability to understand the mental process that one has to engage in when learning to trade. The reality is that it will take different traders different time horizons to improve psychological hurdles to trading. This ultimately depends on the trader’s experience, time dedicated daily to trading and making a trading journal to record trading entries among other variables.
Helping tips that can possibly help you in your futures trading:
- Write your rules and stick them by your computer. Evert time you know you are about to break a rule, stick to your rules. Click Here to download the Golden Rules to Futures Trading.
- Never Make a Random Impulsive Decision. NEVER.
- Seek at times those who have a contrary opinion to yours. This will enable you to see whether your opinion is strong or easily “breakable”. Everyone makes mistakes. You are no different. Just make sure you learn from your own mistakes and allow yourself to learn from other peoples mistakes.
- Try to recognize that “fear” in your trading, as well as the ones presented in the news and media is often mass conjecture and can potentially present better opportunities to capitalize on those who fall victim to it.
- Realize that different leverage might have different “psychological issues” associated with your futures trading. Trading two lots on the ES Emini S&P may be entirely different then trading five lots. Find your “sweet spot” and stick with it for some time before you increase the number of your trades.
- Never fall into the gambler’s fallacy. Markets can go down for a long time and markets can go up or a long time. The notion that the markets “must correct” on new highs or lows is a wrong assumption to trade on.
- Not all discretionary based systems can be automated, but you should look into whether your methodology can be automated to potentially help you achieve the rules you want to stick to.
We hope this will get you started on the right track.
Please be advised that trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. This matter is intended as a solicitation to trade.
