The Real Truth about Trading Psychology

The Real Truth About Trading Psychology

 

Why Trading Psychology and Discipline Are Weak Excuses Promoted by the Industry?

The selling of psychology as a key aspect of trading is over rated.
Please, don’t misunderstand us. We are aware of the fact that the mental aspect of trading VERY important, but the whole trading industry has managed to convince you that our human instincts and psychology is hard-wired for trading failure. The words of fear and greed are omnipresent and always hovering over traders, explaining all mistakes and failure.

So you study all the common books about mastering the psychology of trading and how to deal with trading psychology more effective, spend a lot of money on webinars and seminars to make you more focused, but, at the end of the day, you don’t improve and your results still remain the same. You change to a different trading method, switch brokers, and start “fresh”—just to repeat the same thing yet again. At this point, most traders just give up because they cannot deal with the ongoing failure without ever seeing any improvements or because they just run out of capital.

Blaming it all on discipline is very easy

With the help of hindsight, pointing out the obvious mistakes and what you should have done is very easy. Then, we can blame our discipline, or lack of discipline, for not doing the ‘right thing’. In fact, it all boils down to blaming the student for the teacher’s failure, which is really quite shameful when you think about it.

Instead of buying into the self-blame, consider this:
Just turning on the ‘discipline’ mode is easier said than done when a trader experiences loss after loss. How can one continue trading at a high level when his/her hard earned money is being eaten away day after day without any end in sight?

Here’s the simple, uncut truth in our opinion:

You are only as disciplined as the quality of your method—and your belief in that method. Many traders complain that they repeatedly allow small losses turn into big losses. “It was a lack of discipline”, some might say. But if this exact same group of traders saw a brick plummeting from the sky, they would scurry immediately out of the way. Why? Because they can very accurately anticipate the pain that is going to occur if the brick would hit them. In the case of our traders, they act as if they believe that the brick might suddenly turn or just stop midair. They KNOW the odds are that the brick will behave differently are zero, so why is it that they still hope for an alternative ending?

In trading, if you had a way to detect the “pain” that is awaiting you, you would avoid such scenarios at all costs.  But you don’t. Why? It is not undisciplined that is to blame, but you don’t have an anticipatory system to detect what prices are going to do. No one has a magical crystal ball that can foresee the future. However, trading is not about predicting the future, but about calculating the odd of possible scenarios right.

Here’s another example: When a car is speeding ahead at 90 mph, it cannot just stop and reverse on the spot. Rather, it’s more likely that when the brakes are applied, the vehicle will continue to move forward for a while. This is the law of physics which you have observed enough times to know and accept that this basic truth.

 Prices Work the Exact Same Way.

They can continue to go way beyond what one anticipates and calling tops and bottoms,without any real method, can therefore be very dangerous — just like a car whose exact stopping point you can’t predict.

Some prices will extend further out of pure inertia, and no method can detect exactly where they will stop. But many traders stand in front of an approaching train, hoping that prices will stop and reverse.

This is not a lack of discipline, but a lack of understanding of the basics of the supply-and-demand of prices and the auction mechanism of the marketplace.
Sadly, some traders will never understand this. The three biggest areas that traders struggle with consistently are:
1) Entry
2) Exit
3) Target

Some may say that the exit is less important than entry which is a great misunderstanding of how trading works.

A trading strategy is more than a method of identifying entry signals or finding a more accurate indicator to time your entries more effectively. A real trading method comprises many different concepts such as risk management, position sizing, stop and take profit placement and when to deviate from the rules.

Because while you sit there contemplating whether to enter and what to do, institutions might be gearing up to buy/sell at specific price points. The “big boys” have a certain advantage over retail, as they can accumulate positions, adding to their existing inventory. Traditional technical analysis, lagging indicators, and other market actions do not account for this type of activity.

Exits are equally as important as entries. This is where you decide when to get out and cut your loss or under which circumstances you realize a profit.Without a clear plan, you are more likely to become unfocused and you don’t stand no chance in a game dominated by professionals. An exit plan—deciding whether you take a profit or a loss—should not be random.

Randomness is Often Confused with a Lack of Discipline.
You need to exit when the market sentiment changes, when the big players alter direction, and/or when the big players have thrown in their towel and are liquidating. They, too, have a certain tolerance of risk. You can put your stops at $500, $100, or $250… but if it was decided based on your tolerance, it’s randomness. Using reasonable price levels for your stops and profits can often help a trader to make better decisions.

Stops/targets based on what you’re “happy with” will not cut it.

We know this is not what you want to hear. We will discuss how you can weigh certain odds prior to executing a trade. Thus, you can decide ahead of time whether you want to be in a trade or stand aside. Keep in mind, standing aside and not taking a trade is a valid option that traders not make use of often enough .

Based on your own risk tolerance, you should only take trades that suit your personality and your parameters. Stress during a losing trade is often a sign that your position is too big.

Profit targets: This is where you could be in positions in which the profit could be extended way beyond what you have anticipated. But, you MUST know how to differentiate between scenarios where you take a profit at a certain point or when it is better to be patient as prices grow more and more in your favor. Most traders take random profits as soon as they see them, just to regret later that they didn’t wait it out. On the other and, waiting too long and giving back profits is not where you want to find yourself either.

Of course, most trading literature will blame the above on a sheer lack of discipline or greed which is oftentimes not true Rather, it’s your lack of ability to decide how far the price will extend, because periodically, prices do “rest” and extend, “rest” and extend. Your intuition cannot and will should not dictate how far you think prices will extend. You need to exploit the markets when they offer high reward opportunities and be nimble and humble when the market halts.

Choosing targets, taking profits, and then later regretting it, is not a lack of discipline. It’s a lack of a method that helps you intelligently determine whether to stay in a trade or exit it. But, does Psychology Enter Into Trading at All?

The Answer is yes, it certainly does. The psychology of trading has to do with your (in)ability to cut out the ‘noise’ and commit fully to a methodical plan, one based on rules and logic; a plan that has proven itself when back-tested and has been applied under different market conditions successfully.

Ask yourself the following question: Imagine you wanted to buy your favorite product. Would you purchase it at $50, $75, or $100?  Of course, the cheaper the price the better. If you buy something for $50, instead of $100, you saved 50% which can be a great deal.

Let’s look at it from another angle: Assume something, whether stocks, gold, or a Forex pair, is trading at $50, $75, or $100 in the markets. Now what do you do? In case of financial markets, making a decision based on pure prices, without further reference points, is nearly impossible. Think of prices for an item in an auction where no one is interested and bidding. Then someone bids $50 and all of a sudden, people go into a bidding frenzy until the final price of $100 has been reached with the final bid.
In the markets, you can’t simply look at prices to determine what’s “good” or “bad.” The financial markets do not work like a flea market; they function more like an auction as described above. Sadly, though, when it comes to trading, most traders are stuck on the notion that cheap is best. BUT, cheap gets cheaper and high prices (expansive) can get much higher. When it comes to trading, thinking about prices in absolute terms can be a dangerous thing to do.

The absence of discipline, at times, is confused with a failure to understand that the markets move in an auction.

THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES TRADING. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. YOU SHOULD CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES AND FINANCIAL RESOURCES.

 

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