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Trader psychology

Trader psychology

Illustration: Trader psychology

The professional behaviours a trader can engage in are often explained and described in terms of trading psychology. Research also shows that 80% of a trader's gains and losses are due to psychological factors. So psychology is not a mere detail but the very backbone of trading.

A trader's feelings while he is at work are the main factors of his success or failure.

In other words, for a trader, emotional restraint is key to being on the winning side.

Emotions and trading are incompatible

Stress, fear, a bad mood, anger, there are many explanations for failure. If you do not have the right mental attitude for your work you will make the wrong decisions. Stress and fear will make you sell too early, bad mood or anger will make you take too much risk. For this reason it is common wisdom that patience and calm are good character traits for a trader. More generally, self control is essential. You must be able to understand your feelings and set them aside so logic can prevail. Emotional restraint becomes your key task every day not just to win but above all to avoid losing.

Addiction

Trading, like some games, can become addictive, whether you win or you lose. A trader may feel the need to be on the market all the time, he may feel almost under pressure to open positions, even with no valid justification for doing so. He will need his daily dose of adrenaline and cannot stop himself from buying and selling. Obviously this type of very dangerous behaviour can only lead to losses.

Feeling invincible

Although winning is what every trader craves, winning too much or too fast can lead to future setbacks. Indeed, a trader who earns a lot may end up thinking he is the best, that most of his choice positions will make profits in the end, and that nothing can go wrong. Feeling thus invincible is pernicious. Hubris must be avoided at all cost. Only rarely can traders consistently beat the market or just make regular profits. Staying humble and understanding the element of luck in your success is essential.

When greed takes over

Technically speaking, it is important to know when to claim a gain or take a loss. In other words, the key is to set stop-loss levels and objectives. Neither the market nor a position will head indefinitely the “right way”. Countless traders have seen initial gains turn into substantial losses. Stock market actors often say 'if you don't sell you don't lose'. They mean that for as long as you hold on to a security and do not sell it, you do not make a loss. You can then think that your loss is virtual but it is very real. Holding on to a losing position in the hope the market will turn around is usually a risky strategy. Persistence and stubbornness are two different things, and knowing when to sell a position whether it is winning or losing is part of the trader's skill set.

How can you manage your feelings?

Psychology is key to trading. But how can you avoid being overcome by your emotions? Can you really be unaffected by events around you? Human nature makes traders' lives complicated. Indeed, trading robots are effective precisely because they are machines, with no conscience or feelings, rather than human beings. However, there are techniques a trader can use to limit the damage caused by psychological factors.

First of all, the best way to counter feelings is to learn to manage risk. For example, dealing with small lots generally reduces the risk you are taking. And if you are feeling so addicted you cannot stop yourself from taking new positions, dealing with small lots will satisfy your need while limiting the risk.

Another strategy is to work out a fixed trading plan and implement it, to design a strategy and systematically put it in place: thus traders can avoid being influenced by psychological aspects of trading.

Last Update on 31/05/18

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