Trading Psychology - Developing a Trader’s Mindset
Understanding Fear and Greed
In a previous post we talked about lack of a trading plan being one of the reasons traders lose money while trading.
In this post we’re going to talk about one of the other reasons; and that is the inability to trade profitably due to emotions such as fear and greed.
How do we control Fear and Greed?
If we want to solve a problem, it often helps to break it down into smaller, more ‘bite-size’ chunks and tackle each of those. It’s like the old line “how do you eat an elephant?” The answer of course is; “one bite at a time.”
So if we’re going to work on our trading psychology let’s talk about fear first and try to identify what it is that we’re fearful of.
Open up your notepad now and start making a list of your fears. Here are some ideas to start with:
* we fear that the market is going to move against us as soon as we place the trade.. (eg, “We’re unlucky, it happens every time!”)
* we fear that even if the trade does start to move the right way, that it’ll turn around any minute now… (eg, “There, see! It just dropped a point! I knew it!”)
* we fear that our trading system doesn’t work, or that the tip we were given was a dud.. (eg, “why did I follow their advice?”)
* we fear that we don’t know enough and so won’t know when or even how to respond to the markets movements.. (eg, “Should I close or roll now or tomorrow? Oh no, it’s just dropped again..”, “Maybe if I just added this other indicator to the chart that will give me a better entry..?”)
And so on… Did any of those comments sound like anything you might say to yourself? If so, add them to your list.
It all comes down to the fear of losing money, but try to break that fear down into more specific ‘bite-size’ fears as above.
Now just in case fear wasn’t enough to worry about, we also have the effects of greed on our mindset to consider.
The dream of wealth and riches is what can lure people to trading, but it is greed that has people placing trades before they have completed their trading education, before they have developed their trading plan (and money management strategy), and before they have properly backtested and paper traded their trading system.
It is also greed that has them over-trading, and believing that a few wins means they must have found the holy grail and can now ignore the money management strategy they implemented to preserve their trading capital.
So now that we’ve identified our fears and understand our greed a little better - how can we control them?
…Stay tuned for my next post!
I know, I know, you want the information now - but look on the bright side! It’ll be posted in a few days and that will give you plenty of time to open up notepad and start making a list of your trading fears while you’re waiting.
Happy Trading
Brian Dibbins
Elite Insiders Group - Trading Systems
Trade Profitably © 2006 - 2007
June 29th, 2007 at 3:28 pm
Hi Brian,Sean and Dean
thanks to your last post in theTrading System Stock Market Tutorial It is
nice that people like yourself and others continue to help other traders .To
this day I still trade with fear which I should be honest with myself and it
is the lack of discipline to pull the triger either way, I sometimes do
spreads but freeze when to roll or take a hit I feel that I am betting
instead of proper trading.
Maybe it is good to take a break for a couple of weeks to get my focus back.
June 29th, 2007 at 4:00 pm
Hi jayluke,
Thanks for leaving a comment. It’s not always easy to comment when it’s to say you’re having problems, so good on you for doing so.
There’s a great quote that I’m going to use in about two posts time, but I’ll post it here for you as it relates to performance anxiety.
“Successful traders accept that they will have losing trades, but these are not a reflection of who they are. Everyone makes mistakes” (from ‘The Art of Trading’ by Christopher Tate).
You’ve made a start on your ‘fears list’, so keep adding to it, and see if you can identify the fears behind each of the issues you’re having.
Eg; “I don’t feel disciplined because..”, “I sometimes freeze because..”, “I feel like I’m betting because..”, etc.
In Tuesday’s post I’m going to start working through how to respond to some of those example fears I listed in this post. Hope you find it useful.
Cheers,
Brian
June 29th, 2007 at 4:29 pm
Hi Brian ,
thanks for your response ,I suppose it comes down to a trading plan and sticking to it no matter what.
the discipline to back test it and paper trade it . I have read somewhere that if you can’t make money when we paper trade what makes us think you can do it when we go live. It is easy when things turn out with any strategy but the real test is when things go sour and what we do to get out of it.
Thanks
Alex
June 30th, 2007 at 8:45 am
Hi Jayluke,
In essence, yes you’re right. Just sticking to a backtested and paper traded trading plan should be all that’s needed.
But as you’ve found out yourself, when money is on the table then unwanted emotions such as fear can come in to play as well, especially when things start to turn sour as you said.
We’ll start looking at how to control fear in my next post.
Cheers,
Brian
July 1st, 2007 at 1:33 pm
Hi Jayluke,
Your problem with pulling the trigger is common, and a lot of it comes down to understanding what your system is capable of.
When we first learn to drive a car it is a daunting experience, and we are scared to push the accelerator too hard, and if we learn in a manual, we are hesitant in fully engaging the clutch, de-accelerating, changing gears, diengaging the clutch and so on.
However as time passes, we learn what we need to learn and driving becomes second nature. In fact most of us can drive without even thinking of what we are doing. But we also know what our limitations are, what we are capable of doing in a car, i.e. speed around corners, reverse parking and so on. My Dad once told me a car is just an extension of your arms and legs. Wise words!
Trading a system will require the same learning process, and eventually you should know what your system is capable of. For example, I know my system has a better than 50% chance, and so when I incur a loss, it is just that, a loss, as expected, as my system tells me it should be. When you know that the next trade has a certain probability of being a loss, you shouldn’t have an issue with pulling the trigger.
Of course, we as traders are impatient, and as the great Jamie McIntyre says, we over-estimate what we can achieve in one-year and drastically under-estimate what we can achieve in 5 years.
As Brian said, back-testing, paper trading - ‘in real time’, are the only ways to know what your system is capable of.
Thanks for posting, and as Brian also said, it takes guts to be honest with yourself - well done.
Best Wishes
Dean