Trading Psychology

Trading psychology is one of the three core tenets of successful trading. The others being market timing and money management.

Hundreds of books have been written on trading psychology, netting small fortunes for their authors.

And it’s a fascinating topic, but…… for the absolute beginner, it’s one often avoided until the beginner is already in a trading hole.

Newbies might pay lip service to the fact psychology is important, and then go back to spending their waking hours pursuing the holy grail.

Trading psychology is put on the back burner.

So, for all those who cannot drag themselves away from their charts for more than five mins, this post is a quick heads up to some of the things that can catch you out.


Discretionary trading

This might not seem like a gateway into future trading problems, but for many, particularly beginners, it can be.

There’s much debate in newbie land as to which is best, a mechanical system or discretionary one?

And it’s an important question.

I personally stand on the mechanical side of the debate.

I don’t feel I am near clever enough to know where the market is headed next.

And any attempt at doing this only ends up with me berating myself when I call it wrong.

I do use slight discretion in the markets I choose to trade (based on fundamentals, or order flow), and slight discretion in the bet size taken.

The problem for beginners is they haven’t a large enough database of market experiences to filter discretionary decisions through.

Having a losing trade, that results from a wrong decision can kick off a process of negative self-talk.

Keep making poor market calls, and that self-talk can become deafening, leading to severe performance anxiety.

Sure, mechanical systems can get things wrong too,

But there isn’t such an intense feeling you personally did something wrong.

The system just kicked out a loser, no biggie,

Provided you have a modicum of self-discipline, as a system trader, you’ll return to the battle again, relatively scar-free.

But the mental scars from discretionary trading can be seriously debilitating,


Always trading your last trade

It’s said that a general always fights his last war, – and traders always trade their last trade (usually a loser).

If your last trade lost, you probably think you did something wrong, when in fact you might have just lost to randomness.

How many times have I read something like this on the Babypips forum?

‘I was stopped out too early on my last trade so next time I’ll use a wider stop.’

‘I took a bigger loss than wanted so next time I’m going to use a tighter stop.’

‘The moving average technique I used failed miserably, so next time I’ll use horizontal support resistance.’

‘I tried that Harami Inside Bar technique over at Tradeneophytes, and it sucked, so next time I’ll check out Niall Fuller instead.’

What’s interesting is that while saying all this, you naively believe your trading skills are improving.

But they are actually getting worse!


Because… constantly moving goalposts is the opposite of consistency.

And it’s consistency, that you need to be profitable over the long haul.

Trading your last trade is one of the biggest illusions traders face and one many never return from.


Overestimating emotional control

There have been many occasions I’ve placed a trade, and no sooner than a minute later I’ve started regretting it.

Yet, moments prior to having skin in the game, I was so confident about what I was about to do.

For me, this scenario might play out with an intraday trade, or when I go short.

Or when I risk more than 5% of my capital on one trade or have multiple highly correlated positions.

For you, it could be a totally different scenario.

But the one thing we both have in common is we overestimate the emotional control we have.

Overestimating our control comes particularly when leverage is involved.

Which is one of the reasons why we should only ever risk small amounts on any single trade.

Many newbies currently demo trading, think they’ll be able to handle the emotional roller coaster that comes with scalping or day trading.

But most are in for a rude awakening when it dawns on them, that they’re taking on more than they can handle.


Any idiot can make money

Markets can only do one of three things.

Go up, go down or go sideways.

So, there is a good chance that no matter how bad your trading skills are, on any one trade you can make money.

This leads to a false sense of confidence and ultimately leads to market ruin.

You may recall the Telewest trade, in my trading journey part one?

From the get-go that trade worked perfectly – until it didn’t.

It’s easy to think you’re a hotshot trader when you really just followed some advice from some dude on an internet chat room.

Many of the Robinhood traders currently following the Wall Street Bets forum, right now likely feel like masters of the universe – having just squeezed the shorts out of prominent hedge funds.

For a few of these traders, things will work out long term.

But for most, their inability to confuse brains with a bull market will bite them in the butt.

Markets always figure out who is genuinely skilled in the art of trading and who is just riding their luck.


Recognition is half the battle

In life, you either learn from other peoples mistakes or learn from your own.

It’s more profitable learning from other peoples of course, but who the hell is clever enough to do that?

I was already making heaps of mistakes by the time I finally appreciated the sage words of Livermore or the books of Mark Douglas.

Or, the lessons from the Market Wizards.

In fact, when I first purchased my Telewest shares way back when I literally had no f&%&*%ing clue what I was doing.

Even for newbies who have put in serious study time, the theory is one thing, practice something else.

This is the greatest dilemma for the newbie. You just don’t know that you don’t know.

So before you get back to your charts, searching for that one infallible system (which doesn’t exist) consider the above scenarios that can lead you to potential trading problems.


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John Scott
John Scott has been trading CFDs and FX since 2003. His favourite markets are the Dow 30, Gold and the GBP/USD. John believes short-term price action trading is the best approach for beginners to trade. Tradeneophytes is his humble attempt at helping new traders reduce the learning curve to trading success.
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