How To Be A Psychological Trader, In A World Full Of Mechanical Trading!
Psychology is defined as a scientific study of the human brain and the way it functions. This is with respect to those functions of the mind, which affects the behaviour of a person in any given context. It can also be defined as the mental characteristics, like the attitude of a person towards something, the way they think, etc. Psychology won’t just give us an understanding of how a person thinks consciously but also covers the unconscious or subconscious phenomenon. Hence, it can be considered as the overall study of the mind, which is not just limited to the basic thinking and beliefs of a person but also the beliefs and deep-rooted perceptions.
Importance of Psychology in trading
Trading is one of those fields where Psychology plays a significant role. We can say that the Basic Psychology of the trader can decide his/her fate in this field. Psychology in trading refers to the way a trader perceives on what is happening in the financial markets and how their attitude and emotions can influence these perceptions.
There is a general perception that the majority of the traders go through the same set of emotions while they trade, but that is definitely not true. If that were the case, there won’t be a staggering difference between the traders who are making a lot of money and who are losing a lot of money.
A lot of traders believe that a reliable and tested trading system alone can lead them to success in financial markets. They spend almost all of their efforts, time, and energy around figuring out these reliable, standard, and proven techniques. So they hardly pay attention to their discretion ability and their emotional awareness.
These are the essential factors that can decide a trader’s success in the market. Therefore, paying zero attention to overcome psychological barriers will only lead them to failure. Almost always, these emotional extremes are the factors that obstruct traders in properly analyzing the market.
The number of individuals failing in this industry is vast. People who force themselves in the world of Forex trading eventually fail. This is because of their unrealistic expectations. They tend to believe that trading in the Forex market for very few months will enable them to leave their full-time jobs. They expect for the money they invested to grow from $1000 to $100,000 in a matter of months. These unreal expectations construct an utterly wrong mindset, which results in running behind the thirst to make profits. As this thirst builds up, a trader unavoidably becomes controlled entirely by their emotions, which is a sure-shot way to go broke. It is this exact combination of wrongly defined trading objectives and the unrealistic expectations, which results in the utter failure of their trading career.
Role of Emotions in trading
Not being able to control your emotions, instead, letting your emotions control, you can only lead to failure in the Forex market. Making decisions while you trade without the interference of your emotions is not an easy thing to master. It takes years and years of experience and strong discipline to diminish the impact of your emotions on your decision making.
In general, there are five common emotional mistakes that traders make which have the potential to spoil your trading career. Overcoming these psychological barriers can make you a remarkable trader. They are the sensations of Greed, Fear, Revenge, Euphoria, and Pride.
Finding Solutions within the problems
A lot of studies in the early 90’s states that people are shockingly mechanical. They like to do what they already know, and it is very difficult for them to come out of that and perceive something that will lead to success.
Problems are everywhere. Problems are solutions that have just outlived their usefulness. This is completely relatable for any mediocre trader. A trader who developed his methods during a long bull market by buying dips consistently made him money. Now it becomes difficult for him to succeed in a totally different market. He has used his indicators and oscillators to figure out what he has to do when. Those gaps and oscillators that seemed so reliable during the strong market now are working against him, resulting in huge losses. Despite the indications that the trading methods are no longer working, the trader continues to do the only thing he knows. He adds to the positions on the way down only to be caught in a waterfall decline. This is a psychological problem.
The trader’s stubborn mindset is his greatest enemy. He still believes that the solutions that have worked for his previous problem can also be the solutions for his present problems, which is entirely wrong. Outdated solutions replay themselves in a variety of life situations, leaving people mindlessly repeating their mistakes.
A professional trader should have the ability to convince himself that not all problems have the same solution. They should have the flexibility in their head to think about what would work right for the current problem they are facing. Only then, one can prosper in this field of trading where you face hundreds of different problems, and all of them require a different solution.
Trading is a psychological game.
A deep understanding that this is the game you’re playing allows you to play it differently than the masses.
There is this principle called Pareto’s Plus. This principle divides the population into two different groups, one who belongs to 95% and the other who belongs to 5%. For example, 95% of sales can come from just 5% of loyal customers; 95% of road accidents occur in only 5% of accident locations; 95% of profits may come from just 5% of your products, etc. There is one fundamental difference between this 5% & 95% of the people, which separates from each other.
In the field of trading, that fundamental difference is the Psychology of the traders. The group of 5% of the successful traders will always be thinking different, have a different attitude towards the problems they are facing and react accordingly, which separates them from the other 95% of the unsuccessful traders. So when you play the psychological game of trading, think different from what others are thinking and see your trading game change.
Behavioural consistency, no technical knowledge, separates the pro-traders from the amateurs
Technical knowledge is, of course, vital for someone to succeed in trading. But just that alone can never make you a professional trader. The simple reason being, it can be learned over time. There are thousands of institutions and websites all over the world where you can learn technical stuff like how patterns work, how market moves, and obviously when to buy and sell. These things are essential, but for you to become a professional trader, it is essential to know that being consistent in the way you think and behave is what matters the most.
For instance, let’s say you are a skilled trader with a lot of technical knowledge. You want to margin trade a currency, so you see the market. With all the indicators you know, you understand that there are 90% chances of you winning the trade. At the same time, you are not emotionally stable with zero behavioural consistency. So instead of performing a 2x trade you generally do, you will want to do a 10x leverage as all the odds are in your favour. There might be some mess up in the market, and you lost the trade, which resulted in the liquidation of your assets. So are you a professional trader now? Despite being a technical expert in trading, you had to pay a huge price just because of not being consistent. Had you stick to your 2x strategy, you would have ended up losing just something that you can afford to lose. This is the exact reason why behavioural consistency is a lot more important in trading than the technical knowledge you possess.
If you’re a wounded trader, trade small. Take it slow. Overcoming one little fear with small courage gives you the confidence to take on the next.
A man without patience is a lamp without oil. Being extremely patient is one important quality a trader should have. Keep watching the markets until you feel the setup is right for you. Waiting and understanding the markets can increase your knowledge on what can happen when you stumble upon something similar in the future. At the same time, never back off when you know you should place the trade. Never let that fear stop you from doing what is right. Mitigating the risk is very important, but not risking at all will take you nowhere.
Understanding and Overcoming Fear
Being a trader is one of those professions which involves dealing with a lot of fear. Almost all of the traders and investors in any market feel fear at some point of time in their trading journey. This is because financial markets like Forex are volatile, and they are something which is not in our control. Some news events can change all the trading plans you had for the day, and anything that is not in our control can cause fear of uncertainty. At the same time, it is essential for a trader to understand and overcome that fear to trade anything at all. The key to successful & profitable trading is in how we prepare ourselves to handle the fears that are involved in trading.
Most of the investors believe that they know what is going to happen next in the market. This results in traders overthinking about their current trade while ignoring their past performance in the probability game of trading. As the importance of a single trade increases in the mind of a trader, the level of fear also increases. They are directly proportional. This results in traders becoming more cautious in their trading activities and develops self-doubt. The risk of them, choking under pressure increases, as they feel the pressure build. Almost all of the traders have fear, but the crux of overcoming fear is in managing it.
Successful traders manage their fear, while the amateur ones are controlled by it. When faced with a potentially dangerous situation, there are two choices. You can either face the fear or run away from it. You should know when to do what. In general, there are four types of fears traders generally face. They are the fear of losing the trade, fear of ruining profits, fear of missing out the trend, and fear of self-doubt.
Fear of losing trade is one of the most common fears every trader would have. This fear may occur after incurring a few losses while following your trading strategy, leading to a lot of adverse consequences. Fear of losing will stop you from entering or exiting a trade, thereby spoiling your timing strategy. This fear will prevent you from taking action at all in your trading activities.
Being in constant fear of losing the trade will never let you trade that way you want to. For instance, if you fear you will actually be able to exit your position when your strategy indicates you to get out, as a self-preservation mechanism, you will also choose not to get into any new trade. The only possible way to overcome this fear is to thoroughly understand that losing is inevitable. Many of the successful traders still lose trades after 10 to 20 years of trading, day in and day out. No one can be correct all the time. But the crux of overcoming this fear lies in your ability to minimize the loss and executing your timing strategy flawlessly. Remember & understand that the right timing strategy is designed to safeguard against significant losses.
The fear of losing profits is most common among amateur traders. They take quick profits and let loses go out of control. They lock in a quick profit to guarantee that they feel like a winner. This can be avoided by understanding the trend correctly. When you know the trend, it is easy for you to anticipate what is going to happen next, and you will never lock in your profits until the reversal occurs.
Fear of missing out the trend begins with greed. Investors pressurizing traders to get them in the trade at any price possible to follow the hot trend puts a lot of pressure on the trader. In this situation, traders are constantly worried about the trend leaving the station without their knowledge. Hence they enter into a position or exit a position in a hurry irrespective of their trading and timing strategy. There is a lot of ignorance on the downside of that trade or the risk factor involved, which is dangerous. The only way to overcome this anxiety or fear is to trust your strategy and anticipate the trend instead if possible.
Doubting your self is the last thing you should do while you trade. Trading is a game of probabilities where you execute your strategy and expect the odds are going to be in your favour. Self-doubt kills your creativity in planning your strategy. You will always be worried about being wrong, thereby focusing on the negatives more than positives. You should be confident enough on the strategy you made for yourself and execute them irrespective of the result. By doing this, you can easily overcome this fear of not being right.
Surpassing Greed in Trading
There is a famous saying in the world of trading, which is ‘Bulls and Bears makes money buy Pigs get slaughtered.’ The pigs here are referred to the greedy traders. Greed can be the one thing that will stop you from being a successful trader. Slow and steady wins the race. They only want you can get rich very quickly in the world of trading is to go slow. Understanding the market and acting accordingly while doing risk management is the best way to succeed. But when the greed kicks in, your risk management would go for a toss and results in horrible losses. The desire to make most of the trend is natural, but this becomes your enemy when you do it excessively. Greed is worse than fear. Fear would just paralyze you and keep your account stagnant, but greed will make you act in the ways you shouldn’t and destroy your assets.
Having a concrete plan for your trading activities and sticking to that plan can help you in overcoming greed. Do not dare to violate your plan either while entering or exiting a position. The plan is set up for a reason. By having this clear trading plan, you know exactly what you are looking for, in terms of entry. Do not compromise. Wait for the exact entry as you planned. Rather let the market come to you than you chasing the market can avoid the greed of you missing a trade.
Overtrading can also be considered as greed. Overtrading even when you know the odds are against you is nothing but gambling. Stick to your plan and the strategies that have worked for you to avoid over-trading.
Usage of Risk Management will give you an idea of how much you can risk. Especially when you use leverage, there are high chances of getting tempted to take high leverage in the hope of getting high returns. The greed for a massive profit with less size of trading accounts can be very dangerous. You should have robust risk management plans before entering any trade to mitigate risk.
Greed is one of the biggest obstacles for you to become a successful trader. Inculcating qualities like emotional discipline and self-control can help you in overcoming greed while you trade.
Plans & Reactions
To be successful in any field, proper planning is necessary. With respect to trading, the Forex, or any other financial market without a plan is almost a sure-shot recipe for failure. Setting goals in advance and being aware of when to get out of a trade is very important to be successful in forex trading. Trade must be liquidated for the profits to get realized. Ideally, every successful trader in the market should depend on some plan or guideline for their success.
When you trade without a plan, you are asking for troubles. And when they come, they often do so with momentum
Unplanned trades are the worst. There might be a chance of you winning the trade, but expecting the same result all the time is dangerous. Sticking to the plan and working for it will fetch you great results over unplanned trades. Never go for an unplanned trade even though the odds are for you. If you are not capable of handling the loss, do not take that trade.
You have no power over what the market hands you. You have power over how you respond
As the above quote states, it is not about what happens in the market that decides your profits in trading. It is the way you reacted to it, which has resulted in what you got. There are a lot of professional traders who make money in both Bullish and Bearish markets. So complaining about the market conditions is not the right thing to do, as it’s you who is responsible for how you have reacted to those poor market conditions. One crucial psychological factor a trader should have is taking ownership of what has happened rather than to play the blame game.
The way you respond to the situation matters the most and makes you realize what kind of trader you are. What if you lost a trade? That wouldn’t be the end of your trading journey, right? Losing in the world of trading is inevitable. Learning from where you went wrong and never repeating the mistake you just did, will definitely make you a better trader. Losing a lot of trades in the very beginning of your trading journey is the best thing that can happen to you, only if you are willing to learn from each of those mistakes. Never get demotivated and doubt yourself as at the end of the day, you should be your strongest motivation.
As loosing is not permanent, neither winning is. When you win a trade, analyze that trade and figure out what went right. Share the best practices of yours within your community because you will only increase your knowledge by sharing the things that have worked for you. Take feedback and get back to work. Winning a trade doesn’t really mean you mastered something. It just means the odds were in your favour and your strategies worked. So it is a good practice to work more on your trading strategies and never let that win make you overconfident.
The power of being Inquisitive
In either life or financial markets, the greatest rewards come to those who invest their most important resource in being inquisitive. Anyone’s most valuable resource is time. Spending time in learning and updating the knowledge you have is the best thing you can do for yourself. Education is a continuous process, and the only way to keep winning in the game of trading is to keep learning more about them.
It all boils down to who knows more. For instance, let’s say you know more about technical analysis in trading, and you see a huge opportunity in trading currency by looking at its price action. You set your positions and all ready to take profits. Some speculation happens, and you lose the trade. But there is someone in the market, who was inquisitive and read about the fundamentals of that particular currency. He guessed the speculation and avoided trading that currency, thereby avoiding the loss. So being inquisitive will take you to places, especially in the financial markets.
Learning to trade is just like learning to ride a bike or play the guitar; it’s going to come easier for some than for others. But as slow as your progression is, know that the reward, in the end, is well worth it.
There is a very famous saying which says, if your earning starts before learning, there are high probabilities that you will fail. Learning is critical for you to succeed in financial markets. It is that one single thing that stands between winners and losers. The more you learn and know your stuff you prosper. This is obvious, and you might have heard this a million times. But yes, we still wouldn’t mind saying it one more time. Learning is where the money is.
No Pain, No Premium
The term similar to No Pain No Gain in financial markets is No pain, No premium. Unless you go through the hustle of learning and updating yourself, you won’t get the premium you have asked for. This statement is universal and something you should always abide by.
The art of overcoming Perceptual Rigidity
Success and failure in the world of trading solely depend upon the decisions you make. A credible study done in the early ’90s suggests that the judgments people make based strictly on past experiences are far different from those that are made in an entirely new situation.
In the former situation, the quality of long-term memory correlates quite well with the judgments people render. However, in those unfamiliar situations, a person’s memory is a poor predictor of the decisions that will be made. The findings of their research suggest that most spontaneously generated decisions are apt in such situations than basing your decisions over past experiences. Trading Forex markets, most of the time, is like facing an unfamiliar situation. So basing your decisions on your emotions when the market clearly says otherwise is the last thing you should do while you trade. People generally are far better at generating ideas than at revising them, especially people who are comfortable with the relative balance of risk and reward. Moreover, when the uncertainty is high, and the volatility of the markets requires on-the-spot decision making, people are most likely to fall prey to their cognitive and emotional biases. The only way you can overcome this is to be aware of this, and since you are aware of this now, you are never going to base your decisions on your emotions over what actually is happening in the market.
With discipline, anything is possible.
Without it, locating success is like looking for a needle in a haystack
The field of discipline we want to bring out here is the emotional discipline. To be a professional trader, you must be emotionally disciplined. Meaning, you should be the controller of your own feelings, which has the potential to spoil the trade for you like Greed, Fear, Euphoria, etc.
If you can understand (and appreciate) how much you don’t know, you’ll find it much easier to trust your rules
Realize that there is much more to know than what you actually know. In fact, there is a lot more in this world that you don’t even know what you don’t know. So it’s always better to make decisions based on the facts than your emotions which are based on your blind belief.
Abide by the rules
Every trader will definitely have his own set of rules. Having rules is, of course, important but sticking to them throughout your trading journey is what makes you a distinct trader. This has a lot to do with human psychology. A recent study that has been done by 64 traders states that under highly emotional circumstances, traders tend to behave more like unsuccessful traders and less like successful traders. This is determined by various factors, one of which includes them not sticking to their general trading rules.
Trading rules are there for a reason: they protect you from your own inconsistencies and create a reliable framework from which consistent results can be possible.
Once you set the rules for yourself, you need to realize that they are there for a reason. We should never break a rule unless and until there is a very strong reason to do so. These rules protect you from being inconsistent in your trading activities. After all, that is the reason why you made those rules. These rules create a set of boundaries that you are not supposed to cross. But a lot of amateur traders break these rules out of fear or greed and end up paying a big price.
Be uncompromising with your rules, yet flexible with your expectation
Trading journals help traders in tracking their trades throughout the day. It is an excellent tool because it includes a lot of details beyond what you can see on a brokerage statement. It includes what market conditions were like in the past and gives you an idea on how you used to trade before and how you are doing it now. It will also give you a glimpse on if you were distracted or made mistakes. By maintaining a journal, you can record strategic ideas that may come up as you trade throughout the day.
Keeping a journal involves writing out objectives. In trading, it’s essential to maintain a trading journal. A trading journal is not just a simple list of activities you did on a particular day. It should include a lot of information about the kind of investments that are being made and why. If there is any recent news about the company or currency that you have invested in, make a note. This will help you in analyzing the trading decisions you make. By tracking how your decisions affect your trading, you also can spot dangerous trends and work to correct them. Write down everything. Don’t leave anything out. While you are in a trade and forgot to exit it as you were distracted play PUBG, write that down and explain why. Having a trading journal helps you understand your past mistakes better. With this, you will be able to trade better. Make sure to begin the journal before the trade and end it after the trade with a small summary of the patterns that you came across during the trade.
A good journal should allow you to examine your own mental attitudes so that you can be your own therapist
Be sure the journal includes observations about your trading and about the financial markets you trade-in. We have identified that trading journals are mostly skewed toward self-analysis and include little in the way of market observation. Take notes on some interesting factors that are affecting the movement, up or down. Using the trading journal, you will also be able to make quick decisions. Keeping a trading journal helps you redefine your strategies and avoid potential issues.
Not having a journal is as same as not learning from your mistakes.
There are many Journal apps for both Android and IOS. Apps like Evernote and Edgewonk are the most credible & user-friendly ones.
Edge Wonk Link – https://edgewonk.com/free-trial/
Evernote Link – https://evernote.com/
Music and Moods
Music has the ability to alter your mood either for better or for worse, depending on what you are listening to. Mood drives behaviour and listening to the right music when trading can improve your trading results to a great extent. This might sound bizarre, but it has worked for a lot of great traders. Having said that music with vocals might distract you or affect your trading performance, so it is recommended try something calm, soothing, and perhaps even neutral like ambient sounds. Music can increase accuracy. A study that has been done involving radiologists found that listening to music improved their accuracy as they accomplished monotonous tasks that they already knew. They actually performed better compared to another group who did not choose to listen to any music at all. So if you are a trader looking for recognizable patterns, by all means, listen to some soothing music and see if you can get the work done with more efficiency.
Mindfulness makes it easier for us to do the unpleasant but necessary thing.
Mindfulness is the human ability to be completely present. It is nothing but being aware of where you are and what you are doing. When you are mindful, you won’t be overly reactive or overwhelmed by what’s going on around you. This is one important quality a trader must have in order to succeed. For example, being extremely depressed since you lost a big trade or being extremely happy about the trade you won can never make you concentrate more on what you are going to do next. Being mindful will help you to stay calm in any situation possible so that you are not affected by the outcome no matter what. There is a lot of content on the internet for you to understand the entire concept of Mindfulness and its advantages. We would recommend you to go through them in order to become a trader with substance.
Tech for the Rescue
Fortunately, we are in the 21st century, where we have an app for everything. There are a lot of brilliant apps to help traders in finding the right music. These apps beautifully pre segregates music according to its genre. All we have to do is plug in and play.
Some of the exciting mentions include Headspace, The Mindfulness App, Calm and MindBody. Most of these apps support both IOS & Android operating systems with a free version available.
Motivation and Daily Routines
Knowing where you are now and where you want to be, itself is a great motivation. No external motivation can replace the motivation that comes from within. So being constantly motivated towards the goal you want to reach will definitely help you to trade better. Habits and routines are extremely powerful. Your habits determine who you are, and your routine decreases the work for your brain by subconsciously doing that work without even you knowing it. That is extremely important because it is a proven fact that your subconscious memory is much mightier than your consciousness. So you can never make a mistake when it is a routine. Hence having good habits like planning your tomorrow before going to bed, meditating, listening to calm music, reading trading related books, consuming those foods which positively affect the brain, quitting procrastination, maintaining a journal can help you in becoming a better trader.
Start the trading day by executing your action plan for the day.
End your day by reviewing your day: did you accomplish that task or not?
Planning can never be helpful unless you take action. Starting the day with the set of goals you want to achieve and reviewing it by the end of the day to see how you have performed for the day, can always give you an idea on where you stand at. This is very important because for a trader to be consistent, reviewing his/her performance is very important. Make it a habit for the first one month, and you will realize where you stand at as you are reviewing your performance daily.
Meditation teaches us that it’s okay to relinquish control; to let go, to cease trying, to surrender, to just be. We need that from time to time.
Practising meditation on a daily basis can work wonders for you, especially if you are a day trader. Meditation reduces the monkey mind. A recent study by Yale University discovered that meditation decreases activity in the default mode network, which is responsible for mind-wandering and self-referential thoughts. Since mind-wandering is associated with being less happy and worrying about the past and future, meditation is a proven technique to calm the mind and helps to focus on the present.
This is particularly significant for the traders as it allows them to reroute their attention to the present whenever they catch themselves thinking about past or future trades, the reasons for their wins or losses, any kind of judging or doubting which is unnecessary. Meditation also reduces stress and anxiety.
The practice of meditation reduces the density of grey matter in areas of the brain related to anxiety and stress. The individuals who meditate daily tend to live in the present, and they are less likely to cling on to the past. Meditation helps in reducing the symptoms of panic disorder. It also improves focus, attention, and ability to work under stress, which is essential for traders as most of the time, they will be under constant pressure but are supposed to be focused and attentive.
Meditation also improves information processing and decision-making ability. It gives traders mental strength, resilience, and emotional intelligence, which are at most required for that profession. Apart from all of these benefits, there are a lot of professional traders who admit that practising meditation has worked wonders for their trading carrier.