Trading Psychology

So, you have a trading account and you know some technical analysis. Are you ready to dive into the trading world and be successful? The answer is NO. Why? Because you have to face the biggest challenge, yourself. Your psychology! There are some crucial things that can affect the way you operate in the markets and lead you to mistakes that can bring you and your account to the ground. I often see traders who are trying to soak up information from too many sources. This can be news, sentiment indicators, technical indicators, analogs or models. This information is being processed through their personal beliefs and backgrounds leading to a final trading evaluation. But is this only one? Or can it be many causing paralysis and inability of action? The more sources a trader uses the more difficult it becomes to extract conclusions. Most of the traders will run away from a successful model the moment a trade is lost and start looking for other systems that got that specific trade right. They start using the other systems until they lose a trade. The process continues almost forever and the trader ends up watching all of the systems at the same time and wondering what is right and what is wrong.

Everybody is looking for big winners but in a wrong way. A big winner with small risk is good but most big winners out there are a product of very big risks. Who thinks that by reading a book will become a scientist? Or who thinks that by skipping workouts at the gym and by eating whatever he likes he will become Mr Olympia? This can’t be done. It takes time to become a scientist and it takes time to become Mr Olympia. Similarly it takes time for a trading account to grow. It takes many trades for a model to prove its validity. Statistics rules. There is no conclusion to be extracted from 1, 2 or 10 trades. A trader should stick to one and only technique at a time and follow it for a considerable period of time. There will be losing trades because the market is a statistical system and it can be provided with probabilities and not certainties. Therefore even with the highest probability the opposite outcome may be materialized.

The trader must know that the levels that are produced by the model are stable and they don’t change. They are there and they will provide a reaction no matter if the market is rising or falling. If the levels depend on market direction then the trader will be under stress thinking that he needs to get market direction right. The trader must feel comfortable when taking a trade. Only then he will be ready to accept the possible loss. That’s why risk must be low, almost negligible. A trade with negligible risk but with big potential can almost be ignored. And this is what a trader wants. As soon as the above elements have been established the trader should be ready to take every trade the model produces without thinking it twice. Act almost like an algo. This will provide the statistics that his equity curve needs in order to rise considerably.