A Beginner’s Tutorial – Lesson 2: Trading Psychology

  • By Tom Cleveland

  • October 16, 2018
  • 12:10 am BST

The psychology of trading is what sends the inexperienced and impatient novice searching for a new investment medium in short order, battered, bruised, and with a lighter wallet to show for their effort. There are correlations to gambling, but to win at this game, one must treat it as a business, knowing “when to hold ‘em and when to fold ‘em.” Beginners lack the emotional “courage” to allow winners to run or to cut losers early. These tendencies shift the odds to the market, preventing any chance for long-term survival. If you can learn to accept a loss and minimize it, and then ride the wave of a strong trend for all it is worth, you will have shifted the odds in your favour. Over time, this disciplined approach to trading is the only path to success.

Developing a plan of attack, executing a buy order for a chosen trading pair, and then following market signals during the course of a trade are all simple enough tasks for the average trader to learn and perfect. However, when it comes time to sell, even for the most seasoned traders among us, there seems to be a nagging little voice in the back of the mind that urges us to hold on for just a little while longer. Intuition can be a saviour at times, but not if our early programming has been unhealthy. The question remains, “Why is it so difficult to sell?”

The growing field of investment psychology has actually uncovered a number of valuable insights from a variety of behavioural experiments conducted over the previous decade. Clearly, the difficulties a trader faces when it comes time to exit a position are comprised of both external influences and internal drives and motives. Like it or not, we tend to be victims of social imprinting and our negative emotions. Fear, anger, greed, and feeling unworthy are only a few emotional responses that can wreak havoc on even the best trading strategy. In order to survive and thrive in a stressful trading environment, we must develop coping behaviours to avoid the pitfalls that our minds have created for us.

Trading in every medium is an endeavour that requires a certain attitude for success. Many novice traders are unaware of the mental attitude necessary for successful trading. They begin to trade, not realizing that their personal defects of character will be manifested in their results. When referring to personal defects of character, many conscious and subconscious elements of personality can and often do get manifested for the first time when a person begins trading for their own account. This process often happens because many elements of a personality lie dormant until certain conditions in the environment arise.

While eliminating the emotional element in trading is highly unlikely, seasoned professionals have minimized emotional and character elements with education, practical experience, and using a trading plan. We often refer to this as a disciplined approach to the market. Being well educated on the economic forces that cause prices to change and having considerable familiarity with the market and product one is trading give the trader confidence. Confidence in trading makes up a large part of a successful trader’s attributes, but a step-by-step trading plan is recognized as the best method for moving emotions to the back burner in the midst of the heated stress of a trading session.