Lesson learning objectives : How personal psychology affects trading decision ? What are optimal trading practices ? This lesson address these important topics in a simple and efficient way, to allow the participant to understand how personal psychology affects trading decisions and how to optimize them on the market place
Understanding how personal psychology applies to trading
The most important variable to any trade is the trader themselves and their decision making ability. Being able to make rational decisions during irrational times are one of the reasons successful traders seek to employ a set of predefined rules upon their trading activity in order to minimize making poor decisions, decisions usually affected by emotion.
“Most traders lose money because they do not have an understanding of the markets or themselves. They trade without method, strategy or discipline. They fall prey to powerful emotion, which leads to impulsivity and behaviors more akin to gambling then understanding. They fall prey to perceptual biases which lead to false conclusions and inappropriate actions”
Greed and Fear are the two main emotions traders encounter which can affect their profitability in the markets. Understanding and running a trading strategy allows scenarios that unfold to be handled automatically thus reducing the chance for the trader to be swayed.
Traders also need to be flexible with trading strategies, keeping records to check and self analyze from in the aims of self improving their approach to the markets. Technical analysis (covered in the second course) allows the trader to analyse and interpret market data in order to take trading decisions, such as with a cryptocurrency, based on analytics as opposed to emotions.
Optimal trading practices
Mark Douglas, arguably one of the best trading educators in market psychology and the author of the book “Trading in the zone” sets out some core steps for trading success.
Staying focused on what you need to learn
Douglas expresses the importance of understanding what is needed to achieve their desired goal. Rather than focusing on the money, use your trading to expose your own weaknesses to learn from. In other words learn to trade and profits will take care of themselves.
Dealing with losses
Traders need to accept losses if they do not then they will generate fear leading to the very thing they are trying to avoid. Douglas mentions it is also important to define a loss before it has occurred and have it worked into the traders strategy so that the response to the loss is automatic.
Douglas states “When losses are pre-defined and executed without hesitation, there is nothing to consider, weigh, judge and consequently nothing to tempt you with”.
Learning how to execute a trading strategy/system flawlessly
Douglas explained a traders strategy as “they mathematically define, quantify and categories past relationships in collective human behavior to give you a statistical probable outcome of the future”
Douglas argues that unlike in gambling, whereby a random outcome determines your success thus leading the participant to not take responsibility for the outcome. In trading the trader does take responsibility for outcome and thus their self esteem is at stake and it is much more difficult to participate.
Developing a strategy is half the battle, having the discipline to follow through with it, incurring losses, with the confidence of eventual profit is the second part.
Learning to think in probabilities
One of Mark Douglas’s most popular tips is that you need to learn to think in probabilities and not in certainties. It is important to remember that a traders success comes from all the result of all of their trades not just a single one. A popular way of thinking about his is to imagine you are a casino and that your trades are the games you let people play on. You don’t expect to win every single game but since the probability of you winning is slightly over 51% you can
Learning to monitor yourself
Goals are a good way to monitor your records, as taking records without reflecting on the cumulative results will not aide in improving your trading strategy. Spreadsheets offer a useful way to plot your trade statistics and to help keep a record over time of them.