Articles on Psychology of Trading

[Jennifer]

Hi Friends,

I am opening this thread to post some important Articles on Psychology of Trading. I request you all to share more informative articles on this thread. Psychology plays an important role in our day to day activities and in the case of Trading, its much more evident. To succeed in Trading, the Trader should be psychologically and emotionally very strong and the more we understand about it the more better it is. To begin with, I am sharing a nice article on Psychology of Trading with you all, please keep this thread populated with many more articles.



Trading Psychology

The psychological state of the crowd and the psychological state of the investor or trader are important areas to look at when considering an investment or trade. Bubbles and crashes within any market arise out of crowd psychology. Bubbles and crashes in any one individual account also arise out of the psychological state the single person brings to both their decision and their execution of their decision.

What do we mean by psychological state? Answer: The combination and type of intellectual, physical and emotional energy coming to bear upon an investment or trading decision. Put another way - trading psychology is the sum total influence of a human psyche on the process of making an investment or trading decision. The American Heritage dictionary defines psyche as: "The mind functioning as the center of thought, emotion, and behavior and consciously or unconsciously adjusting or mediating the body's responses to the social and physical environment."

Fear and Greed

Typically when people talk about psychology in the markets they reduce it to the emotions of fear and greed. Likewise, the typical response is to try to avoid the influence of the feelings of fear or greed. In many ways, this is a futile effort in that those emotional responses are natural and are not going to go away. A better approach is to accept that reality and learn how to become aware of their influence on a decision and also aware of their influence on how a stock might be acting.

Emotional Awareness in Investing

In actuality, the situation is much more complex and nuanced than that and the work being done in trading psychology now is extending and applying the work of neuroscience in understanding the human response to a risk reward decision. Researchers such as Dr. Andrew Lo of MIT, Dr. Brian Knutson of Stanford and Camelia Kuhnen of Northwestern are delivering excellent work which illuminates just exactly what the brain is doing when faced with a choice about risk.

There is great evidence for the value of actually including emotional intelligence in making decisions about the financial markets. This is an area that is just beginning to be explored. It also extends to the interaction between human and computer in the situation where trading strategies are driven by quantitative models which drive automatic trade executions in the market.

How Can an Investor Account for Psychology?

Two simple ways to address this ever-present issue are to always ask the following two questions. #1)Is my analysis being impacted by what the crowd is doing? #2) Is my analysis being colored by the result of my last investment or trade? Including an analysis of the the human factors influencing a trading decision offers to opportunity to reduce risk and improve return.

[Tom]

Hi Jennifer,

Where have you been these days? Thanks for starting a good thread and I agree with your views on Trading Psychology... will keep posting interesting articles on this thread.

[Jennifer]

Hi Friends, here is another great article related to this thread topic.


Rethinking Trading Psychology


Conventional wisdom in trading psychology used to depend on two primary tenets – discipline and "control your emotions."

But that was before neuroscience started putting traders, poker players and other risk-gamers into brain scanners.

Now that we know that all decisions depend on the presence of an emotion, most perception occurs outside of our awareness and that how our bodies feel will influence what we think, Trading Psychology 101 requires a re-write.

Did you know that research indicates we can only make a few – maybe as little as two – “disciplined” decisions in a row?

Researchers call this decision fatigue or ego-depletion. For traders, it means that instead of sitting at the screen fighting for every tick that that same quantity of discipline imbued into a structured plan for getting out of the office and away from the quotes will most likely produce an increase in P&L.

Research also shows that complex decisions, or those with many conflicting data points, create the most satisfying results when they are made non-deliberately. This means that letting a trader’s unconscious – or all of his or her accumulated knowledge – percolate or bake into the realization the trading brain has delivered the decision equivalent of superb coffee or heavenly brownies.

In other words, going to the gym not only in the middle of the day but even in the middle of a trade will optimize your trading psyche to make the most profitable judgment call on a trade’s exit point. Pumping iron or spinning those bike wheels turns what we used to call physical energy into market-reading clarity. In fact, it is likely that your better read on the market’s next dance will seemingly magically come to you when your earbuds have your favorite song beating and not when you are staring at every tick trying to force the screen to give up the future’s secrets.

Which brings us to the inexorable connection between the body, feelings, emotions and risk decisions: the maxim “control your emotions” emanates from a misunderstanding. Any of us can feel anything – and not act on. We do that all the time. Logically we only have to control our actions. Senses, feelings and emotions should be considered data and analyzed.

Adopting the strategy of “emotions as information” leads to two primary benefits – knowing the difference between and impulsive feeling and an intuitive (market experience) one. And second, disengaging repetitive emotions and events fueled from our past and acting in a fractal manner from our expectation of what the market is doing. We all bring our personalities to our perceptions. A large part of those personalities contain our characteristic reactions – the market is out to get me, I will all snatch defeat from the jaws of victory, the price action (authority figures) can’t be trusted and on we could go.

Antonio Damasio and his team got it started with the research reported in Descartes Error but now the proof is in, every decision includes emotion. This means every trading decision that turns out to be regrettable can be analyzed not from what went wrong with the analysis but from what feeling or emotion was really driving it. Everyone can look for FOMO or fear of missing out or what is really fear of future regret. Decision theory indicates this feeling to be maybe the most powerful one we have.

To take another example of unconscious emotions and how the concept of fractal applies not only to price but to perception, say a trader has a tendency to fight the trend, most of the time this can be traced to a wholly unrelated mental context of needing to prove how smart they are, needing to buck authority or being stuck in feeling like a victim who missed the real move. Untangling emotional data (versus ignoring it) gives a trader the opportunity not only to be making judgment calls on the here and now but opens up their whole perceptual and judgment toolbox to see and act on the fundamental question, what are most of the other market participants about to do.

Given that most traders try to predict market movements based on numbers alone, the trader who wraps the human question around the numbers while simultaneously adopting what decision science now knows about risk perception and judgment automatically derives a calculable advantage.

[Jennifer]

hi Tom, where is the article that you promised to post :)

[Tom]

hi Jennifer, please forgive my forgetfulness, here is a nice article related to this thread. <br />
<br />
Logic: The Antidote To Emotional Investing <br />
<br />
Much has been written about crowd and group behavior in...

[Jennifer]

The Importance Of Trading Psychology And Discipline

There are many characteristics and skills required by traders in order for them to be successful in the financial markets. The ability to understand the inner workings of a company, its fundamentals and the ability to determine the direction of the trend are a few of the key traits needed, but not one of these is as important as the ability to contain emotions and maintain discipline.

Trading Psychology
The psychological aspect of trading is extremely important, and the reason for that is fairly simple: A trader is often darting in and out of stocks on short notice, and is forced to make quick decisions. To accomplish this, they need a certain presence of mind. They also, by extension, need discipline, so that they stick with previously established trading plans and know when to book profits and losses. Emotions simply can't get in the way.

Understanding Fear
When a trader's screen is pulsating red (a sign that stocks are down) and bad news comes about a certain stock or the general market, it's not uncommon for the trader to get scared. When this happens, they may overreact and feel compelled to liquidate their holdings and go to cash or to refrain from taking any risks. Now, if they do that they may avoid certain losses - but they also will miss out on the gains.
Traders need to understand what fear is - simply a natural reaction to what they perceive as a threat (in this case perhaps to their profit or money-making potential). Quantifying the fear might help. Or that they may be able to better deal with fear by pondering what they are afraid of, and why they are afraid of it.

Also, by pondering this issue ahead of time and knowing how they may instinctively react to or perceive certain things, a trader can hope to isolate and identify those feelings during a trading session, and then try to focus on moving past the emotion. Of course this may not be easy, and may take practice, but it's necessary to the health of an investor's portfolio.

Greed Is Your Worst Enemy
There's an old saying on Wall Street that "pigs get slaughtered." This greed in investors causes them to hang on to winning positions too long, trying to get every last tick. This trait can be devastating to returns because the trader is always running the risk of getting whipsawed or blown out of a position.
Greed is not easy to overcome. That's because within many of us there seems to be an instinct to always try to do better, to try to get just a little more. A trader should recognize this instinct if it is present, and develop trade plans based upon rational business decisions, not on what amounts to an emotional whim or potentially harmful instinct.

The Importance of Trading Rules
To get their heads in the right place before they feel the emotional or psychological crunch, investors can look at creating trading rules ahead of time. Traders can establish limits where they lay out guidelines based on their risk-reward relationship for when they will exit a trade - regardless of emotions. For example, if a stock is trading at $10/share, the trader might choose to get out at $10.25, or at $9.75 to put a stop loss or stop limit in and bail.

Of course, establishing price targets might not be the only rule. For example, the trader might say if certain news, such as specific positive or negative earnings or macroeconomic news, comes out, then he or she will buy (or sell) a security. Also, if it becomes apparent that a large buyer or seller enters the market, the trader might want to get out.
Traders might also consider setting limits on the amount they win or lose in a day. In other words, if they reap an $X profit, they're done for the day, or if they lose $Y they fold up their tent and go home. This works for investors because sometimes it is better to just "go on take the money and run," like the old Steve Miller song suggests even when those two birds in the tree look better than the one in your hand.

Creating a Trading Plan
Traders should try to learn about their area of interest as much as possible. For example, if the trader deals heavily and is interested in telecommunications stocks, it makes sense for him or her to become knowledgeable about that business. Similarly, if he or she trades heavily in energy stocks, it's fairly logical to want to become well versed in that arena.
To do this, start by formulating a plan to educate yourself. If possible, go to trading seminars and attend sell-side conferences. Also, it makes sense to plan out and devote as much time as possible to the research process. That means studying charts, speaking with management (if applicable), reading trade journals or doing other background work (such as macroeconomic analysis or industry analysis) so that when the trading session starts the trader is up to speed. A wealth of knowledge could help the trader overcome fear issues in itself, so it's a handy tool.

In addition, it's important that the trader consider experimenting with new things from time to time. For example, consider using options to mitigate risk, or set stop losses at a different place. One of the best ways a trader can learn is by experimenting - within reason. This experience may also help reduce emotional influences.

Finally, traders should periodically review and assess their performance. This means not only should they review their returns and their individual positions, but also how they prepared for a trading session, how up-to-date they are on the markets and how they're progressing in terms of ongoing education, among other things. This periodic assessment can help the trader correct mistakes, which may help enhance their overall returns. It may also help them to maintain the right mindset and help them to be psychologically prepared to do business.

Bottom Line
It's often important for a trader to be able to read a chart and have the right technology so that their trades get executed, but there is often a psychological component to trading that shouldn't be overlooked. Setting trading rules, building a trading plan, doing research and getting experience are all simple steps that can help a trader overcome these little mind matters.

[Tom]

Patience and Discipline.

Professional traders know that their emotions are going to affect their trading whether they like it or not. As a result, they develop personalities that allow them to overcome their emotions and trade profitably. Two of the most important personality traits are patience and discipline, because they allow you to handle one of the most difficult aspects of trading.

Making Up Trades

Possibly the most emotional time for a trader is when their profit / loss is negative, and they are waiting for their next trade to come along. During this time they will be impatient and anxious, and they will be desperate to take their next trade in order to make back the money that they have lost. Most new traders (and also many experienced traders) will start taking trades that are not part of their trading system (known as making up a trade). As soon as this happens, their loss will increase, and will continue to do so until they realize what they are doing and correct their behavior.

Accepting Your Emotions

The solution to emotional trading is not to try and remove or control your emotions (good luck if you decide to try), but to develop character traits that allow you to control your response to your emotions. By developing a personality that counteracts your emotions you will be able to continue making logical decisions, even when your heart is pounding and sweat is streaming down your face (maybe this is a slight exaggeration).

Patience and discipline are vital personality traits for professional traders. Being patient allows you to wait for your next trade regardless of your current profit / loss, and being disciplined allows you to take only trades that are part of your trading system (not making up a trade). For some traders, the thought of losing money is enough to make them instantly patient and disciplined, but for others, the emotions are too strong, and they need to cultivate their patience and discipline.

Trading Log

One method of learning how to be patient and discipline is to keep a detailed log of every trade that you take. At the end of the day (or week, or month), replay every trade, and compare the replayed trades to your trading log. If there are any differences, you should be able to determine what caused them, and hopefully know what you need to avoid the next time.

Another method of becoming patient and disciplined is to have absolute confidence in your trading system. Knowing that your trading system will make money over the long term can be enough to overcome the negative emotions that occur when you are experiencing a negative profit / loss. The only way to have confidence in your trading system is to test the system thoroughly. If you have tested your trading system over a significant length of time, and it is consistently profitable, there is no reason to question that it will continue to be profitable.

[Jennifer]

What is trading psychology?
Trading psychology is the perception change that you go through once you are actively in the markets trading your own money. When trading on a demo account, it seems like it would be easy to make money and there seems to be no reason why you wouldn't be able to start making money with a live account. Then, you make that first live trade and you start to feel indecisive about when to take profit, or cut your losses. You have just discovered the effects of trading psychology.
How does trading psychology affect your trading?
Trading psychology can affect your judgment while you are trading. There are two emotions in particular have been the source of ruin for forex traders over the years. Those two emotions are fear and greed. Fear will cause you to either not make a trade when the opportunity arises, or to close a trade prematurely without giving it a chance to be profitable. Greed will cause you to make trades that are too large or too risky, while trying to make massive gains.

How to beat your emotions
The best way to combat trouble with trading psychology is by making a trading plan and sticking to it. Use well thought out risk management and don't get in over your head. Remember that mastering your emotions will allow you to seize the real profit from the markets while emotions are high for others. If you can master your emotions and follow good risk management practices, you can be a successful forex trader.

[Tom]

Focus On Winners - Not Losers

There's an old adage in the market that a trader should always focus on protecting downside and not worry about the winners, as they will take care of themselves. Any trader who's been around for a bit of time will tell you that's faulty logic.

It goes without saying that a failure to protect the downside and cut losses short is a quick way to blow up an account or end a trading career. That aspect of trading must be automatic; much life breathing is to life. Unfortunately, many traders over-focus on their fear of loss and allow trading anxiety to negatively influence their trading.

Finding success in trading is an altogether different proposition - one that requires the knowledge and discipline to focus on and properly manage winning positions to obtain maximum gain prudently.

Justifying Each Trade

The groundwork for success in trading is laid before a position is ever taken - when the trader assesses a possible trade by working through a process of justifying the action. It's at that time that the ideal entry price and the stop and target prices will have been identified, along with important insight as to the overall profile or "lay of the land" for the instrument - all important elements in trade management and maximizing gains.

The justification process involves identifying all of the relevant spots on the chart, along with strategy-specific variables, that one must be aware of before entering a trade, including:
•Key levels (near and longer-term retracement levels, extended targets, daily pivots, gaps, current/recent/historic price points of significance, etc.)
•Near-term and historic trends and trend lines
•Current chart patterns/formations
•Average daily price range
•Key moving averages
•Current price in relation to its opening range
•Volume/comparative volume
•Additional price or indicator variables specific to a strategy

That same process and awareness holds true for the broad market and closely aligned sector indices, as well as correlative issues (be their relationship lockstep or inverse), such as gold, oil, treasuries, dollar, etc.

Other key variables that must be considered include the recent/current volatility in the market, price movement and velocity (Are moves structured and tradable?), time of day, the trade cycle (e.g. key expiry periods, etc.), how "played" or exhausted the tape is in the current session, the normal trade profile for the instrument being considered, etc.

Remain Disciplined

Once in a trade, gain management becomes a process of remaining disciplined and allowing the trade strategy to unfold. The information and insight gained during the aforementioned justification process regarding normal price movement (swing and range) and likely stopping points enables a trader to do just that. Armed with that insight, an individual can enter a trade with a good understanding of the spots on the chart they'll likely be dealing with, enabling them to better manage the position through the normal ebb and flow of price movement with confidence.

Let The Winners Run

Ultimately, the key reason many traders fail is due to the fact they don't recognize the likely levels and normal trade characteristics (of the instrument traded) that will come into play once they've taken on a position. As such, they succumb to the fear of giving up any amount of gain and fall into the trap of cutting winners too quickly. They never allow their strategy or trade plan to work to fruition.

Inversely, good traders enter each trade secure that their downside is covered by a reasoned stop, eliminating fear of loss and enabling their full attention to be placed on managing gains. They have their exit strategy planned before the trade is entered. Their focus once in a trade is singular - choosing where they will exit based on their insight and on what's happening on the ground, refusing to succumb to fear or to be chased out of gains at the first sign of trouble.

[Tom]

The Holy Grail of Trading

It is widely believed by new traders, that there is a single trading system (i.e. a single set of trading rules), that is composed of a small group of technical analysis indicators (e.g. two stochastic lines and the MACD), with a certain configuration of technical indicator settings (e.g. twenty bar and thirty bar stochastic lines and a fifteen bar MACD), that can be traded on any market using any trading style (i.e. scalping, day trading, swing trading, or position trading) and always makes a profit. Many new traders spend years searching for the holy grail of trading, believing that it is the key to their being a consistently profitable trader. If you are one of the new traders that is (still) looking for the holy grail, today is your lucky day, because the holy grail of trading is revealed in the very next paragraph.

The Holy Grail of Trading Revealed

The holy grail of trading is ... that there is no holy grail of trading. I will repeat that just in case there is any doubt ... the holy grail of trading is that there is no holy grail of trading. There is no trading system, no group of technical analysis indicators, and no configuration of technical indicator settings, that is guaranteed to make a profit. Disappointed? Well, don't be, because knowing that there is no holy grail of trading is a big step towards becoming a consistently profitable trader.

The Underlying Principles of Financial Market Price Movement

Instead of spending years searching for the holy grail of trading, new traders should spend their time watching financial markets and learning how the various aspects of financial market price movement interact with each other.

An example for short term traders (e.g. scalpers) might be watching the time and sales (also known as the tape), focusing on the ebb and flow of the buying and selling, looking for repeating patterns in the price movement. An example for long term traders (e.g. swing traders, position traders, etc.) would be reviewing many years of market data (i.e. the previous trading information) looking for price and/or indicator patterns that occur at significant prices (such as yearly highs and lows).

By watching the financial markets, keeping a detailed log of anything and everything, and painstakingly analysing your log, you will develop an understanding of why and how the financial markets move. With this understanding, you will be able to choose (or develop) trading techniques or trading systems that are based upon the underlying principles of financial market price movement (e.g. market dynamics such as supply and demand), and you will then have a significant advantage over the traders that are still searching for the holy grail.

Almost the Holy Grail of Trading

Having said (rather clearly) that there is no such thing as a holy grail of trading, there is something that is close to being a holy grail of trading, but not in the sense that might be expected. The closest thing that there is to the holy grail of trading is to learn a professional trading technique (i.e. a trading technique that is based upon the underlying principles of financial market price movement).

Learing a professional trading technique will not guarantee that you will become a successful trader (hence it is not the holy grail in the expected sense), but learning a professional trading technique is the only thing that will even give you a chance of becoming a successful trader, therefore it is the closest thing to the holy grail of trading.

[Jennifer]

Recognizing and Overcoming Stubbornness

A large part of being a successful day trader is having the right personality traits, or if not, at least being able to control the opposing personality traits. Human traders will always be influenced by their personalities and their resulting emotions, but professional traders have learned to overcome the emotions that are counter productive to their trading.

Stubbornness

One such personality trait is stubbornness. Stubbornness (or obsintance) causes people to become attached to their decisions regardless of the consequences. Day traders need to be decisive in order to make their trading decisions promptly, and then act upon those decisions without any hesitation, but they also need to be flexible and able to react when a decision was incorrect. In order to be successful, day traders need to find the right combination of decisiveness and flexibility for their personality.

Overcoming Stubbornness

Stubborn people usually refuse to admit that they are stubborn, so recognizing that stubbornness is causing problems with their trading can be difficult. Stubbornness usually causes several different trading mistakes, with the following mistakes being the most common. If you are making any of these mistakes in your trading, it is probable that you have some degree of stubbornness in your personality , and that it is affecting your day trading:

•Refusing to use targets and stop losses, and certainly refusing to actually place target and stop loss orders
•Choosing not to follow a trading system, because you know what the market is going to do
•Holding losing trades until the pain is just too much to bear (or even until your brokerage exits the trade for you, because you no longer cover the required margin)

For any other reason, these mistakes are actually easy to overcome, but not when they are being caused by stubbornness. In order to overcome these mistakes, stubborn traders first need to recognize that the mistakes are being caused by a natural human emotion, and that there is nothing wrong with admitting this. As being stubborn is a form of control, it may help to think that by recognizing the cause, you can have more control over yourself, and hence over your trading.
Once the cause has been recognized, trading in simulation will provide time to correct the trading mistakes without risking any real money. Trade in simulation until you are consistently profitable (by consistently, I mean several weeks, not just one day), and then move to live trading, but be aware of the additional emotion that will appear when you start trading live.

[Jennifer]

Master Your Trading Mindtraps

The popularization of speculative trading in the financial markets, partly due to the development of retail trading solutions offered on the internet, has created a new population of traders in the market. Most of these traders are non-professionals that are attracted by the potential to generate revenue quickly.

Falsely Created Expectations

Many novice traders may believe that it is very easy to make money, especially when they are trying a broker service using a free practice account.

However, if these traders manage to generate a sudden substantial return, it can lead them to believe that trading is an easy occupation - one in which revenue can be quickly generated with little work by the trader. For the inexperienced, one good pick can make it seem like market speculation is the key to success and wealth.

Unfortunately, when these inexperienced speculators overtake this virtual investing environment and decide to start trading live accounts and risking real money on the market, the activity becomes much more complex. In many cases, the days of outstanding day-trading performance come to look suddenly and distressingly like old souvenirs - it is an abrupt initiation into the pitiless reality of the financial markets.

Real Life vs. Practice

When new traders take the leap from their virtual trading accounts to trading with real money, they enter into the most difficult step of their initiation to trading: trading psychology.

In other words, while it may be easy to trade when the risk of loss does not exist, when the trader's hard-earned dollars are thrown into the mix, his or her focus and price objective can go out the window. Often, traders using virtual accounts will feel relatively comfortable even when the market moves against the positions they enter. This allows them to keep their focus on their price objective and wait for the market to get moving in the right direction. Because there is little consequence tied to "virtual money", personal emotion does not interfere. Unfortunately, when a trader's actions come to affect the gain or loss of his or her own personal assets, that trader is less likely to behave in such a methodical way.

Emotions Can Rule the Trade

Emotions can be seen as the trader's worst enemies; they often lead to misjudgment and loss.

Feelings generate what psychologist Roland Barach calls "mindtraps" in his book, "Mindtraps: Unlocking the Key to Investment Success" (1988). Roland Barach provides a collection of 88 lessons explaining the pitfalls, such as fear and greed, that hold many traders back.

Greed
Greed can lead a trader to hold on to a position too long in hopes of a higher price, even as it falls. This emotion has been the main reason behind many trades that have gone from large gains to large losses. To thwart this emotion, try to take an objective look at the reasoning behind your positions. When one of your positions experiences a large run-up, ask yourself whether the reasons behind your initial investment still remain; if not, it may be time to close or reduce the position.

Fear
Fear can prevent a trader from entering trades and lead to taking them out of positions far too early. If an investor is too concerned with potential loss and the risks that come with an investment, he or she can often be dissuaded from a good opportunity. Also, if a trader is more susceptible to fear, he or she may sell out of an investment far too early based on the fear of losing the gain he/she has made. In many cases, this can prevent a trader from cashing in on a much bigger gain.

Paralyze by Analyze
Paralyze by analyze is an interesting phenomenon in which traders get so caught up in analyzing everything about a potential investment, they never actually pull the trigger on the trade. In this case, what often happens is that the investor will constantly question all of the little details found in the analysis in an attempt to perfectly analyze a situation. This is a truly unachievable task, which can prevent a trader both from making monetary gains and from making experiential gains by getting into the trade.

A wide range of other emotions can rule a trader, but the important thing for any market participant is to recognize these emotions.

Acknowledge Your Emotions

All traders will experience at least one mindtrap, but the very best traders learn to recognize, understand and neutralize them. This process forms the foundation of any trader's training. Therefore, if you want to become a successful trader, you should first spend some time getting to know yourself and the particular mindtraps you tend to fall into. A skillful trader tends to have a strong desire to master his or her emotions and prevent them from affecting his or her performance.

Trading Nirvana

Traders are only human and, as such, perfection may not exist in trading. However, profitable trading can be achieved when a trader learns to manage his or her emotions. This will be easier for some than for others, but it is only through experience in the market that this skill can be developed. Therefore, before you can learn how to win, you have to take some risks (or at least get into the market) and learn to master the emotions that making (and sometimes losing) money stirs up.

[Tom]

Increasing Targets.

Day traders use target orders to automatically exit their trades when their trades are in profit by a predetermined amount. Target orders are usually limit orders, and are usually placed as soon as a trade is entered. This means that the target order is active throughout the trade, while it waits for the price to trade at the target price. Once the price trades at the target price, the target order will be filled, and the trade will be exited with the appropriate amount of profit.

Target orders should be placed at the price that corresponds to the optimal amount of profit. For example, if a trading system enters trades that usually go more than 80 ticks into profit, but rarely go 85 ticks into profit, a good target would be 80 ticks. Placing target orders correctly allows the right combination of long term profit and short term risk.

Why Are Target Orders Necessary?

One of the main reasons for using target orders is that they remove the trader from the decision of when to exit the trade and how much profit to take. Beginning day traders are often affected by the emotions of fear and greed, and this can cause bad decisions about exiting trades. Correctly placed target orders will make sure that every trade is exited at the optimal amount of profit (if that amount of profit is available), without being affected by the emotions of fear and greed.

Increasing Targets is a Mistake

Once a target order has been placed, it should not be moved under any circumstances (unless it has been placed incorrectly). One of the reasons for using target orders is to remove the trader from the profit taking decision. If a target order is moved, the trader is still controlling the profit taking decision, and is not letting the target order do its job.

The usual reason that traders want to move their targets is because the price is moving in their direction, and they want to take as much profit as they can. The problem with this is that the trader is no longer taking the optimal amount of profit, and the long term result will be less profit.

Greed is the emotion that causes this desire to take more profit, and can be so strong that a trader will increase their target, even though they know that doing so is a mistake. Some trading software has a feature that prevents target orders from being modified, and this is a good solution for traders that cannot overcome their greed.

[Tom]

Sentimental Trading

One of the psychological abilities that traders need to have is the ability to let go and move one when a trade does not go as expected. In other words, traders cannot afford (literally) to be sentimental about their trades, be they profitable or losing trades.

Why Sentimental Trading?

There are various reasons why a trader might be sentimental about one (or all) of their trades. Some traders simply have sentimental personalities and are sentimental about everything in their lives. Some traders are not sentimental in general, but are sentimental about their egos, and therefore cannot accept they have made a losing trade. Some traders are sentimental about money, and are therefore unable to exit any losing trades because that would mean accepting a loss.

How To Overcome Sentimental Trading

Whatever the cause, sentimental trading will have a negative impact on any trader's profit and loss, and therefore it must be overcome.

Traders that are sentimental about everything should have the easiest time overcoming their sentimental trading, because their sentimentality is not specifically related to trading (excepting traders whose sentimentality is caused by a mental issue such as a compulsive disorder). These traders are perfectly capable of letting go of things (e.g. they probably throw away empty packaging on a daily basis), so they should be able to apply the same thought process to their sentimental trading (e.g. they are simply letting go of a trade that they no longer need or want).

Traders that are sentimental about their egos will have the hardest time fixing their sentimental trading, because their sentimental trading includes their self worth. These traders need to recognize that all traders make losing trades from time to time (just hopefully not too many). Part of being a professional trader is being able to learn from any mistakes that were made as part of a losing trade (if there were any mistakes), and be able to move on to the next trade without any further thought about the losing trade.

Traders that are sentimental about money will also have a hard time overcoming their sentimental trading (but not as hard as the ego based sentimental traders). These traders tend to hold onto their losing trades in the hope that they will reverse and become profitable trades. These traders need to learn that holding onto losing trades will only make the losses larger in the long run. Eventually there will be a losing trade that does not reverse, and this one losing trade will then erase any profit that was made by holding the previous losing trades (this actually happened to a trader on the very day that I warned them about it).

Sentimental Trading Should Be Simulation Trading

If you are a sentimental trader, and are having difficulty overcoming your sentimental trading, try trading in simulation rather than trading live. By trading in simulation you will be able to practice letting go of your trades without reaping the consequences of any mistakes (i.e. without risking any real money). Once you have mastered the psychology of letting go of your trades, you should find it easier to switch to live trading without becoming sentimental about your trades again.

[Tom]

Scalping and Patience

Scalping is one of the trading styles (i.e. scalping, day, swing, and position trading) and is specifically the shortest tem trading style (i.e. scalping makes the trades that are active for the least amount of time), but in all other respects scalping is no different from the other trading styles.

One of the perceived differences between scalping and the longer term trading styles is the amount of time between trades. Scalping is often (and incorrectly) assumed to make many trades very quickly, but the reality is that scalping often requires waiting just as long as day trading, sometimes as long as swing trading, and theoretically even as long as position trading.

Scalping Myth

One of the reasons that new traders are often attracted to scalping is the popular belief that scalping makes many small trades in rapid succession, with very little time spent without an active trade. As a result, many new traders approach scalping with an expectation of making a lot of trades very quickly (not to mention the expectation of making a lot of profit very quickly), and consequently they perform their scalping incorrectly.

Scalping is the shortest term trading style, and therefore does tend to make smaller trades (i.e. trades with smaller targets and stop losses), but the frequency of the trades does not necessarily increase accordingly.

Scalping Requires Patience

Scalping therefore requires a lot more patience than many new traders expect or are prepared for. Scalping definitely requires as much patience as day trading, sometimes requires as much patience as swing trading, and in theory could require as much patience as position trading (i.e. waiting weeks for the next trade). Professional scalpers will wait as long as necessary for their next trade, even if that means waiting several days for a trade that then lasts only five minutes.

Any lack of trading when scalping can theoretically be offset by trading additional markets (e.g. where a day trader might trade a couple of markets, a scalper might trade several markets), as the additional markets could provide additional trades (assuming that the markets are different enough), but trading many markets is not a requirement of scalping, and there are some very successful (and very patient) professional scalpers who only trade a few markets.

[Jennifer]

Patience, Decisiveness, and Calmness

The idea of making a living as a day trader appeals to a large number of people, but not everybody has a personality suitable for day trading. Even people that are successful in other fields (even related fields), often find that they are not compatible with day trading. Day trading is a flexible profession (meaning that it can be adapted to suit different styles), but there are a few qualities that all day traders need to have in their personalities, in order to be successful (profitable), and avoid becoming a nervous wreck in the process.

Patience

When non traders imagine day traders, many people think of traders in a trading pit, wearing brightly colored jackets, shouting and waving their arms about. While this may have been true once, it is no longer an accurate image of day trading. Modern day trading is performed by sitting quietly in front of a computer, waiting anywhere from a few minutes, to several hours, or even days, for the next trade to come along. Being able to wait patiently is a necessity, otherwise you will find yourself taking trades that are not part of your trading system (known as making up a trade), and most likely losing money on them. Waiting patiently does not necessarily mean doing nothing, and there are many things that you can do while you are waiting for your next trade. Some day traders join live trading rooms where they can interact with other traders, some traders play computer games and watch movies, and many day traders eat their meals while they are trading (breakfast often coincides nicely with the market open).

Decisiveness

Deciding when to enter and exit trades is one of the most basic functions of a day trader, and it is important that these decisions are made as efficiently as possible. Being decisive is vital to successful day trading, otherwise you will only sit and watch trades that you should have actually taken. Being decisive does not mean being rash, and taking trades that you are not sure about, but it does mean acting promptly when a trade does come along. A common pitfall that many beginning day traders come across is seeing a trade occuring, but hesitating and waiting for the trade to start moving into profit before entering (waiting for confirmation that the trade is going to be a winning trade before they enter it). This always results in an entry price that is not as good as it would have been with a prompt entry, and can turn a winning trade into a losing trade.

Calmness

Remaining calm during trading is one of the most important personality traits for a day trader, but it is also one of the most difficult to obtain and practice. As humans, the natural reactions to a winning trade are excitement and joy, and the natural reactions to a losing trade are panic and sadness, but day traders need to control these emotions, otherwise they will adversely affect their trading decisions (particularly the negative emotions). For example, the panic that occurs after a losing trade might make you take a new trade almost immediately in an attempt to make the money back, even though there was no trade according to your trading system.

Trading in Simulation

Trading in simulation is a good way to practice your patience, decisiveness, and calmness during trading, without risking any real money. After many hours, days, or weeks of simulation, you will have a good idea of how your personality and your emotions will affect your day trading, but even then, there will still be an emotional response when you start trading live.

[Jennifer]

Scalping and Risk

Scalping is one of the trading styles (i.e. scalping, day, swing, and position trading) and is specifically the shortest tem trading style (i.e. scalping makes the trades that are active for the least amount of time), but in all other respects scalping is no different from the other trading styles.

One of the perceived differences between scalping and the longer term trading styles is the amount of risk that is required in order to make trades. Scalping is often (and incorrectly) assumed to have lower overall risk because its trades are only active for a short amount of time (e.g. trades are not held overnight, etc.), but the reality is that scalping requires just as much risk as day trading, swing trading, and even position trading (seriously, even position trading).

Scalping Myth

One of the reasons that new traders are often attracted to scalping is the popular belief that scalping trades are active for the shortest possible amount of time, and that scalping therefore has the lowest possible risk. As a result, many new traders approach scalping with an expectation that their trading will be very low risk (but with the potential for very high profit), and consequently they perform their scalping incorrectly (e.g. increasing their trade size, etc.).

Scalping is the shortest term trading style, and therefore does tend to make shorter term trades (i.e. trades that are active for the least amount of time), but the risk of the trades does not necessarily decrease accordingly.

Scalping, Day, Swing, and Position Trading Risk

Scalping, day trading, swing trading, and position trading all require the same amount of risk (at least from a time spent with an active trade perspective). The popular belief that making only short term trades lowers the overall risk of the trading because the trading is exposed to the movement of the market for the least possible amount of time is incorrect. Risk is not related to the amount of time that is spent with an active trade, and therefore scalping (where each trade might be active for a few minutes) has no lower risk than position trading (where each trade might be active for several months).

Professional scalpers know that the risk of their trading is not related to the amount of time that is spent with an active trade, and they will therefore keep their scalping trades active for as long as necessary, even if that means keeping a scalping trade active overnight.

[Jennifer]

Stress and Trading

Stress is one of the most common emotional problems that traders face, and trading while under stress can (read as will) have a significant impact on a trader's profit and loss. There are many different forms of stress, but for the purposes of this discussion, we will consider stress as being either trading stress (i.e. stress caused by trading) or external stress (i.e. stress from non trading sources).

Trading Stress

Trading stress is stress that is caused by the act of trading. For example, the fear of losing money can place a trader under significant stress. Perversely, trading stress only compounds the original problem. For example, if a trader is having difficulty making a trade management decision, the stress that ensues will only make it harder to make the decision, and will almost guarantee that the decision is made badly.

The solution to trading stress is knowledge and experience. Knowledge gives a trader the ability to trade well, and experience gives a trader the confidence to trust in their knowledge. When a trader knows that they have the ability to be profitable, and they also have the confidence to believe in themselves, it is much easier to overcome any stressful situations that might arise.

External Stress

External stress is stress that comes from any source other than trading. For example, a trader might be having relationship problems with their husband or wife (which happens more often than you might think due to the solitary nature of trading). External stress is the most difficult type of stress to avoid, because its cause is often out of the trader's control.

The solution to most external stress (at least from a trading perspective) is to temporarily trade in simulation instead of trading live. Trading in simulation during stressful times allows a trader to continue trading, but without risking any real money. Once the stressful situation has been resolved, the trader can go back to trading live without having to make up any stress related losses.

How Stress Affects Profit and Loss

Stress affects a trader's profit and loss in a number of different ways, and the exact manifestation will be different for each trader. For some traders, stress might cause them to trade more than usual (perhaps in a desperate attempt to make more money), while for other traders, stress might cause them to trade less than usual (perhaps because they are unable to make any decisions). However the stress is realized, the result will always be a negative impact on the trader's profit and loss. So if you suddenly find yourself trading badly, consider your emotional state and whether that might be the cause, before you decide to make any adjustments to your trading (e.g. changing your trading system, etc.).

[Tom]

Trading and Intuition

I was once asked by a trader how they could determine if a market was moving decisively (i.e. was moving in a single direction), and my answer was that if they were not sure, then the market was not moving decisively. In other words, if they looked at a chart and they didn't immediately know which direction the market is moving, then it was not moving in a single direction.

Intuition and Instincts

I was suggesting to the trader that they use their intuition and instincts in deciding if the market was moving as they required, rather than a fixed measurement (e.g. an indicator being above or below a particular level). Intuition and instincts either play an important role in trading, or they play no role at all. This is because they apply differently to discretionary and system trading.

Discretionary Trading

Discretionary traders can (and very often do) use their intuition to confirm (or negate) their trading decisions. For example, a trader might decide not to make a trade because the trade would require a slightly larger stop loss than usual, even though all of their entry requirements had been met.

While discretionary traders are able to use their intuition and instincts in their trading, they need to make sure that they do not confuse them with fear and greed. For example, whenever a trader decides not to enter a trade based upon their intuition or instincts, they need to know why they are doing do, otherwise it is possible that the decision is based upon fear of a losing trade. Similary, if a trader decides to hold a trade longer than usual, they need to make sure that it is their intuition rather than greed that is making the decision.

Knowing the difference between intuition and emotions is something that will come with experience. In the meantime, if you are making a trading decision and you find that your heart is racing or that you are starting to sweat, you are probably making an emotional rather than an intuitive decision.

System Trading

System traders on the other hand, cannot use their intuition in their decision making process. System traders make their trading decisions during their testing and analysis of their trading system, rather than during live trading. If a system trader starts using their intuition and instincts to modify their trading decisions, they are no longer a system trader, and they may need to modify other aspects of their trading accordingly (i.e. there is no such thing as a part discretionary and part system trader).

[Tom]

The Trading Psychology of the Days of the week

Many new traders start trading with real trading capital (i.e. making trades that place real money at risk, as opposed to make trades in simulation) before they are ready to do so (e.g. before they have learned trading correctly, using an incorrect trading technique or trading system, etc.), and by the time that they realize their mistake, it is too late for them to do anything about it.

Knowing whether you are ready to start trading with real trading capital or not is extremely difficult (and almost impossible for new traders) because of the psychology and emtional aspects that are involved (e.g. being under pressure to make money, needing to bolster a lagging self-esteem, etc.), but there is a rather odd method of determining whether you are ready to make trades with real capital or not that uses the psychology of the days of the week.

Monday Morning

How you feel when you wake up Monday morning is an excellent indicator (no, not a technical indicator) of whether you are ready to make trades with real trading capital or not.

If you wake up feeling content, perhaps somewhat excited, and looking forward to the day (particularly to when your markets will open for the day), then you could very well be ready to make trades with real trading capital. If on the other hand, you wake up feeling nervous, trying to think of an excuse for not getting out of bed, perhaps with a feeling of dread for what the day holds, then you are very likely not ready to make trades with real trading capital.

Your emotional condition on Monday morning is a very reliable indicator of how you really feel about your trading, not how you think you feel about your trading, and not how you want to feel about your trading. New traders often wake up on Monday morning with negative emotions (even if they do not directly attribute the emotions to their trading), whereas professional traders usually wake up feeling calm, and with a sense of pleasant anticipation for the day's trading.

Friday Evening

How you feel on Friday evening (particularly at the moment when your markets are closing for the week) is equally as useful as how you feel on Monday morning, but usually in the opposite direction.

If on Friday evening, you feel the stress lifting off of your shoulders, and you breathe a large sigh of relief, you have probably not really enjoyed the previous week, and are most likely not ready to be making trades using real trading capital. If on the other hand, you wonder what you are going to do over the weekend, and breathe a sigh of relief that Monday morning is only two days away, then you are most likely ready to make trades using real trading capital.

Your emotional condition on Friday evening is an equally reliable indicator of how you really feel about your trading, not how you think you feel about your trading, and not how you want to feel about your trading. New traders often feel a sense of relief that they have two whole days without any trading, and try to convince themselves that they will spend the entire weekend analysing their charts to determine what went wrong the previous week. Professional traders usually smile, and then either check the timetables for their weekend skiiing trip, or (if they more philosophically inclined) wonder if their charting software is sad that it won't be used for the next two days.

The Exception to the Above

While the psychology of Monday morning and Friday evening is extremely reliable, there is an exception that could negate the entire idea. If there is something else in your life that is more significant than your trading, and that could cause more pronounced emotions (such as your best friend having being run over by a bus yesterday afternoon), then your emotional condition at any given time may not be related to your trading at all. If on the other hand, the only other emotionally significant event that is occurring in your life is that you forgot to program your coffee maker the night before, then your emotional condition on Monday morning and Friday evening is most likely related to your trading.

The Solution

If you are one of the new traders who is on the wrong side of the psychology of the days of the week, the solution is very very simple, and is to learn trading correctly. Learning trading correctly will provide the knowledge, and allow you to gain the experience, that will enable you to move to the correct side of the psychology of the days of the week.

[Yousuf Ali]

The first thing you must do in order to conquer the psychological aspects of trading is to know what makes you tick and what your trading personality is. What is your tolerance to risk and what do you need to do to ensure you make the correct trading decisions?

You find it hard to tolerate big intraday swings you may wish to try swing trading instead of day trading. If you find your emotions causing you to frequently change your mind about your trading decisions, then you could consider developing a system.

In the same way, it is always possible to improve your mindset, so think about keeping a diary or trading journal detailing your trade rationale and your emotions at the time of each trade. Continually re-evaluate your diary so that you can see where you are going wrong and how you can overcome your limitations

[Jennifer]

Why Markets Fall Quicker Than They Rise

All markets move in both directions (up and down), and as professional traders, we do not care which direction the markets are currently moving, because we can make a profit by trading in either direction (long or short). However, there is one difference between the two directions that is interesting to professional traders.

The difference is that most markets tend to move down quicker than they move up. This applies to all types of markets (stock indicies, futures, individual stocks, currencies, etc.), and to all timeframes (fifteen minutes, hourly, daily, etc.). The reasons for this tendency are the human emotions that are associated with rising and falling markets.

Fear and Greed

The non trading public (which includes most buy and hold investors) have been conditioned to believe that rising markets are good and falling markets are bad. When the markets are going up, the emotion of greed is in control, so the public buy stocks, which gives the markets short term momentum to the long side. When the markets are going down, the emotion of fear is in control, so the public sell their stocks, which gives the markets momentum to the short side. Initially, these two emotions would appear to balance each other, however, fear is a much stronger emotion than greed, so the reaction to the fear is much greater than the reaction to the greed. It is this reaction to the fear that propels the markets downwards.

For example, long term investors hear some news about company XYZ, so over several days they buy shares of XYZ at various prices that they consider reasonable. This slow accumulation of XYZ causes its stock price to increase, so the long term investors hold the stock thinking that the upward price movement will continue (the emotion of greed is in control). However, once all of the long term investors have bought XYZ, there is no further upward pressure, so the stock levels off and then starts to decline. The long term investors now see their profits disappearing, so they all sell their shares at any available price (the then current market prices) in an attempt to keep some of their profit (the emotion of fear is now in control). As the panic selling happens in a shorter time span than the buying, the price of XYZ falls quicker than it rose.

Professional Traders


Professional day traders experience the same emotions (fear and greed), but hopefully they have learned to keep their emotions under control, so they do not react the same way (this is easier said than done by the way). Professional traders will follow their trading system regardless of what emotions they are experiencing, and this allows them to consistently make a profit in market conditions that amateur traders lose money in.

Professional traders also know about the fear and greed cycle that the public experiences, and they will trade to take advantage of this. Continuing the above example, when the professional traders hear the same news about XYZ, they may wait a few days, and then take the opposite trade (i.e. a short trade). The professionals' selling also adds momentum to the stock's decline, thereby increasing the speed at which the price falls.

[Jennifer]

Reacting to an Unprofitable Trade

One of the things that all traders (new traders, amateur traders, and professional traders) have in common is that they are going to experience an unprofitable trade from time to time. As one might expect, new traders and amateur traders tend to experience unprofitable trades more often than professional traders do, but that is not the main difference between the different groups of traders. The main difference between new traders, amateur traders, and professional traders when confronted with an unprofitable trade, is the trader's reaction to the unprofitable trade.

New Traders

When new traders experience an unprofitable trade (e.g. a trade that reaches its stop loss), they usually think that they have done something wrong, and they immediately starting looking for a way that they could have modified their trading system or trading technique to avoid the unprofitable trade (e.g. they should have been using a two minute chart instead of a one minute chart).

Amateur Traders

When amateur traders experience an unprofitable trade, they usually get angry or upset, and start looking for someone to blame for their trade being unprofitable (e.g. a larger trader was looking for their stop loss, etc.).

Professional Traders

Professional traders on the other hand, usually say something like "Hmm, that is very interesting", or "Hmm, I didn't expect that to happen", or perhaps "Hmm, what shall I have for dinner this evening?", while they calmly review their charts to see where their next trade will now occur.

One other difference between the way that new traders, amateur traders, and professional traders react to an unprofitable trade, is that professional traders usually know why the trade was unprofitable (i.e. why the market continued moving in the opposite direction to their trade, and why the market moved to the price that it moved to).

Learn From Your Reaction

Regardless of which group of traders you think that you are in, your reaction to an unprofitable trade will tell you the truth about which group of traders you are in. For example, you might think that you are a professional trader, but if you react to an unprofitable trade with anger, then you are not a professional trader, but are probably an amateur trader who is trading incorrectly (e.g. using one of those well advertised, 100% guaranteed trading systems, that for some reason only makes long trades), but doesn't want to admit it.

[Yousuf Ali]

Positive Thinking

Stay positive, always remind yourself why it is you are trading and remember to keep your goals in sight. Make sure to visualize yourself reaching those goals and keep up a positive internal dialogue as often as you can.

[Tom]

Moving from Simulation Trading to Live Trading

Most new day traders start trading in simulation so that they can gain experience without risking any real money. Once they are consistently profitable in simulation they will move to live trading, and this is when they come across one of the most common problems that affect new day traders. Moving from simulation trading to live trading sounds like an easy task, but many traders find that what was once a profitable trading system immediately starts losing money when it is traded live.

Fear of Losing Money

The reason that their trading system suddenly stops working is the additional emotion that comes with trading their own real money. The fear of losing one's own money is a very strong emotion, and can cause even experienced traders to make mistakes. Hesitating before entering a trade, moving their stop loss to break even too early, or taking a smaller profit than they would normally, are all common mistakes that are made because of the emotion of fear. This situation often gets compounded, because many new traders are unable to determine what they are doing differently, and are therefore unable to fix the problem.

Overcoming the Fear

If you are experiencing this, the solution is to have faith in your trading system. If you have tested your trading system thoroughly, and it consistently makes a profit, then you need to have faith in your trading system, and follow it exactly.

The following steps will help you determine what you are doing differently when you are trading live (entering late, moving your stop loss, etc.).

Keep a record of every trade that you make, including the entry, the target and stop loss settings, any changes that are made (such as trailing the stop loss), and the exit.
At the end of the day (or week), go back over the trades in simulation and compare the simulated trades to your trading log.
If there are any differences between the simulated trades and the live trades, it should be easy to see where (and hopefully why) the differences are occurring.

[Tom]

How Percentages Describe Financial Market Price Movement

The price movement of financial markets (e.g. stock indices, individual stocks, currencies, commodities, etc.) is often described using percentages (e.g. fifty percent, 50%, etc.). For example, if the price of an individual stock market moves from $50 to $55 dollars, the stock market could be said to have moved upwards (i.e. increased) by ten percent.

While there is nothing wrong with describing financial market price movement using percentages, it can be useful to know that percentages do not necessarily describe the price movement equally, and that percentages can be biased to make it seem as though a financial market is increasing in value when it is not really doing so.

Percentage Basics

A percentage describes the value of a financial market (or an amount of anything for that matter) as an amount relative to the previous value of the financial market. For example, if an individual stock market has a value of $80, then one percent would be equal to $0.80 (calculated as 80 / 100 = 0.8), ten percent would be equal to $8 (calculated as (80 / 100) * 10 = 8 or as 80 / 10 = 8), and so on.

The Appearance of Percentages

If an individual stock market had a value of $80, and the price of the individual stock market moved upwards by $8, then the individual stock market would be said to have increased in value by ten percent. Similarly but conversely, if an individual stock market had a value of $80, and the price of the individual stock market moved downwards by $8, then the individual stock market would be said to have decreased in value by ten percent.

Given no further information (such as the individual stock market's previous price movement), it appears as though describing the individual stock market's price movement using percentages is exactly correct (which it is), and that describing the individual stock market's price movement using percentages is equally balanced between the value of the individual stock market increasing and the value of the individual stock market decreasing.

The Reality of percentages

If an individual stock market had an initial value of $80, and the price of the individual stock market moved upwards by $8, then the individual stock market would be said to have increased in value by ten percent (there is nothing different so far). However, if the price of the same individual stock market then moved downwards by $ $8 (back to its original value of $80), then the individual stock market would be said to have decreased in value by nine percent (one percent less than the previous increase of ten percent).

In other words, when the price of the individual stock market moved upwards by $8, the increase in value as a percentage was ten percent, but when the price of the individual stock market moved downwards by the same $8 (i.e. exactly the same monetary value), the decrease in value as a percentage was only nine percent.

The same difference applies to any monetary value, and becomes more pronounced as the monetary value (or the percentage) increases. For example, if a stock index had an initial value of $1,000, and the price of the stock index moved upwards to $2,000, then the stock index would be said to have increased by one hundred percent (100%), but if the price of the same stock index then moved downwards to $1,000 (i.e. back to the original price), then the stock index would be said to have decreased by only fifty percent (50%), even though the monetary amount (i.e. the $1,000) is exactly the same.

Using percentages to describe the price movement of a financial market is correct, but in doing so, it can appear as though financial markets move upwards more than they move downwards (particularly if the previous price movement of the financial market is not provided).

[Jennifer]

Fear and Greed

In order to be a successful day trader, you need to have the right tools, choose the right markets, and trade the right trading systems. However, it is just as important to have the right psychological and emotional outlook. Without the right psychology, your emotions will have a big impact on your trading, and may even prevent you from trading at all. The two main emotions that day traders experience are fear and greed, and while you will probably not be able to remove these emotions completely, you will need to manage them.
Fear
Fear is the emotion that stops us from doing things that might be too risky. In the right quantity, fear is obviously an emotion that we need, but when fear becomes too great we can be prevented from doing things that might be necessary. In day trading, the main fear a trader has is that they are going to make a losing trade and lose money. This is a rational fear as no trader wants to lose money, but it is irrational if it prevents the trader from taking any trades in the first place. As an example, a trader might make a losing trade, and then be too fearful to make the next trade, which of course turns out to be a winning trade, and would have covered the previous loss. By letting the fear take control, the trader now has a net loss, even though a winning trade was available. The emotion of fear can be overcome by acknowledging that all day traders have losing trades occasionally, but as long as they are less frequent than the winning trades, there is nothing to be afraid of as there will still be a net profit.
Greed
Greed is the opposite emotion to fear, in that it is the emotion that makes us do things we would not normally do. The right amount of greed is necessary because it gives us the motivation to work at something, but when we are too greedy we will start doing things even when we know that we should not. In day trading, greed can make traders make random trades, or hold on to positions longer than their trading system dictates. For example, if a trader is watching a market moving strongly upwards, the trader might be tempted to make a trade even though their trading system says not to. The trader has allowed the greed to take control, and more often than not in this scenario, they will be buying right at the end of the move and will have a losing trade. The emotion of greed can be overcome by testing and then trusting in your trading system, and knowing that if you follow it correctly, it will make a profit without taking every potential trade.

[Jennifer]

Avoiding Trading Noise

One of the hardest things to learn to cope with in day trading is the phenomenon often referred to as "noise." Frustrating to deal with whether you're seasoned or new to day trading, beyond being a nuisance, trading noise often creates whipsaw losses for those who fail to recognize and deal with it correctly.
Trading Noise Defined
No matter the instrument traded, be it stocks, futures, options, ETFs, etc., and notwithstanding opening gaps, most trading sessions tend to be filled with tedious back-and-forth activity, much like a rugby scrum or a grudge match. Borrowing from the maxim used to describe police work, trading is best characterized as long periods of boredom and monotony interrupted by extreme periods of excitement. The noise is the lackluster activity that tends to dominate, broken up by occasional periods of extreme excitement - often short-lived - where the price of the instrument will move in earnest, driven by true conviction exhibited by one side or the other.
Churned and Burned
The problem presented by trading noise is the fact it doesn't come labeled as such. Moves in either direction look real and leave one with the impression that a trend is underway, be it new, a continuation of an existing trend after a period of consolidation or as a reversal.
The differentiating factor between noise and real moves is conviction. Simply put, real moves are backed by real dollars and go somewhere in an organized fashion - they tend to push the trading instrument to a new level (often several levels) either above or below the previous level.
Trading noise is unorganized and generally does little more than push the bounds of the current range, triggering trade signals and tempting unaware traders into positions, while the move itself breaks down and teeters out or actually reverses course. More often than not, this pattern of disorganized activity will play out numerous times during the course of any trading session, causing inexperienced traders to over-trade and churn their accounts. Entering and exiting losing positions at or near the same levels on multiple occasions during a single session is a hallmark signal of a trader that has succumb to trading noise.
Real Activity Versus Noise
The key to effectively dealing with trading noise is to first recognize that it occurs during most trading sessions. A good example is the so-called institutional lunch, which in truth is the period of time between the morning session - the first couple hours of the cash or pit session - and the final couple hours leading into the pit or cash-session close. Generally speaking the institutional order flow and overall volume tend to slow during the middle portion of the daily trade session. Lacking true dollars to push moves through with conviction, lunch period activity is notorious for whipsawing traders.
Moreover, it's important to understand that there are generally few organized, tradable moves during any given trading session. Some sessions are devoid of real trading moves altogether, while most will offer one to as many as a couple real moves.
Smart traders come to recognize that whether they catch or miss such a move, especially early on, the odds are greatly diminished they'll have another opportunity as the session plays out - the news and events driving the session are generally baked into the early part of trade day. Good traders play the probabilities and are cautious about being drawn into additional trade setups, understanding that most activity will likely be false - nothing more than trading noise.
How Do You Avoid It?
Discipline is critical when it comes to avoiding whipsaw and the resulting overtrading activity synonymous with trading noise. Moves are real or they are not - a good trading system will help identify and capture genuine opportunities. All else is noise and should be avoided to the extent possible. Understanding probabilities and the limited nature of opportunities available each day is critical knowledge that should be factored into all trade decisions.
The best defense against trading noise is that of adhering to a solid trading plan that includes strict rules limiting the number of daily trades to be taken and covering daily/weekly drawdown limits. Those rules will keep a trader from churning their trade deck.
Bottom line, a good plan implemented in a disciplined fashion will experience more gains than losses over time, but there will always be days, sometimes even weeks or longer periods, where the trading ranges are tight and the overall opportunities are limited. Trading smart and adhering to the rules during such occasions enables a trader to live through each session and trade another day.

[Jennifer]

What is Day Trading?
Day trading (and trading in general) is the buying and selling of various financial instruments, such as futures, options, currencies, and stocks, with the goal of making a profit from the difference between the buying price and the selling price. Day trading differs slightly from other styles of trading in that positions are rarely (if ever) held overnight or when the market being traded is closed.
Day trading was originally only available to financial companies (such as banks), because only they had access to the exchanges and market data. But with recent technology such as the Internet, individual traders now have direct access to the same exchanges and market data, and can make the same trades at very low cost.
Trading Styles
There are several different styles of day trading, suited to different day trader personalities. The styles range from short term trading such as scalping where positions are only held for a few seconds or minutes, to longer term swing and position trading where a position may be held throughout the trading day. Most day trading systems have a lot of flexibility, and can have open positions for anywhere from a few minutes to a few hours, depending upon how the trade is doing (whether it is in profit). Some day traders will trade multiple styles, but most traders will choose a single style and only take that type of trade.
Day trading also has different types of trade, such as trend trades, counter-trend trades, and ranging trades. Trend trades are trades in the direction of the current price movement (i.e. buying if the price is moving up), and counter-trend trades are trades against the direction of the current price movement (i.e. selling if the price is moving up). Ranging trades are trades that go back and forth between two prices, and are used when the market is moving sideways. Most day traders will choose a single type of trade, but some traders will take different types, and choose which one to trade depending upon the current condition of the market.
In addition to the style and type of day trading, there are other variances between day traders. Some day traders like to make many trades throughout the trading day, while others prefer to wait for what they consider the best conditions for their trade, and perhaps only make one trade per day. However many trades are made, the trading process that is used, and the desired goal of making a profit, are the same.
Markets
There are many different financial instruments, or markets, that can be day traded, and they are offered by various exchanges throughout the world. The main types of day trading markets are futures, options, currencies, and stock markets. Within these types, there are groups of markets based on stock indexes (such as the Dow Jones, and the DAX), currency exchange rates (such as the Euro to US Dollar exchange rate), and commodities (such as gold, and oil). Day traders can have access to all of the exchanges and their markets via direct access brokers, so called because they offer direct access to the exchange, which provides faster trade execution at lower cost. Further information about the available markets can be found in the article Which Markets can be Day Traded?, and details of the most popular day trading markets are available in the Market Profiles category.

[abih]

Our biggest enemy on trading forex is our self. till now, I am still struggling to control my own emotion. I hope I can learn a lot from this thread to control it.

[raheelrehman]

That's really nice article that Jennifer has posted here, I have pointed out that most of the traders are facing two main emotions and these two emotions always cause them big loses, one is fear and second one is greed that you have pointed in your first post, I want to tell you one more thing, because the psychology of all the traders are not same, some of the traders dare to trade and they have courage to loss the money, that's why they come into another emotion that is called over confidence. This is really harmful for a trader.

[thelife786]

The aboriginal affair you have to do in adjustment to beat the cerebral aspects of trading is to apperceive what makes you beat and what your trading personality is. What is your altruism to...

[sichone]

Psychological of trading is one of the pillars of the the pillars in forex trading, beside capital and strategy. In my opinion, the physiological trading can be seen as an easy way for trading. Why, in my opinion, the psychological factor can affect each trader to make many great profit and also can make a trader loss a great of money. In this case, I take part in some discussion of forex to know the sharing of the experienced traders, how do they manage their psychology so that they can be sustain in forex trading and even being a successful trader in the world.

[eyangbaikhati]

Good thread. thank you..

[sichone]

There are three pillars of forex online trading which should be remember by each traders both of experienced traders and especially new traders. They are capital, strategy for trading and psychology of trading. Many traders lose their money because they do not manage their psychology both in profit or in lost condition.

[sichone]

Hi Friends,

I am opening this thread to post some important Articles on Psychology of Trading. I request you all to share more informative articles on this thread. Psychology plays an important role in our day to day activities and in the case of Trading, its much more evident. To succeed in Trading, the Trader should be psychologically and emotionally very strong and the more we understand about it the more better it is. To begin with, I am sharing a nice article on Psychology of Trading with you all, please keep this thread populated with many more articles.



Trading Psychology

The psychological state of the crowd and the psychological state of the investor or trader are important areas to look at when considering an investment or trade. Bubbles and crashes within any market arise out of crowd psychology. Bubbles and crashes in any one individual account also arise out of the psychological state the single person brings to both their decision and their execution of their decision.

What do we mean by psychological state? Answer: The combination and type of intellectual, physical and emotional energy coming to bear upon an investment or trading decision. Put another way - trading psychology is the sum total influence of a human psyche on the process of making an investment or trading decision. The American Heritage dictionary defines psyche as: "The mind functioning as the center of thought, emotion, and behavior and consciously or unconsciously adjusting or mediating the body's responses to the social and physical environment."

Fear and Greed

Typically when people talk about psychology in the markets they reduce it to the emotions of fear and greed. Likewise, the typical response is to try to avoid the influence of the feelings of fear or greed. In many ways, this is a futile effort in that those emotional responses are natural and are not going to go away. A better approach is to accept that reality and learn how to become aware of their influence on a decision and also aware of their influence on how a stock might be acting.

Emotional Awareness in Investing

In actuality, the situation is much more complex and nuanced than that and the work being done in trading psychology now is extending and applying the work of neuroscience in understanding the human response to a risk reward decision. Researchers such as Dr. Andrew Lo of MIT, Dr. Brian Knutson of Stanford and Camelia Kuhnen of Northwestern are delivering excellent work which illuminates just exactly what the brain is doing when faced with a choice about risk.

There is great evidence for the value of actually including emotional intelligence in making decisions about the financial markets. This is an area that is just beginning to be explored. It also extends to the interaction between human and computer in the situation where trading strategies are driven by quantitative models which drive automatic trade executions in the market.

How Can an Investor Account for Psychology?

Two simple ways to address this ever-present issue are to always ask the following two questions. #1)Is my analysis being impacted by what the crowd is doing? #2) Is my analysis being colored by the result of my last investment or trade? Including an analysis of the the human factors influencing a trading decision offers to opportunity to reduce risk and improve return.

Good psychology is important for a trader. Sometimes the new traders do not have it and dhis is the main reason in my opinion that they lose their money deposited before. In this case a trader must learn from the experienced traders how to manage their psychology to maximize their profit and minimizing their lost in trading forex

[Steve nison]

There have three kind of analysis in Forex. Technical, Fundamental and Psychological analysis. Actually, which traders have enough knowledge about technical and fundamental only they are able to control their emotion in trading. Forex is a mind game so; we need huge knowledge power to protect our trading capital from unfortunate result.

[Noin1976]

great information. If a trader has good psychology then it needs to learn more about forex and these type of articles can help you a lot to succeed in forex trading.

[Andrew]

I am new in the forum, I hope to make friends with whom you can exchange ideas forex.

[Danielpeters]

Thanks a lots for share this important information with us.

[Alex007]

Trading psychology can be our greatest foe. And actually it is for most of the traders. Forex trading includes feelings as there is benefit and misfortune. The issue is most traders disregard the mental part of the traders even they think about it. They don't chip away at to build up their trading brain science. They pursue procedure. Regular they search for another 100% productive system. Attempt to know the business first you will get achievement.

[Sameeh]

I want to say that our activity and habits in the market during trading affect on our psychology and so we can control the fear and stress or we can increase them during trading, when we decrease the risk on the account and trade with the suitable volume then we will not be fearful and stressful or have little, but if we increase the risk and trade with big risk then we will be in great fear and stress especially when the market starts to go against us, so if he always manage the risk then our fear will be managed also and will be little and help us to take the right decisions of trading and manage the open trades in winning and loses and so this will keep the account safe always without exposing of it to big risk and keep making of money.

[PROPENSITY100]

Yes trading psychology has to be well managed during trading. Many traders continuously watch the price ticks after opening a trade and this disturbs their psychology a lot. under the influence of emotions they might close the trade in small profits and even in some cases with losses. So to avoid these mistakes we should always trade with properly planning and strategy and heed to what we have planned and follow it with discipline. Trading without a plan or strategy is like we are trading for losses and of course who wants losses, so we should trade with discipline and keep in mind that earning in Forex isnt child's play.

[bpserts]

I would suggest people to read some books on behavioral psychology. Things like that could really help people get an edge in Forex and in life in general

[Bernadar]

Psychology is always important in the work of a trader, because it will influence your further decisions and their results.

[MArcusA]

The success that a trader achieves in the markets is directly correlated to one’s trading discipline or lack thereof. Trading discipline is 90 percent of the game.
The formula is very simple: Trader with discipline and you will succeed; trade without discipline and you will fail.


There are three spokes that make up, what I call the Wheel of Success as it relates to trading. The first spoke is content. Content consists of all the external
and internal market information that traders utilize to make their trading decisions. All traders must purchase value-added content that provides utility in
asking their trading decisions.


The most important type of content is internal market information (IMI). IMI simply is time and price information as disseminated by the exchanges. After all,
we all make our trading decisions in the present tense based on time and price. In order to scalp the markets effectively, we must have the most live and
up-to-date time and price information seamlessly delivered to our PCs through a reliable execution platform and/or charting package.


Without instantaneous time and price information, we would be trading in the dark. The second spoke is mechanics. Mechanics is how you access the
markets and the methodology that you employ to enter/exit your trades. You must master mechanics before you can enjoy any success as a trader. A simple
keystroke error can result in a loss of thousands of dollars.
A trader can ruin his entire day with an inadvertent trade entry error. Once you have mastered order execution, though, it is like riding a bike. The process of entering and exiting trades becomes seamless and mindless. Fast and efficient trade execution,
especially if you are trading with a scalping methodology, will enable you to hit a bid or take an offer before your competitors do. Remember, the fastest
survive.


The third and most important spoke in the Wheel of Success is discipline. You must attain discipline if you ever hope to achieve any level of trading success.
Trading discipline is practiced 100 percent of the time, every trade, every day.


the formula is not simple, but effective. Saved me a lot of bad investments and helped me achieved the results that i ve wanted and needed. the ebook and other useful books i found on finacademy . io - ahh its free content.


hope it was helpful

[FXOpen Trader]

We will need to have a control over the skills and trades done by us.

[Katrina]

Yes, control over emotions are also a great requirement in the Forex Trading.

[Elrufai]

With the best effort any trader can expect to run the business of forex. We trader are the responsible one for making our own path of success or failure here. But if you are constantly worrying about your future income, there will be no certain way to become rich. As constant tension, worries and under confidence can lead the whole trading journey more hit and miss and make you more tented actually.

[Katrina]

Trading psychology is an important aspect of trading stocks, forex or almost any other security. Trading psychology is concerned with the mindset of traders and how they manage their emotions, thought processes and trading decisions.

[Foget]

I agree. I would say that psychology is a key element of trading.

[Katrina]

Traders need to make rules and follow them when a psychological crisis hits. Create guidelines based on your risk-reward tolerance for when to enter a trade and when to exit it. Set a profit target and place a stop loss to remove the emotions from the process.

[Foget]

Stop loss is a problem for many. I myself had sinned before placing Stop Loss. Now there are no such problems

[Katrina]

Trading psychology can be as important as other attributes such as knowledge, experience, and skill in determining trading success. Fear and greed are often associated with trading psychology, while things like hope and regret also play a role in trading behavior.

[Elrufai]

Psychology takes up a large part of forex trading. If you take a psychologically calm approach to trading, there will be no big problems in trading.

[Foget]

Psychology takes up a large part of forex trading. If you take a psychologically calm approach to trading, there will be no big problems in trading.
Yes, but psychology is not the only market success factor.