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The 14 Stages Of Trading Psychology

  
  Education
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1. OPTIMISM – It all starts with a hunch or a positive outlook leading us to buy a stock.

2. EXCITEMENT – Things start moving our way and we get giddy inside. We start to anticipate and hope that a possible success story is in the making.

3. THRILL – The market continues to be favorable and we just can’t help but start to feel a little “Smart.” At this point we have complete confidence in our trading system.

4. EUPHORIA – This marks the point of maximum financial risk but also maximum financial gain. Our investments turn into quick and easy profits, so we begin to ignore the basic concept of risk. We now start trading anything that we can get our hands on to make a buck.

5. ANXIETY – Oh no – it’s turning around! The markets start to show their first signs of taking your “hard earned” gains back. But having never seen this happen, we still remain ultra greedy and think the long-term trend is higher.

6. DENIAL – The markets don’t turn as quickly as we had hoped. There must be something wrong we think to ourselves. Our “long-term” view now shortens to a near-term hope of an improvement.

7. FEAR – Reality sets in that we are not as smart as we once thought. Instead of being confident in our trading we become confused. At this point we should get out with a small profit and move on but we don’t for some stupid reason.

8. DESPERATION – All gains have been lost at this point. We had our chance to profit and missed it. Not knowing how to act, we attempt to do anything that will bring our positions back into the black. (more…)

How do *your* coping efforts work for you?

  
  Education
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effortTake a look at how well you trade after a position has gone against you. Do you trade better after a drawdown or worse?

How about after you have a few winning trades, days, or weeks in a row? Do you trade better or worse? Breaking down your performance as a function of recent performance will tell you a great deal about how effective you are in coping with risk and reward.

The other excellent indicator of whether your coping is working for you is your emotional experience during trading. If you find that anxiety, overconfidence, frustration, and stress are pushing you into poor decisions, you know that you’re not coping well with the uncertainties of markets.

Finally, it is helpful to identify the sequences of coping behaviors that you utilize when you’re making good decisions and the sequences when you’re trading poorly. Knowing how your individual coping responses come together to form coping strategies can help you cultivate your coping strengths.

Tracking how you deal with challenges when you are at your most effective enables you to create a mental model of that coping that you can call upon during periods of high stress. We cannot avoid the stresses of trading, but those do not have to generate distress and biased decisions.

Be Imperfect

  
  Education
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As a trader – or an investor – you will not be right all of the time. If you can accept your imperfection, and work within it, you will be much more successful:

If you have a perfectionist mentality when trading, you are setting yourself up for failure, because it is a “given” that you will experience losses along the way. You must begin to think of trading as a game of probability. Your losses ( that you hope will return to breakeven) will kill you. If you cannot take a loss when it is small ( because of the need to be perfect), then you will watch that small loss grow into a larger loss and so on into a vicious cycle of more and more pain for the perfectionist. Trading on hope does not work. The markets can remain irrational for a lot longer than you can remain solvent.

The object should be excellence in trading, not perfection. Moreover, it is essential to strive for excellence over a sustained period, as opposed to judging that each trade must be excellent. This is a marathon…not a sprint.

The greatest traders know how to take cut losses and let winning positions run. Perfectionists often do exactly the opposite. They get in at the wrong time, stay in too long and then get out the wrong time. Perfectionists are always striving and never arriving. The market will find the flaw in a perfectionistic trader and exploit it day after day.

The Agoraphobic Trader

  
  Education
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http://en.wikipedia.org/wiki/Agoraphobia

The market is risky.  There is nothing about it that isn’t risky.  Risk never changes, your understanding and ability to make decisions based on what you are likely to achieve does change.  

One of the most important things about risk is liquidity. Agoraphobia is a “Panic disorder with agoraphobia is an anxiety disorder in which a person has attacks of intense fear and anxiety. There is also a fear of being in places where it is hard to escape, or where help might not be available.” –A.D.A.M Medical Encyclopedia

This plays out in two ways:

  • Physical limitations: The ability to get out of a position because there are ample orders on the other side of your trade.   We have seen many positions get too big to win.  Amaranth Nat Gas trade, CDS, and most recently the London Whale Trade.  For most of us we will never have the ability to get into a position that size but if you trade penny stocks you might find yourself in trouble and with some serious momentum trades.
  • Mental limitations:  As it is often said “second trade first”, meaning have your exit in mind before you get into a position. We have all been there before.  Not getting out of a trade where we should have.  Now we are down money or gave back open profits.  We are essentially trapped.  The trade begins to own us.  We have created an extra branch on the decision tree that does not need to be there.  

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12 Signs of Stress for Traders

  
  Education
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Markets have been particularly volatile recently, at least for intraday traders and daytrading can create a significant amount of stress. Because our bodies are designed to adapt to stress, we may fail to realize that we are stressed out.
Here’s an inventory of common trader behaviors that may signify excessive stress.
12 Signs of Stress
1. A vivid fantasy of making lots of money today.
2. Feelings of invulnerability.
3. Eating breakfast or lunch at your trading desk.
4. Hyperfocus on price bars as they form.
5. Talking out loud to the market.
6. Bargaining with the market about an open position.
7. Cursing at the market.
8. Expressing irritation at partner, kids, pets, plants, inanimate objects.
9. Sudden urge to increase position size or frequency.
10. Canceling or moving stops for no good reason
11. Adding to a losing position.
12. Trading in your underwear !
TIP: Stress degrades decision-making. If you are stressed out, shift your focus 

4 Steps to Changing Your Bad Trading Habits

  
  Education
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1. Understand the benefit of change. First, ask yourself if you need to change. Then, ask yourself what you need to change. Identify your current habits and ponder the benefits of changing them. Perhaps while trading you are feeling negative emotions such as stress, anxiety, temptation, or frustration. And ultimately, these emotions cause you to make poor, impulsive and self-destructive decisions. Write down what would happen if you were no longer feeling such negative emotions. That is, what would happen if you were able to remain calm and clear-headed while trading?

2. Dissect the proposed change and benefits. Find as many holes in the prospective change as you can. Don’t just convince yourself that things will become better if you change. Make sure the grass actually is greener on the other side of the fence. Be clear about what you want to change and how you will go about it. Write down the benefits that will take place if you do indeed change.

3. Recognize the situation that triggers your self-destructive action. Write down those all-too-familiar conditions, or circumstances, that lend themselves to activating negativity within you (e.g., all the things done, or said, that push your buttons). Also, write down how you are going to consciously recognize them during the day as they happen. Now, next to each item, write down what systems and processes you will implement to avoid letting that situation become emotional. (more…)

The Hidden Variable in Your Trading Success

  
  Education
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Most traders realize that trading involves a lot of psychology. And most traders readily admit that a significant portion of their trading losses, or lack of performance, is due to “psychology”. Although the term ‘psychology’ isn’t always mentioned as an explanation, you can see it easily enough in the following statements ……”I froze just as I was about to pull the trigger”….. ”I hesitated and missed that trade and was so pissed that I got myself into an impulse trade right after”….. “That large loss was not what I wanted, I held it thinking it would come back because last time I bailed out of this type of trade I got stopped out right before it reversed”….. “I was really nervous about losing money again so I got out of my winning trade way before my target”

Those are four common examples of trading psychology issues manifesting in one’s trading. Do you recognize yourself in the above statements?

All four of those statements have in common one thing, fear. Whether it’s the fear of not being perfect, the fear of being wrong, fear of losing money, fear of missing out, the fear of not being approved by others, or some other fear, the common theme is fear. Most trading mistakes are a maladaptive attempt to deal with fear or anxiety.

Emotions like fear and anxiety cannot be eliminated; it is part of the human experience. But how you respond (your behavior, the action you take in response) to anxiety and fear will determine how successful you are as a trader. Some traders recognize this and do something about it; they learn to work with the fear and anxiety to reduce the chance that they’ll continue to fall into the same old behavioral response pattern to fear and anxiety.

Fear will never disappear. Yes, maybe some days you feel more ‘in the zone’ and fear is less of an issue, but most days you’re probably not in the zone; and on those days the fear is unavoidable. Most likely, those are the days when you have your largest losses. The question is, what are YOU going to do to work with the fear? If you cannot eliminate fear, you must learn to work with it, use it to your advantage. Emotions are a form of self-communication; you need to learn what the message is (e.g. If this trade loses I won’t succeed as a trader) in order to begin to learn how to control your actions in response to the fear and anxiety. Your performance will not change until you learn to manage yourself differently when experiencing fear and anxiety.

Greed and Fear Are Two Sides of the Same Coin

  
  Education
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Merriam-Webster’s dictionary defines greed as simply “… a selfish and excessive desire for more of something (as money) than is needed.” Greed is often referenced as one of the main contributors to trading loss. Greed mangles the mind by distracting the trader from what matters most in the trade, which is quite frankly to protect your capital by prudent planning and following rules. It also distorts your judgment regarding high probability strategies and effective follow-through.  Additionally, it is the other side of the fear coin; that is, greed can arguably be thought of as a fear of not having “enough.”  Of course, having enough is a purely subjective notion, but for the reasonable person, someone who wants more, more, more as in getting every cent in a move, or wanting more than one’s share, is considered “greedy.”  Whether we’re talking about the fear of loss or the fear of not having enough, either way it is a very difficult emotional challenge to getting the trading results that you want.  Now, the question is what do you do about those bouts with fear/greed that takes your trading effectiveness south?  The important thing of course, is to manage your fear/greed one trade and one incident at a time.

Managing errant emotions is one of the most important trading skills that you can develop. Emotions are an inextricable part of being human and cannot be totally taken out of the trading equation.   However, you wouldn’t “want” to take emotions out of your trading even if you could. Yes, negative emotions throw a monkey wrench into your process; for instance, anxiety, fear, greed, guilt, self-doubt, impatience, apathy, to name a few are what mangle your thinking.  (more…)

1+11 Reasons Why Traders Fail

  
  Education
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  1. They have inadequate capitalization.
  2. They are using someone else’s system.
  3. They lack knowledge of the system’s performance.
  4. They are unable to sit through flat periods or drawdowns.
  5. They are unable to handle stress.
  6. They lack commitment.
  7. They experience drawdowns that are greater than their hypothetical testing.
  8. They override the system’s signals.
  9. Their ego prevails.
  10. Their system is overoptimized; they make additional rules to take out losing trades.
  11. They lack parameters for spike performance in markets.
  12. They lack diversification between systems and/or markets.
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