Over the years we’ve noticed a remarkably consistent pattern. A very high percentage of our trainees can trade brilliantly in the simulation program; steady consistent profits, sharp entries and exits, excellent grasp of market conditions and a clear, rational plan for exploiting them
And then they start trading real money.
It’s like somebody turned out the lights. Almost immediately things turn sour; they jump in too soon, get scared out of good positions, hang on to losers and cut their winners short … the exact opposite of what they should be doing, and the exact opposite of what they were doing in the simulation program.
WHAT HAPPENED?
The only difference between real and imaginary – and between good and horrid – is the emotional impact on new traders of having real money at risk. They succumb to the two emotions that drive the market: greed and fear.
Nothing cranks up our emotional responses faster than money. And trading is about nothing else. But successful trading requires a kind of cold, calculating rationality, and any emotion – giddy joy as well as bitter despair – is fatal.
So we see trainees doing things they know are dumb:
- They jump on the long side of an uptrend because “they don’t want to miss the trade,” even as the trend is ending.
- They cling tenaciously to losing positions hoping the price will come back – an attempt to avoid admitting you made a dumb trade that usually turns a small loss into a big one.
- They pull their stops so they won’t get hit. Really!
- They become so traumatized by losing that they take excessive risks hoping to get back even.
- Finally, they quit in despair, close their trading account, burn the computer, and retreat into a dark place to lick their wounds.
None of this is necessary. All of it can be avoided. Here are some things that help. (more…)
What we perceive is not just a function of what is out there, but also the lenses that we wear. Many of our cognitive lenses are so much a part of our thinking that we forget they are there. We assume that what we’re perceiving is what objectively exists…but that’s not always the case.
The paper is old (2002) but still interesting. Andrew W. Lo and Dmitry V. Repin in 
* A trader views the market as an enemy to be conquered;
Traders often hear about the potential benefits of preparing actionable trade plans prior to the next trading day. The goal of such preparation is to make yourself immune to mental edge breakdown. One of the greatest threats to your mental edge is coming across something that’s unexpected during the trading day. Seeing an unexpected price move (especially one you perceive to be a big move) is likely to stress and panic you and therefore cause your psychology to shift into an emotional, reactive state. An effective way to prevent this is to prepare with possibility mapping. 
“If you fail to plan, then you plan to fail”. I don’t know who first said that, but it’s a very sound piece of advise indeed. Planning is something that is all too often overlooked by traders, and yet a well drafted trading plan is one of the most important tools for success and profit. 
Emotions are at the root of trading problems. Yes, emotions can interfere with concentration and performance, but that doesn’t mean that they are a primary cause. Indeed, emotional distress is as often the result of poor trading as the cause. When traders fail to manage risk properly, trading size that is too large for their accounts, they invite outsized emotional responses to their swings in P/L. Similarly, when traders trade untested patterns that possess no objective edge in the marketplace, they are going to lose money over time and experience an understandable degree of emotional frustration. I know many successful traders who are fiercely competitive and highly emotional. I also know many successful traders who are highly analytical and not at all emotional. Trading is a performance field, no less than athletics or the performing arts. Success is a function of talents (inborn abilities) and skills (acquired competencies). No amount of emotional self-control can turn a person into a successful musician, football player, or trader. Once individuals possess the requisite talents and skills for success, however, then psychological factors become important. Psychology dictates how consistent you are with the skills and talents you have; it cannot replace those skills and talents.