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Three Motivations for Traders

  
  Education
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There are three motivations behind taking a trade: monetary reward, educational reward, and/or psychological reward. The first pays the bills, the second will pay the bills, and the last will prevent you from paying the bills.

Whenever I feel the pull of psychological reward, I have the voice saying “do you want to be a trader?” Letting go of the psychological need to take a trade or be right, is hard. Our brain does not know what money is. It listens in terms of chemical releases. Letting go of psychological reward is not easy. It is the most instantaneous form of reward.

The best way I know to give psychological power to money is to make a habit of seeing money as opportunity. Opportunity for financial freedom and opportunity to make another trade. The brain understands opportunity. This needs to be in balance as well.

If you are feeling the psychological pull, take a few seconds and answer the following.

Do I want to be a trader?
Did my last trade affect the thought process in an irrational way for this trade? (Need to be right, need to make my money back, I am invincible, etc.)
Can I get a better price or is this my best opportunity?
Am I seeing the whole picture?
As always, am I willing to accept the consequences of my action or inaction?

The Same Winning Principles

  
  Education
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In life, as in trading, the right mindset is crucial for success. You must be confident in your decisions because they are based on cause and effect, not on emotions or opinion. Negative people who are unsure of themselves are not successful in any field. You need faith in yourself and your methods to be able to persevere and not give up before reaching success.

• You can risk too much and lose it all in your business, life, marriage, friendships or family. You have to measure the potential cost of every action. One affair can cost you your marriage, just like one big trade with too much risk can cost you all your capital.

• In business there are certain methods which bring in customers and turn a profit, and others which cause a business to turn away customers and lose money. Trading is similar: methods which turn a consistent and long-term profit are essential for success.

• Having unrealistic expectations in a marriage, job, or business will lead to unhappiness and failure just like it will in trading. You have to set realistic expectations so
you do not get discouraged easily and quit in any of these areas. You have to be satisfied that the results are worth your effort over the long term. You need to understand what to expect before you begin a marriage, a job, a business, or trading. (more…)

MindTraps-Great Book

  
  Education
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I read a great book on trading psychology, called MindTraps by Roland Barach. MindTraps focuses on how the average person tends to think, compared to how we need to think to make money over time in the markets.

 Here’s a summary of points that can benefit you as a trader:

  1. 1.Before entering any trade, you should consider the other side of the trade and state the reasons you’d take the other side of the trade.  This helps you objectively enter a trade with a full understanding of the major risks that involved.
  2. Analyze your behavior from the beginning to the end of the trading process (from idea generation to entry and finally to exit) – what are the areas you can improve to help your trading profitability the most?
  3. Keep a trading journal of your thoughts on open positions and new ideas – writing things down helps you objectively look back and see where you went right and wrong.
  4. Fear blinds us to opportunity; greed blinds us to danger – emotions cause “perceptual distortion” where we only see the part of the picture that our beliefs allow us to see.
  5. We are likely to continue doing things for which we are rewarded -this can cause us to get too bullish after the bulk of the uptrend has occurred, or get too bearish near the lows.
  6. Fear of regret slants stock market behavior toward inaction and conventional thinking –  the person who is afraid of losing is usually defeated by the opponent who concentrates on winning (an analogy for sports fans is the Prevent defense in football – playing “not to lose” only prevents you from winning).
  7. Can’t have a personal agenda to prove your self-worth in the markets –  the focus must be on following your plan to maximize the ability to make money.
  8. Don’t get overly attached to any one view on a stock or market – don’t talk to others about open positions; it just makes it that much harder to exit when your plan says it should.
  9. Our predictions are only as good as the information available to us – objectively look at the indicators and data you use, to get the best quality of information and focus available
  10. People prefer for gains to be taken in several pieces to maximize their feeling good about their ability, while they prefer to take all their losses in one big lump to minimize the pain they feel.
  11. People prefer a sure gain compared to a high probability of a bigger gain, so they can say they made a profit; in contrast, people will speculate on a high probability of a bigger loss over a sure smaller loss, because they don’t want to feel like a loser.  In trading, we must flip around the conventional emotions to allow us to let profits run while cutting losses shorter.
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