As you know by now, psychology is a secondary interest of mine, after reading charts and tarot cards, of course. For this week, I decided to cover the “trader’s mindset” and the most common psychological issues that all traders deal with.
How does someone know that they reached the trader’s mindset? Here are a few characteristics:
1. No anger whatsoever.
2. Confidence and being in control of the self
3. A sense of not forcing the markets
4. An absence of feeling victimized by the markets
5. Trading with money you can afford to risk
6. Trading using a chosen approach or system
7. Not influenced by others
8. Trading is enjoyable
9. Accepting both winning and losing trades equally
10. An open mind approach at all times
11. Equity curve grows as skills improve
12. Constantly learning on a daily basis
13. Consistently aligning trades with the market’s direction
14. Ability to focus on the present reality
15. Taking full responsibility for your actions
Developing the trader’s mindset takes time. It usually takes traders 2-5 years before they can read through the above list and honestly say that it describes themselves.
Let’s take 100 traders using the same trading system or approach. It is highly likely that no two of them will trade it exactly the same way in all aspects. Why is this? Because our mindsets, beliefs, and understandings are unique. It is no surprise that most traders fail and the reason why is because they lack the trader’s mindset. This article covers those in Stage III and IV within the 4 Stages of Learning. More importantly, it applies to those that survived Stage II.
There are two parts to fixing any psychological problems:
1. Recognizing that it exists
2. Accepting it so you can move on
In trading, this is where it’s so crucial to take responsibility for your own actions because it induces change and you can start making improvements. If you don’t recognize and accept a problem, then you won’t get anywhere!
What are some of these issues that I speak of? Here are a few along with their causes and/or effects:
1. Anger over a losing trade – Traders usually feel as if they are victims of the market. This is usually because they either 1) care too much about the trade and/or 2) have unrealistic expectations. They seek approval from the markets, something the markets cannot provide.
2. Trading too much – Traders that do this have some personal need to “conquer” the market. The sole motivation here is greed and about “getting even” with the market. It is impossible to get “even” with the market.
3. Trading the wrong size – Traders ignore or don’t recognize the risk of each trade or do not understand money management. There is no personal responsibility here.
4. PMSing after the day is over – Traders are on a wild emotional roller coaster that is fueled by a plethora of emotions ranging throughout the spectrum. Focus is taken off of the process and is placed too heavily on the money. These people are very irritable akin to the symptoms of premenstrual syndrome.
5. Using money you can’t afford to lose – Usually, a trader is pinning his/her last hopes to make money. Traders fear “losing” the “last best opportunity”. Self-discipline is quickly forgotten but the power of greed drives them, usually over a cliff.
6. Wishing, hoping, or praying – Do this in church, but leave this out of the market. Traders do not take control of their trades and cannot accept the present reality of what’s happening in the market.
7. Getting high after a huge win – These traders tie their self-worth to their success in the markets or by the value of their account. Usually, these folks have an unrealistic feeling of being “in control” of the markets. A huge loss usually sobers them up pretty quickly.
8. Adding to a losing position – Also known as doubling, tripling, quadrupling down, typically, this means that the trader does not want to admit the trade is wrong. The trader’s ego is at stake and #6 comes into effect as the trader is hoping the markets will “work in their favor”.
9. Compulsive trading – Similar to #2, except these traders have an addiction to trading and quite possibly gambling issues. They need to constantly be trading, even if there is no rational reason to do so. They are always excited whether they win or lose.
10. Afraid of “pulling the trigger” – This usually means that the trader does not have a system or approach already in place. They have not calculated risk/reward and many times, these trades are unplanned. This also comes after a string of losses. They don’t want to be “wrong again”. There is no trust from within.
11. Over-thinking or second guessing – Similar to #10, but these people are usually looking for a “sure thing”, when they clearly don’t exist. Losing is not recognized a normal part of trading and the risks and unknowns of trading are not fully accepted.
12. Limiting profit or getting out too early – These traders have poor self-esteem. This is a direct effect of believing that the profits were undeserved. Usually a trader is stressed over a trade for some reason and closing the position quickly eliminates the anxiety. Usually, there is a fear of “giving back” those gains.
13. Fear of being stopped out – Traders fear failure and the pain from taking losses is great. Here is another instance where the ego is at risk. They must always be correct or suffer a feeling of “let down”.
14. Not following your system – This is a trust and follow-through issue. Perhaps the trader didn’t test it enough, or it recently produced a string of losses, casing some doubt. Your faith in the system is broken. Not only do you not trust the system, you can’t even trust yourself with picking one that works for you.
15. Following other traders (indiscriminately) – These traders do not have a system. They are also limited in trading knowledge. They feel that they will become winners if they simply “follow” someone. These trades are usually impulsive.
The key to all things is creating balance. This means that if you are winning or losing, you should not care. When you finally recognize and accept each of these common pitfalls, you’ll be well on your way to acquiring the trader’s mindset. Good luck.
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Amazing article. Thank you for writing this.
I am enjoying this series. Thanks, Addict. Good stuff.
This is a wonderful analysis of a trader’s psychology which I believe is more important then any technical indicators. I think 1 to 9 and 15 are mistakes typically made by beginners . As time goes on, a beginner starts to realize that he is totally humbled by the capricious Mr. Market. Then he will enter the second stage, which is constant fear. That is when 11-14 come into the picture.
good stuff.
Yes. Very good post.
I would recommend for reading Trading In The Zone by Mark Douglas. It’s not the kind of book one would read through in a sitting or two but is very helpful concerning the mental process of trading.
I have had it for about six years and every once in awhile pick it up and read a half dozen pages or so.
Great Article. 10 was me Friday and again on Monday. I had my plan and couldn’t pull the trigger. Naturally, I didn’t lose, but now I have the regrets, all part of the process I can see. The mental part of investing is a huge part of it. Thanks
thanks.
TC – Mark Douglas is a great author. I recommend his books to everyone.
As for #10, I got distracted because I was going horseback riding with this girl on Friday and I couldn’t think straight. I know I ‘should have’ shorted but I’ll do that tomorrow. The market gives people second chances sometimes.
Look, this site is important and entertaining. Thanks for your efforts. You spoke of Tarot. How about the “Luscher Color Test” for psychological profiles? Anyone tried it?
HB
Damn, I did not get past number 1. I get angry as hell when I do not win 🙂
Excellent article. Foundational stuff that is so easily ignored or overlooked.
Wiley time…
You have an amazing insight to the psychology of trading. I very much enjoy your series.
Thanks John for taking the time to post these articles! I always add them to my trading journal for periodic review. Top notch work as always!
Before I think about doing something stupid, my past experiences almost always stop me from doing it. I think everyone has to go through these things to at least experience it, so they know what not to do next time.
C.A.-May be true (what you just said) but hopefully us newbies will be able to avoid some landmines from this great article and other iBC bloggers’ writings/warnings of late about staying rationale in our trades. They are sure getting through my thick brain the more I read them and think about the message. This was really well written. Thank you. I plan to keep a copy of this close at hand and review it before making trades in the future. (but #1- really??)
the psychological component of trading is underrated. great article CA. i’m currently reading “the psych of trading” — an excellent book.
Awesome! so many good post on iBC over the weekend. I’m highly interested in anything having to do with psychology.
excellent.
nice to see you around the site Yogi.
Adding 20% short positions into the close.
chart,
what do you think about today’s move. is it a temporary pull-back?
CA, how do you scan for spikers? Do you use the candle patterns at stock charts, or is there something in the PPT?
If we have more than 3 solid down days, not doji, then that ruins the chances for a pullback. I’ll have to assess what happens tomorrow and Wednesday for any reversal signals back to the upside.
The long/short spikers are entirely my own proprietary and discretionary strategy. It is the core of my swing trading that I’ve researched/developed over the years. They only occur about once per month, so I definitely highlight them in my posts to you guys when they do arrive.
If we have 3 solid days down is that not a pullback? Forgive a newbie for asking, I don’t understand.
Thanks
A gravestone is a gravestone. The death of any trend up or down. Today, there was a burial…even if short term. The bull is meant to be rode, but can ya hang for more than the time allowed? (Try June if you can’t)
JFF
It’s really interesting that taking profits too soon was one of the most common. It is a self esteem issue, too, we don’t think we deserve it, although we all spend incredible amounts of time working at this. It must be because we love it. We think we don’t deserve to get the most profits. We’ve been programmed to believe that we don’t deserve it.
This is a huge revelation to me. To know that so many others are not believing in themselves and the work they have put into this that they love so much.
Thank you, CA. An eye opener and a chance to work on correcting the wrong thinking we each personally need to overcome.
Frog – I mean large solid red candles indicated accelerated selling. The duration and force behind the down days determine the probabilities.
chanci – np