Trading Psychology – External Problems

The way we trade have emotional implications, such as how our emotions impact our decisions.

To succeed in the financial markets there are rules that must not be disregarded. Emotional problems such as depression, anxiety and relationship conflicts, substantially interfere with our concentration and ability to deal the normal ups and downs of markets.

Additive patterns can be extremely harmful to the trader. Many trade of need and impulse, without being identified a real opportunity.

How to know if the emotional disruption in decision making is due to greater psychological problems?

 

If problems occur at long time, and especially if they occurred at different stages of life, is likely to be not merely situational. If problems existed before embarking on trading, it is natural problems are not merely related to trading it self.

If a problem affecting sleep or appetite, mood, overall productivity and social life, is very likely to also affect the performance in trading.

Note that a problem may be recent and of short duration, such as an ended relationship and have very severe impacts. On the other hand, a problem may not be serious and we function adequately despite it, but of long duration and prevent us to perform our best.

When emotional issues interfere with our work, the best solution is to reduce the risks and devote attention to solving the problems. The destruction of financial wealth only exacerbates stress and stress is to interfere with the negotiation, then it makes sense to solve what gets us into stress rather than it worsens our performance in trading.

In case you are dealing more with your own problems than the markets, the best deal you can do is invest in your emotional well being, getting the right help.

Decision and Risk – From Dr. Itiel Dror

When coming across the research of Dr. Itiel Dror, who teaches at the School of Psychology at the University of Southampton in England, one can find his work on decision making which is particularly relevant to trading.

The important take-away from this research is that many of the factors that influence performance, even among expert performers, are situational and not part of fixed personality traits. What we perceive and how we respond are greatly influenced by the environment. A full understanding of a trader’s performance requires an appreciation of the specific situation in which the performance was embedded.

– Time Pressure Affects Risk Taking – Under time pressure, individuals are more conservative when they face less risk, but more risk-taking at higher levels of risk.

– Emotions Affect Pattern Recognition – Increased negative emotionality led raters to identify more patterns in ambiguous situations.

– Contextual Information Affects the Judgments of Experts – When you provide leading information to experts, their subsequent judgments change to fit the prior information.

– Perception is Far From Perfection – What we perceive is greatly influenced by our mental states, the information we’ve already stored and organized, and the meanings we impose upon ambiguous situations.

– Primacy Effects – What we see first biases our perception and affects our subsequent performance.

 

Trend following

To win consistently, you must have control over emotions. The game of negotiation becomes easier when played in the abstract, so we will benefit if we work for example in points or ticks and not in US dollars or Euros. It is convenient to segregate the “real world” finances from our trading account. We must maintain cash reserve to live and to continue to negotiate.

People feel most comfortable in a congestion or a consolidation area, but this may be the most dangerous place to be. So it would be logical to conclude that trading outside the comfort zone shall be the safest and correct one.

Price is King

Most professional traders accumulate the “beans” the market gives them. It is good to add profitable trades quickly and consistently, accepting that what counts is the aggregate of the net results of the negotiations and that in the end is not the analysis that counts, but the daily equity curve of our trading account. Thus, we must realize that the initial analysis is only a starting point for moving in the right direction. From there, it’s really a matter of seeing what the market is willing to give. The truth is the price level at which negotiates an asset in the given moment, regardless of what we would like to see.

An important issue for the successful trader

The pressure for quick profits leads to Over Leverage and this reduces the ability of the trader to align with the market, in that it eliminates the required presence of mind to keep our belief and raises the risk of unsustainable loss.

The Over Leverage leads to the shortening of the time to make gains, making it more difficult to ride winning trade ideas. An important virtue of the successful trader is precisely the ability to preserve winning positions.

If many are Over Leveraged, there is a potential advantage to increase the duration of the trade, as when others are shaken, we may negotiate the long-term movements more effectively.

Webinar – Trading and Day Job 3: 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.

Improve your results and have a deep insight into mastering trading psychology, especially in volatile markets.

Don’t miss this free webinar from ActivTrades | 28 of April 2016

Guest Speakers: Malte Kaub

Time: 19:00 – 20:00 (UK Time)

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Discipline – Conclusion (5th Note)

Conclusion

For many “neo-traders”, trading in order to generate consistent profitability is an insurmountable challenge .

The knowledge and skills required to achieve consistent performance are very broad, so the relevant experience and achievement of sufficient aptitude, becomes very difficult, especially when such experience does not always result in financial returns at the beginning of your career . However, perseverance and resilient search of your own “Edge”, the self-discipline of the daily advance planning approach and its implementation, will tip the balance in your favor.

Results will not come quickly, and if that happens, they tend not to last. A disciplined approach to trading is an investment in your future that will allow you to reap consistent and enduring rewards if you have the strength of character to implement it.

The relevance of Discipline and Self-Control (4th Note)

The relevance of Discipline and Self-Control

The essence of the success of this highly effective approach to maximize your “Edge” is the individual discipline in the face of apparently high profit opportunities. Only the repeated practice of self regulated discipline can reduce the tendency to act on impulse. For those who are not prepared to solve this problem, this tendency will never disappear and consistency will remain unreachable. So for the vast majority who were not born with the gift of self control, a powerful technique is to written record in the form of a daily trading plan which clearly define the goals and objectives. A disciplined routine analysis before the markets open, and the structuring of the trading day, are essential to avoid the temptation to trade on impulse. We intend to develop the instincts of profitable trading, that must be present during the selected trading period, so, with advance planning, we eliminate the need to decide on the spur of the moment, and this will previously allow us to know how, when and why shall we place a trade. For example, the decision to trade on the release of an economic indicator, or the immediate move at the futures market close should not be a spur of the moment, but rather, these strategic decisions must be made in advance with a clear mind, with purpose and objectivity. Only this approach will enhance your “Trading Edge”.

Knowledge and involvement: Preservation Of Capital (3rd Note)

Knowledge and involvement: Preservation Of Capital

Even if you have identified your “Edge”, one shouldn’t forget is competing in the global financial markets against other participants which can move the markets significantly (Ex: Central Banks, Primary Dealers, hedge funds, pension funds).

Commonly, inexperienced traders adopt an aggressive stance, attracted by the “potential” reward such behavior allegedly provides. In these cases, remaining out of the market, or if you have the knowledge, aligning with these larger “entities” rather than challenging them, will improve the chances of achieving a truly exceptional consistency, which will then increase your talent in the effective implementation of your “trading tools”. It is also recommended to be very cautious with extreme volatility. A “neo-trader” who is trading on the basis of his identified “Edge” has his chances drastically reduced in times of high volatility.