Prop Training Section 8 - Psychology of Trading

I must first know myself, as the Delphian inscription says; to be curious about that which is not my concern, while I am still in ignorance of my own self would be ridiculous.
Plato

Psychology of Trading

Every good trader must conquer the psychology of trading. We are human. We are all flawed in some way. We have limitations. We get angry and frustrated at times. We do not like to admit when we are wrong. Traders must recognize their shortcomings and take steps to minimize the trading losses that can occur from those limitations. Most specifically, traders have difficulty hitting their stocks when they move against them. Creating a detailed trading plan will minimize the negative impact from the above mentioned pitfalls. Below, we will discuss the psychological challenges that traders must conquer and what steps you can take to minimize the effects of these challenges.

1. Exiting a losing trade.

Most hate to admit when they are wrong. Let’s just acknowledge this. We all have to take steps to deal with this aspect of human nature. Trade as if you were an unemotional robot. The best day trader I ever saw was Dave Liu. When you walked by his desk you could never tell whether he was up or down money. He just executed on his plan. When a stock trades against you, HIT THE STOCK, reevaluate and gather information as to its strength based on how easily you exited.

You only have to be right 30 percent of the time to make money consistently. But your profits from when you are correct will be diminished if you do not limit your losses when you are wrong. It all adds up. Minimizing your losses affects how much money you will make. It is ok to be wrong. However, it is not ok to increase your losses because you were incapable of admitting that you were wrong. It is unacceptable to let a stock move further than your exit price.

2. Controlling your emotions/ frustration

It is unrealistic to expect that you will never get angry or frustrated. You will. But let’s develop a plan that minimizes the effect that these emotions can have on your trading results. If these emotions occur and start to affect your decision making then get up and take a walk. One of my index cards that I read before every trading day states: “Don’t get angry”. This helps. If you are continually angry, ask yourself why you are angry. There is a root cause to why you are getting so angry. Deal with this cause.

3. Fear

We all get scared while we are trading. A sale is a sale is a sale. But a sale isn’t a sale until it is a sale. What does that mean? It means that if your plan is to sell a stock in your favor if you see x, y, or z and x, y or z never present themselves then the stock is not a sale. Selling too early is a common weakness for most traders. Sell your stock based upon your plan.

4. Know your limitations.

We all have different skill levels, abilities to focus, degrees of intelligence, etc. We should acknowledge this and trade accordingly. I can’t trade GOOG. So, I don’t. If you cannot trade a fast moving NASDAQ stock that is in play, then don’t. If the home builders or oil stocks are too difficult for you, then find others. Part of your job as a trader is to recognize the truth about your abilities and what you can and cannot trade.

5. Obsession

Often when we make a few losing trades in a stock, we continue trading the same stock until we get positive. We do this even if we are trading the stock poorly and our chances of making back some money is remote in this stock. We feel we must conquer the stock. This is your ego getting in the way of rational thought. There are some stocks with which you will struggle. Some days stocks that you normally trade well will just be too hard or not fit your trading style. A good trader moves on to a stock that he can trade successfully and doesn’t concern himself with his past failures in a stock. The goal is to make money, not to prove that you can trade every stock.

6. Insisting on making back all of your losses

Some days you will lose money. We judge our trading system over a long period of time and not on one trade or even one day. Sometimes our best days are when most would lose $600 and we cut these losses to $100. A $500 loss avoided on a tough day is just as good as $500 earned on a positive day.

When we are negative, there is one way to start making our money back. Make one good trade. And then after you make one good trade, make one good trade. Chip away. Do not try to hit a home run and make back all of your losses in one trade. This usually leads to even bigger losses.

7. Bad relationships and/or not feeling well

We all have been in bad relationships. We are all sick or tired on some days. If this is the case, then adjust your trading. Consider trading lightly. And try to rid yourself of this negative energy. It does affect your trading. Remember, this job is hard enough when nothing is bothering you.

8. Trade like an unemotional robot

Trading without emotion will improve your trading results. You make better decision when you remove emotion from the equation.

9. One Good Trade and then One Good Trade and then One Good Trade At Duke, Coach K teaches his players to concentrate on the next play, and after that play to then concentrate on the next play. Next play. Next play. Next play. When you trade you should focus on making One Good Trade, and then One Good Trade, and then One Good trade.