Trading Psychology
Mastering Your Trading Psychology is the most important step in building your trading systems. Up to 100% of your success depends on it, because without a clear understanding of your personal strengths, shortcomings, and belief systems, acquiring the requisite skills to meet your goals may remain forever outside your grasp!
I’m going to show you how to achieve more success in your trading with a relatively simple, yet powerful self-reflection tool to help identify your strong points, then use them to reach your goals.
(For a more in-depth study of trading psychology, I highly recommend Dr. Van Tharp, at Van Tharp Institute www.vantharp.com His courses and books are the best I’ve read, and I urge anyone serious about trading to work through one or more of his courses.)
Let’s begin……
Believe in Yourself!
Belief Starts From Within
I cannot over-emphasize the importance of personal confidence in your trading success. Without believing in yourself, and your ability to learn the necessary skills, you’ll be frustrated at best, and unsuccessful at worst.
Start With Honesty
THE ONLY THING YOU CAN CONTROL IS YOU! No one else can do it for you. Living a better life through trading starts with creating and working through a strong initial evaluation to define your Trading Psychology. Completing this evaluation is vital to reaching your goals.
To help with this, I’ve created a Trading Psychology Workbook, a free resource where some of these “hard questions” will be asked. As you think through your responses, write them down, then impartially review your answers, a picture will begin to emerge of how all your subjective feelings, and objective data, will impact your success. The ultimate outcome of this self-reflection, written in your Trading Psychology Workbook, will be a more positive and direct road to your triumphs as a trader.
In this section of the website, I’ll state the questions, pose some examples, then explain their relevance. The Trading Psychology Workbook, itself, is where you write your answers.
What do you want to achieve as a successful trader?
This is the fun part of the self-analysis, where you get to dream about a better life, and what financial freedom means to you. This vision is unbelievably important and empowering. Examples might be a new house, family vacation, college for the kids, better car, or just getting out from credit card debt. Maybe you’ve always wanted to work for yourself, or test your own boundaries. These goals can be limited to one or many, short-, intermediate, or long-term, but the common denominator is the money to reach them.
What would keep you from reaching your goals?
The two most common excuses are not enough time or money. Such justifications as, “With my job and family, there just aren’t enough hours in the day,” or, “Living paycheck to paycheck, there’s just no way I can save enough!” require very practical, cooperative solutions. Other roadblocks, such as a long learning curve, or lack of material resources, can be just as disconcerting, but with commitment, can also be worked through.
Once you list your obstacles:
- Ask other trusted family/friends to review them (you may perceive your reasons as valid; others may see them as excuses)
- Ask for suggestions on anything you may have inadvertently (or purposely) overlookedBased on a realistic assessment, decide what roadblocks can be overcome, or certainly minimalized
- Come up with tangible, practical, realistic steps, using the cooperation of those closest to you, to ensure your impediments are either eliminated, or sufficiently reduced, to not get in your way
Your Trading Psychology is crucial. If you have strong personal goals, coupled with the confidence to reach them, unexpected doors will open to offer the resources you need. It cannot be overemphasized that your success is a collaborative effort, requiring the input, support and cooperation of those closest to you. If you succeed, they succeed as well!
Now let’s create your Assets and Liabilities List. These cover those very personal qualities—strengths, weaknesses, positive and negative traits—that describe and define you—strong suits, shortcomings, idiosyncrasies, habits—every personality characteristic you can think of.
Let’s start with your strengths. Think about the times in your life you were successful, and what made it so. This prosperity is usually the result of behavioral traits that made good things happen. Qualities such as clear-thinking, confidence, patience, discipline, decisiveness, enthusiasm, and resolve, can lead to rewarding jobs, satisfying relationships, and financial comfort, because they usually reflect the mind-set of someone who believes they control their own destiny.
Now think back to experiences that left you angry or frustrated. Did you lose an important job or relationship? Are you always in debt? Are these disappointments a pattern in your life? Such traits as compulsiveness, laziness, aggression, inflexibility, disorganization, or an inability to defer gratification, usually represent a chaotic, irresponsible mind-set, where the good things in life tend to remain just out of reach. Being accountable, especially when things go wrong, is key, especially if you want to be a successful trader.
Now, how would you define your positive and negative qualities? These differ from strengths and weaknesses in that they reflect your feelings about yourself, and your life, in general. There can be some that are on both lists.
If you see yourself as outgoing, strong-minded, likeable, a good learner, open to other points of view, and have the internal optimism to accomplish anything you set your mind to it, these positive qualities reflect a confident mind–someone who will approach trading with a “can do” attitude.
However, if you believe you’re not sufficiently smart, likeable, talented, or deserving, or think others have assets, skills, and advantages you lack, you’ll be hard-pressed to succeed because these insecurities will cloud your judgment and prevent the confidence you need to make the right decisions as a trader. (Also, and not to put too fine a point on it, so will any chemical dependency!)
Once you’ve filled out your Assets and Liabilities List, once again ask those closest to you to review it. Self-reflection can be challenging, and most of us need a sounding board to ensure our assessments are accurate. It’s important to remain open to others’ points of view, and allow them the comfort and honesty to express it.
Finally, what are your beliefs about the market and trading industry? Do you see them as random and uncontrolled, or do they have some logic and predictability? This is your Market Perceptions List.
- Do you feel comfortable buying stocks already going up, and have a higher relative strength to other positions in the market? This would be a better fit for traders that like to own “Growth,” and want to develop a trend trading system.
- Do you feel comfortable buying something that is down, and you feel is overdone based on the fundamentals of the company? This would be a better fit for traders that like to own “Value,” and want to develop a reversal (band) trading system.
- Do you believe the markets follow seasonal patterns? For example, some traders believe there are more opportunities to trade around earnings season. They do the study to see what stocks have reported, and how they did, then look for those in the same industry to see if there will be a similar pattern when they report?
The good news is that everyone’s beliefs work, to some degree. The point in understanding your views is to develop a system that fits them. The closer the system to what you believe, the easier for you to trade that system.
Two other important questions, reflecting on both your Trading Psychology and market beliefs, are:
- Do you get emotional when you trade?
- Is being right more important than making money?
The relevance of these two questions is significant.
Putting It All Together to Create a Solid Foundation!
You’ve finished your lists. Now it’s important to make some sense out it because it becomes the foundation for everything you’re going to do from here on out.
- Prioritize your assets and liabilities into those that will help, and hurt, your trading
- Do the same for your beliefs about the market
- Figure out how to use your strengths to overpower your trigger responses and liabilities
As you reflect on your answers, you understand how your Trading Psychology inadvertently affects your behavior and colors decisions, especially as it relates to trading. While we can’t change our inherent character and feelings, the secret to prosperity is acknowledging it all, then working to ensure our strengths and positive traits—those that will make us successful—dominate those weaknesses and negative traits that would get in our way.
Your beliefs about the market should give you an important start, and help answer structural questions on what type of system to build, as it focuses on where your Trading Psychology and beliefs about the market, converge. For example, if one of your weaknesses shows that daily volatility gets you over-excited or depressed, a longer term trading system will probably work better for you. On the other hand, if you are impatient and easily frustrated, a short term trading system may be best.
Reaching Your Goals Through Commitment
The focus must always be on what it will take to be a great trader, and reach your short-, intermediate, and long-term goals. Trading is no different from any other business. The measure of your success is a direct result of your (a) commitment level, (b) goal focus, (c) continued skill improvement, (d) follow-through on whatever you start, and (e) moving forward from setbacks and disappointments.
Create a Plan You Can Stick To!
Ensure you have time, every day, to learn the business of trading. Remember, it’s easy to commit to something you love. You’ll know your level of dedication when you find the time to do it, despite another job or important family obligations.
How are you going to learn the skills? (This was one of my biggest hurdles, early on, and I started reading every book I could get my hands on. Eventually my journey led me to Dr. Van Tharp, at the Van Tharp Institute, and his work has improved my trading dramatically.)
Find ways to stay focused. Make promises you can keep. If you write a commitment to yourself, where you can see it every day, it’s a lot easier to follow.
Create daily tasks (more on this in the Trading Journal). You may not know all the steps now, but it’s worth thinking through so you can fit them into your day.
Create a daily log (also in the Trading Journal), of every thought and event that influences your trading decisions. The more you record, the better you’ll understand your Trading Psychology and learn what works for you, and what doesn’t.
What aspects of trading do you love? Is there a successful trader you want to emulate? If so, study how he or she became successful.
There’s a great deal more to be said on this topic. I highly recommend you supplement my work by going to Dr. Van Tharp’s website and looking at all his programs and workshops on Trading Psychology, especially the Peak Performance Course. Particularly helpful is the Tharp Trader Test, made up of 35 questions to help identify your specific trading personality, an integral measure of your potential success as a trader:
The test is on the top right hand corner of this website
After you’ve submitted your answers, your profile will be emailed to you, along with what cautions to heed. If you adhere to his guiding principles, you can avoid both trouble and wasted effort.
For example, my trading psychology is an Administrative Trader, I’ve been categorized as someone who loves the details of trading system analysis and development. However, my efforts can be sabotaged if I follow the wrong guidelines or advice.
In summary, there are many types of trading psychology personalities, some better suited for trading than others. But if you understand your strengths and weaknesses, use them to your advantage, and have a burning desire to succeed at trading, nothing can hold you back!
I will end this where we began…..
“Master Trading Psychology and Achieve a Better Lifestyle!”
The next part of your journey is to create a Trading Plan.