The psychology of a successful trader

Trading psychology is an important factor in every trader’s journey. Read more on the psychology of a successful trader and how to handle losses and wins.
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A common theme emerges in the many books written on the trading psychology: traders hang on to losing positions, often to the point of wipeout, while waiting for a reversal of trend.

Successful traders stick rigidly to trading systems that are proven, over time, to work. They do not take losses as a personal admission of failure, rather as an inevitable feature of trading.

This is one of the themes explored in Sway: The Irresistible Pull of Irrational Behaviour, by Ori and Rom Brafman. Professional pilots, like professional traders, are prone to abandon years and even decades of training in moments of stress. “A growing body of research reveals that our behaviour and decision making are influenced by an array of such psychological undercurrents and that they are much more powerful and pervasive than most of us realise,” according to the Brafmans.

“We experience the pain associated with a loss much more vividly than we do the joy of experiencing a gain.”

Nearly 100 years ago, successful trader Jesse Livermore penned his experiences in a book entitled ‘Reminiscences of a Stock Operator’, written in 1923.

“I sometimes think that speculation must be an unnatural sort of business, because I find that the average speculator has arrayed against him his own nature. The weaknesses that all men are prone to are fatal to success in speculation (and are) usually those very weaknesses that make him likable to his fellows or that he himself particularly guards against in those other ventures of his where they are not nearly so dangerous as when he is trading in stocks or commodities.”

Fear keeps you from making as much money as you ought to, adds Livermore. When the market goes your way, you are fearful that the next day will see your profits taken away. When the market goes against you, you cling to the hope it will reverse.

The psychology of the successful trader has been explored extensively by online broking firm QuickTrade. Says CEO Hardus van Pletsen: “We’ve spent a lot of time looking at the habits and routines of successful traders, and comparing these with those who lose at trading, and it is quite fascinating.

“Successful traders regard their capital as a vital and precious resource, not to be wasted. They are not going to go all in on a trade.

“They will wait days, often weeks, for the right trade set-up, then will commit a small percentage of their capital. If the trade goes against them, many of them will add to their positions at a lower price, if they are going long, convinced that their reading of the market is correct and that the trade will eventually pay out. If it continues to go down, they exit at their pre-determined stop-loss levels.”

This is very similar to what Livermore describes in ‘Reminiscences of a Stock Operator’. One of his most successful strategies trading cotton was to add small positions each time the price fell from his initial long entry. When the trade moved in his direction, he had sufficient mastery over his fear to ride the trend until the market was consumed by greed, which is usually a sign that the market is topping out.

Van Pletsen says losing traders will question their trading strategies when the market goes against them. They will commit too heavily to a trade, and then double down when the market goes against them.

“In reality, they belong in a casino,” he says. “It’s as if they are betting on red or black at the roulette table.”

Van Pletsen provides the following pointers for traders attempting to master the psychology of trading.

  1. Master your emotions. As legendary investor Warren Buffet remarked: “Be fearful when others are greedy, and greedy when others are fearful.” Treat trading as a business, and your capital as a precious resource. Capital protection is paramount, so make it mandatory to exit a losing trade before losing a pre-determined amount of capital, say 5%.
  2. Develop a trading system that works. There are plenty of tools available on the QuickTrade website to help you hone your skills. Stick with your system and don’t start to doubt it because you have a losing trade. This is crucial to avoid getting caught up in the emotions of trading.
  3. Don’t take tips from social media sites. Following the trend is generally accepted as a successful trading strategy, since a trend in progress is more likely to continue than reverse. Fine-tune your entries and avoid jumping onto a trend when the Fear & Greed Index (shown below) is in extreme fear or extreme greed.
  1. Keep a log of your trades. This is one of the successful actions that helped Livermore become one of the most successful traders in the world. He was able to go back through his records and re-evaluate his losing trades, and reinforce his winning trades. This helps build confidence in your system.
  2. Wait for the proper trade set-up. Don’t fall into the trap of believing you must take a trade just because you have opened your laptop and loaded up your charting system. Fortunes have been lost because of over-trading. Be patient and wait for the market to come to your ideal entry price.
  3. Don’t panic-react to market news. Many traders start to doubt their initial assumptions about a trade when they get bad news, and then start to liquidate their positions – only to later see that the market continued moving in their direction. You should be able to place a trade, along with your stop-loss and take-profit levels, and walk away from the computer. Don’t spend hours and days watching a screen. Walk away from it.

Brought to you by QuickTrade.

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