In this article we will continue with the main ideas developed about the relationship between trading and psychology that we discussed in the article “Trading Psychology”. First at all in that article we discuss the fundamental role that psychology plays in the performance of a trader. Among other aspects, we explained that in most cases the traders loss money due to their fault and because they are not prepared psychologically to face the market environment.
A loser trader needs to admit that he cannot control their losses. Mainly, he has to admit that he have a psychological problem related with the losses and that problem is destroying him as a trader. The trader must fight to speculate without losses, day after day and due to the market conditions most of them think that is impossible. However, we must keep in mind that even the best traders lose sometimes. Nobody and I mean nobody wins all the time. That is a fact. For that reason we must expect some losses sometimes, that is inevitable. If we loss in one trade is not the end of the world at least we do not know how to control that loss.
A trader must draw a line between what is the current risk in trading and a loss. A trader should take the normal risks of trading but never take a risk superior than the their default risk. You, as a trader, are in the business of trading. For that reason you need to define your trading risk, that means the maximum amount of money to risk on each trade. The acceptable risk depends primarily on the size of the trading account. It also depends on the system used and pain tolerance.
An intelligent trader never risk more than 2 percent of the capital of the trading account in any operation. For example, if you have $10000 in your account, you can not risk more than $200 per transaction, if you want to be profitable over time.
All traders got to trading in different ways and mental baggage conditioned by their experiences. Most of us realize that we act in trading in the same way that we do in our normal lives and for that reason in most cases we lose money. The reality is that success or failure in the markets depends of the thoughts and feelings of the trader. Also that depends on their attitudes toward profit and risk, fear, greed and how he handle the excitement of trading and risk.
If you as a trader wants to be a winner in the market you must know yourself and act with confidence and responsibility in all your trades. The pain leads many people to seek magical formulas ans strategies which allegedly never fail . Do not do it because there is no such thing as a trading strategy that never fail. All you will get is to lose more money.
You can compare the market with a big ocean with its ups and downs and regardless of what you could want. The market does not know you exist. You can not do anything to influence it. The only think you can control is your own behavior. A trader should study the trends and market changes. First it all he must act on a small scale when he is learning how to behave on the market. You can never control the market but you can learn how to control yourself. A beginner who performed a series of favorable trades believes that he can walk on water. For that reason he begins to take excessive risks and finally the trading account evaporate before his eyes.
On the other hand, when another beginner trader suffered several losses in series, normally is so demoralized that it is unable to place an order in the market when its trading system gives a strong signal to buy or sell. This is because the trader is now dominated by fear and insecurity.If your trading activities produce you excitement or fear, you will not be able to fully use your intellect. If you are dominated by the emotions in your trading, you will open only irrational positions in the market and surely you will lose. If fear paralyzes you, you will lose beneficial operations, and that is very demoralizing.
For some traders the reality is that trading is a powerful experience that can be very addictive. The losers who leave the money in the market receive in exchange a tremendous emotional experience.The market is one of the most interesting places on Earth.
If the market behavior seems mysterious for some traders, it is because their own behavior is mysterious and unmanageable for them. You can not determine what the market will do if you are not capable to know what are you going to do under certain circumstances. All you can control is yourself. Traders who make money consistently understand the trading as a mental discipline.We will give you some important rules to evolve in this world of trading:
- Decide that you are in the market to stay for long time, that is, that you wants to be a trader over the next 20 years or more and you like it.
- Learn as much as possible. Read and listen to the experts, while retaining a healthy skepticism about anything. Ask but do not believe everything that the experts say.
- Do not be greedy and not rush, take your time to learn. The markets will continue to offer good chances in the months and years ahead. The markets do not end up tomorrow. In my case, I expend almost a year learning before investing seriously.
- Develop a method to analyze the market, that is, “If A occurs then it is likely to occur B. Test all with historical data and then in the market using real money. At the beginning use a demo account which are offered by most brokers.
- Develop a money management plan. Your first objective must be to survive in the long-term, your second goal must be the continued growth of your capital, and your third goal is to get high profits. Almost all the traders put the third goal in the first place and ignore that there are objectives 1 and 2.
- Be aware that the trader is the weakest link in any system of trading. Develop your own method in suppressing impulsive trades.
- Winners think, feel and act differently than losers. You should look inside yourself and remove the illusions and change your old ways of being, thinking and acting. Change is difficult but if you want to be a good trader you must work to change your personality.
These simple advises applied to your trading practices will improve your performance dramatically. Remember one very important thing: The way to become a winner is difficult and not everyone is going to make it. At the beginning you must practice with a demo account and virtual money and when you feel that you are prepared to enter the market, you must begin with small amounts of money to gain experience and confidence in your operations, your strategies and yourself.