Why psychology in trading is so important?
Trading is a very hard game. A trader who wants to succeed must take very seriously what he is doing. You can not afford to be naive or to trade for hidden psychological reasons. Unfortunately, trading attracts impulsive people, players and those who think the world owes them something. If you practice trading for the excitement it produces, it is possible that you may perform many trades with little chance of sucess or accept unnecessary risks. The market does not forgive and the emotional trading always carries losses.
The feelings have an immediate impact on the trading account. May be you have a brilliant trading system, but if you are frightened, arrogant or upset is almost certain that your account will suffer. When you realize that the thirst for gambling is gaining or fear clouds your mind, you must stop trading. Your success or failure as a trader depends on controlling your emotions.
When you trade in the market, you are competing with the sharpest minds in the world. The field in which you compete has been prepared to lose. If you let your emotions interfere with your trading, you has lost the battle. You are responsible for every trade opened and closed. A transaction begins when you decides to enter the market and ends when you decide to leave.
A good trading system is not enough. Most traders with good systems are destroyed in the markets because they are not psychologically prepared to win. The market offers enormous temptations, and most people think that it is a easy way to make money. The market produces a great greed for profit and a great fear of losing what we have. These feelings normally cloud the perception that we have of opportunities and dangers.
Most novice traders feel like geniuses after a winning streak. It’s exciting to think that one is so good that he can break their own rules and win. This is when traders deviate from their rules and fall into self-destruction. Two important recomendations for traders are:
- Make your trading as objective as possible.
- Keep a diary of all transactions and strictly follow your money management rules.
Psychology of losing
A loser trader change constantly between different markets, gurus and trading systems. His trading capital is shrinking as he tries to recreate the pleasant sensation of winning.
Good traders see losing streaks in the same way that society drinkers see alcohol. They simply take a little and stop. If they have a series of losses they take it as a sign that something is wrong. In these cases they take time to stop and rethink their analysis or their methods. The losers can not stop, they continue trading because they are addicted to the excitement of the game and keep their hopes of reaching a large profit. The losers constantly take more and more risks and cross the line between making a risky business and just gamble. Many losers do not even know the existence of that line.
The losers experience the urge to gamble, just like alcoholics feel desire to drink. Normally they take impulsive decision, make excessive trading and try to escape their losing streak by jumping into new trading operations.The losers bleed their accounts and in the end are ruined.
A loser never know why is losing. If he knew it, he had taken measures to prevent losses and be a winner. The losers trying to get out of the hole making it even more trading. They move from one system to another. Dream and believe in magic trading systems that never fail.
When the losses are growing and consuming their trading capital, a loser acts as an alcoholic, he despairs and double their losing positions.A loser has to hit rock bottom before he can begin to recover.
Of course hitting bottom is terrible. It is painful and humiliating. The trader hit bottom when he lose more money that he can afford to lose. In these cases the trader trade with their savings or more. Is even worse when the trader tells their friends how smart he is and later he has to ask for a loan. The market is unforgiving and the trader will soon realize it. The market did not care if it is taking away a little money or all your savings, it just makes you pay dearly for your mistakes. Some traders lose all when only a few weeks ago they have started trading. Others start to add money to their trading account to postpone the day that must admit guilt. In their mind is sad to look in the mirror and see the face of a loser.
We spend our lives building our self esteem. Most people have a high opinion of themselves. When a clever and successful person loses money in trading that affects their self-esteem. The first impulse may be to hide all but remember that you are not alone. Almost every trader has gone through there.
Most people who lose money in the market disappears as a trader. They shamefully leave the market and never look back. The records of the brokerage houses show that 90 percent of people who today makes trading in the market will be gone within a year. At the end they will try to forget all about trading as a nightmare. Some traders lick their wounds and wait until the pain goes away. Then return to trading, having learned very little. Cowering and fear will prevent them from making good trading. Very few traders begin the process of change and growth. For these rare individuals, the pain of hitting bottom will remove them from the vicious circle placed when they win, lose everything and crash. When they understand that they have a personal problem that causes the constant losses, they can start building a new life as a trader. In these cases they begin to develop the discipline of a winner.
In the following article we will continue detailing the most important aspects related with psychology in trading: