Psychology and Trading
The
trading methods and money management techniques form
the theoretical or
cerebral aspects of trading. The psychological part
of trading deals with
how we develop our strategies and interact in the entire trading
process. Psychology is the heart of trading.
Let's assume you
have learned the trading methods and money management. Armed in one hand
with a well tested and potentially profitable
trading method, and in the other hand, with sound
money management principles, you are
now ready to begin trading. And yet, you feel something is not
quite right. You feel uncertain and uncomfortable and aren't quite
sure why. You are at the brink, but for some reason cannot take the
plunge. You have advanced to the hardest
part of trading-being able to live with your trading decisions. Experienced traders
are finally realizing that a proper
psychological attitude is essential
to
successful
trading.
The
psychology of a trader refers to the following
three behavioral factors:
-
Emotions:
Emotions are
extremely important in trading. How a trader
deals with emotions when trading will playa
large part in the success or failure of the
person.
-
Philosophy:
The outlook on life,
and beliefs the person holds will have a large
impact on trading success.
-
Intelligence:
The intelligence of the trader can help in
understanding trading
methods, money management principles, and the
market, which may
help in trading success.
Trading
is much more than simply applying a trading
method and watching profits grow in your
account. It is a constant struggle where the
battleground is not the market but always within
you. You will face the stress over losses in
trading and not the market. You will be in
turmoil in deciding whether to enter or exit a
trade and not the market. Trading will place
many demands on you, and will force you to think
of who you are and what you are trying to
accomplish.
One of the first
books which dealt with a trader's mental state
was Reminiscences
of a Stock Operator
by Edwin Lefevre. It is one of the best books
ever written regarding trading, and is highly
recommended reading. The stock operator in the
book was supposedly the great stock speculator
Jesse Livermore. Jesse reportedly made and lost
many fortunes in his lifetime, trading mainly
stocks and commodities in the early and mid
1900's.
Psychology and Trading