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Psychology Of Trading
The psychological aspect of trading is usually underestimated
by those new to trading. The psychological problem for most
traders is the fear of losing - ironically it is this fear that
causes most traders to lose money in the long run. The fear of
losing can manifest itself in a number of ways:
Unable to pull the trigger and enter a trade. A trader can
start to lose faith in a system that has produced a number of
consecutive losing trades and might start to look for further
confirmation before taking the next trade. Inevitably the trade
that is not taken will be the winner. The point of a mechanical
trading system is that it forces the trader to take the trades
that they wouldn't normally take just by looking at a chart.
Unwilling to accept a losing trade and cut a losing position
short. Losing trades are an inevitable part of trading, many
successful systems will produce more than 50% losing trades. The
key is to never marry a position - if it hits your stop loss then
exit it. Preserve your capital for the next trade.
Taking a profit too early to prevent a winning position become
a losing one.
There are a number of ways to counteract the fear of
losing:
Have a plan. Never enter a trade on a hunch, tip or gut
feeling. Always know your exit before you enter a trade.
Discipline. Developing your own trading plan that you believe
in will make it much easier to follow than trying to trade
someone else's.
Money Management. If a position is too large for your account
size then you are more likely to hang on to the losers or cut the
winners short. Each trade is merely one step along a very long
journey. Strict money management rules should ensure that you
never stake more than you are comfortable with.
Ignore the money. Don't view your trading account as money,
view it as points. The better your trading plan and your
execution the more points you will accumulate as a reward. It is
difficult to trade objectively if all you can think of is that
your last losing trade could have paid for a two week holiday or
bought you the latest camcorder!
Tim Wreford runs Online Futures
Trading, a website that provides information and resources
for traders. Tim also provides a free
day trading system, the results of which are updated daily on
the site.
MORE RESOURCES updated Sat. April / 20 / 2024
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