The Psychology of Trading

There is an old saying that the market is driven by fear and greed. Anyone that has placed more than a couple of trades will surely have experienced these two emotions. All traders experience emotion. The distinction between a successful trader and an unsuccessful trader comes down to how they deal with that emotion. Let’s look at how these emotions affect a successful trader and an unsuccessful trader in various scenarios.

You go long and the market immediately goes down – you go short and the market immediately goes up. That’s 2 consecutive losses, and you are getting a little ‘anxious’ so you don’t take the ‘next’ trade. Of course, this trade is a winner. Now to make the situation worse, you then ‘chase’ the move, and as soon as you enter the trade it immediately reverses, thus giving you another loss – this is now 3 in a row. Ok, one more ‘try’ – this can’t happen on every trade can it?

This time though, you will be really clever. You have noticed that the market is in a range, and it’s the bounce from the low/retrace from the high that is causing all the problems. So this time, the next trade you take will be a range extreme fade AND the hell with your trading method. The market is at the low end and, as per your new ‘on the fly’ trading plan, you go long. Instead of bouncing again, the range immediately breaks out to the downside. Not only does this give you consecutive 4th loser, but the loss occurred from trading against one of your ‘best’ trade setups, which would have been a trade that gives you enough profit to pay for the previous 3 losers, and make you ahead overall.

Now what are you supposed to do – QUIT? And to be sure that there is no more temptation – your throw your computer out the window, and dive out right behind it. You are in a trading psychology tailspin.

What is a Trading Psychology Tailspin?

The Psychology of TradingI think of a trading psychology tailspin as the transition from trading losses that you have accepted both as a part of your trading method, and as something that is inevitable in trading, into a surge of emotions that continually builds to a point where you can no longer accept anything. As this eventually ‘spins’ out of control – trading method becomes completely ignored, and is then replaced by emotional responses and decisions for everything that is done. Even if quitting was really the only viable thing to do at the time, the trading psychology tailspin can cause an emotional response where this isn’t even considered, until the situation becomes so desperate, that the trader can’t take it any longer AND does have to quit.

This isn’t a discussion about emotions and trading, and the various fears and issues that keeps a trader from trading to begin with; as we know, emotions are an inherent part of trading – you learn to control them OR you can’t trade. This is a discussion about emotions that are typically controlled well enough so that you ‘can’ trade, but then something happens where the trader loses that control, and their emotions spiral. A series of consecutive losing trades, especially those caused by deviating from the trading plan, are a root cause for this happening. This also isn’t about something that happens only to inexperienced and unprofitable traders. There are going to be those times where nothing a trader does will work, and that result is going to be a series of consecutive losers. So the situation is the same, it’s the reaction that may be different. For instance, trader “A” may go into a panic causing them to spiral out of control, losing all self-confidence and self-trust, and ultimately more money than was intended. On the other hand, trader “B” may go into a period of revenge trading, coupled with an increase of their trading size, as they are ‘sure’ that each next trade is going to bring them back to even. Also, a spiral out of control, and the losses continue – AND also a loss of more money than was intended.

So, what does trader “C” do?

Don’t miss the next article to find out!

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