Like a game of chess or even in athletics, psychology
plays an extremely important role in trading. On top of gaining the basic knowledge of the market’s structure, the mechanical skills of order sending,
the ability to recognize patterns over a long period of time, and to manage risks, the market has built in to it the challenges of both individual
and crowd psychology that a trader must learn to contend with as he progresses from novice to expert. Because the market is an extremely competitive
environment, traders are constantly faced with challenges that will test the limits of their psychologies and skill in balancing the necessity
to protect capital over taking advantage of previously recognized patterns.
Whether you want to profitably
trade futures contracts, commodities, currencies or NASDAQ stocks, in the end, trading is primarily a game of psychology,
survived by only the toughest competitors. Profitable stock trading is an old game, played in an organized arena governed
by some Golden Rules. Regardless of your professional background, the desire to excel in trading brings forth a professional
challenge that can only be overcome by the toughest and most determined individuals. And to those who succeed, the rewards
may be substantial. To the reckless and unprepared, substantial losses lie ahead. One has to want to excel in the stock
market, and in this endeavor, if they are willing to work hard enough, the market may gladly hand you the rewards you deserve.
Because we should treat trading like a business, we must separate it from what is personal. There is very little room for emotions in trading,
only room to make calculated, well-planned decisions. Our emotions have a strong tendency to skew the decision-making process.
Success, or failure, can bring out the best and worst of emotions. Emotions must be kept in check, while clear thinking, experience, instinct,
and skill are of essential importance. Your experience and skills must also lie upon a good foundation of risk management, a powerful drive
to protect your trading capital, an ability to intelligently forecast price action, and a willingness to take appropriate risk.
Trading is the study of mass behavior - The stock market is a perfect, measurable
representation of optimism and fear as a result of collective, human behavior. Regardless of whether a stock’s fundamentals
may lead one to believe that its current price may be over or undervalued, a trader must face the reality that a stock’s
most recent trade is a reflection of its true value. You must accept the current price as a fact, and not as an aberration
or mistake. This explains why most successful traders place heavy emphasis on studying price, price action and volume
relationships in order to guide them in their trading. Thus, we establish the first Golden Rule of Trading:
Don’t Fight the Market, Go With It….
Trading is like a business - And so, we must treat it like one. To the novice,
the words patience, discipline, hard work, and determination may sound too simple and trite. Many novices believe that
there must be some other, more complicated (or easier) way to excel. Unfortunately there isn’t. Trading will have its
“ups and downs.” You must be willing to look at the “bottom line” and see where you can cut costs, implement better strategies,
account better and understand that this venture needs to be properly capitalized.
Trading is risky - With much higher risks than other commonly used investment techniques, such as long-term
investments in stocks, mutual funds or bonds. If you are risk averse, need to invest for capital growth, or for additional
income, or are trading with money you cannot afford to lose, do not trade. Risk capital is money you can afford to lose
without damaging your lifestyle. It is certainly not borrowed from friends or family, it is not your children’s education
funds and, in most cases, it is not your retirement account.
There is no single magic formula, system, or complicated mathematical analysis that guarantees successful trading.
All that is needed is accurate and timely information to make decisions, an adequate, appropriate source of funds, and
a reliable means to execute your trading plan.
Trading requires continued education - In order to excel at trading, you need to
continue to study and learn. Especially as a novice, it is important for you to get familiar with the market. Because
markets are always on the move, one must strive to be current on market activity. One will find that in many cases,
stock price movements are remarkably simple. You will recognize patterns that repeat themselves. Moreover, because
they do, the experienced trader will quickly act to use them as an opportunity to profit. You will also learn that
patterns occasionally fail to follow through. How well the trader reacts to failed patterns is one of the key
measures of trading excellence. Developing a solid “feel” for market movement should be among the first goals of
the novice trader. This “feel” is gained with patience, discipline, hard work, and determination.
Understanding the Herd
The movement of prices
in the market is a perfect interpretation or display of what everyone is thinking all at once. The herd is always
wrong. The market has within it decades of data to prove that the majority of participants and trades (or “bets”)
placed over a specific period of time will lose.
One of the main jobs of a skilled trader is to take advantage of the ability to view the market from a point of
view that does not place him at the mercy of “crowd thinking” errors. While it is easy to go against the herd at any
particular point in time, the real challenge begins in being able to position oneself at the right TIME.
A skilled trader will utilize a host of indicators, price action, risk management and several tools at her disposal
in addition to her own experience to defy crowd psychologies and, also, that of her own, to gain an edge over the crowd.
Because of money or the desire to excel over others, a trader’s own fear and greed and his ability to curtail these
psychologies plays a crucial role in his success in trading or lack thereof. It simply is not possible to consistently
win on every single attempt at a trade. Trading comes with it the challenges of losing and, worse yet, losing streaks
that the trader must be able to contend with over a long period of time. On top of this, a trader must also be able
to curtail the tendency for over-confidence in a winning streak, as this puts him in a very vulnerable situation to
give back what he had just made, and, in many cases, even more - all because of the lack of discipline. Add to this
the challenges that come from a trader’s world outside of the market, and indeed, individual psychology is one aspect
of trading that any participant needs to master in order to preserve capital and be in the position to stay in the
game and beat the markets.
Discipline is not an innate quality. It needs to be, and CAN be cultivated through practice.