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Trading Psychology

>> Friday, November 4, 2011

This article may seem philosophical as I was listening to an interview with a successful trader recently and the topic was about trading the markets.

Naturally, the first question was how did he get so successful trading the markets?
In light humor fashion, he cheekily responded the question with a question, "Do you think it is because I am a financial guru that thoroughly understands the market inside out? What factors affects and influence at the macro and micro perspective?"

"Well, if you are expecting such a typical textbook answer, I must be is BS-ing you!"

He went on to explain that the only predictable thing about the market is that it is unpredictable. What is important is to focus on your interaction to this unpredictable animal, i.e. how do you perceive and react to the markets. Everything in this world is relative to the most important central element in your perspective, YOU!

Therefore, first and foremost, most importantly, you need to understand yourself. What is your trading psychology?

The market movement is all relative to you. The same market change of moving from an example value of 10 to 11 will mean different things to different people. Someone with a target of 10 and below will be in disbelief, whereas someone with a target of 11 and above will feel that it makes sense. It is that simple, the change is relative to the expectations.

There will be theories upon theories as to WHY the market moved from a 10 to an 11 but it does not change the fact that the movement has indeed occurred already. And more often than not, the movement has little to do with those theories.

Now observe your psychology towards this change, did you get stressed up, complain and get angry with the market when you were wrong; or did you get over excited, built your ego and set yourself to stick your neck out further when you were right; or did you calmly accept the fact regardless of the outcome, re-access the situation and focus on the next trade opportunity.

Trading is very different from investing, and psychology plays an enormous role for trading. It is really crucial to recognize and acknowledge the difference. Some say they invest but trade their holdings very often, some trade frequently but with the mentality of analyzing for investing.

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4 comments:

Temperament November 5, 2011 at 9:05 AM  

Hi,
"Everything in this world is relative to the most important central element in your perspective, YOU!"

i always believe this by a great Christian's prayer:
"No one reacts to things as they are, but to one's own mental images. ......"

So if you react to things as they are, you will be the "Perfect & Supreme ONE. Who can see all into the future.

Singapore Man Of Leisure November 6, 2011 at 5:29 PM  

Ah!

A post close to my heart as I am doing DIY self-psychological analysis of why I react the way I do!? (Warning! That's how I lost one of my screws...)

Small improvements begin to show when I stopped "blaming" others for my losses and mistakes; and self-delusions that I KNEW the answers all along when I make money :)

Lau November 8, 2011 at 9:11 AM  

Hi Temperament, interesting to note that Christ teachings had psychology included.

Hi SMOL, easier said than done, but it truly is the foundation of being successful in trading.

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