Trading Psychology / Psychology of Trading

There are two types of advice that are commonly heard by traders all over the world which are the undeniable foundations of trading psychology;

1) always make sure you control your emotions when trading; and

2) maintain your discipline at all times.

These two viewpoints are an important part of trading psychology and literature on the subject is full of related concepts and tips that reinforce the importance of emotionless trading, understanding limits and trends, risk management, and keeping focused.

This is all common advice that many people follow, however, therein lies the problem.

As this article on modern trading psychology will demonstrate, many traders are reading information from sources where the writers may not necessarily trade successfully themselves. It’s time to embrace a new way of thinking and follow the sources where the writers are also successful traders.

The rehashed advice on trading psychology is old and problematic

No doubt there are many traders out there that are familiar with these common trading psychology mantras, but this is in fact part of the problem. While a large percentage of traders are working through the same old rehashed concepts, these same traders are unfortunately the ones who are experiencing the highest failure rates, while it is the unconventional ones who are succeeding the most.

It’s often said that 95% of traders will fail, and that is just one of the unavoidable downsides of this profession, but what makes this even more problematic is that it is often this failing majority who are writing the rules rather than the small, successful minority.

The desire to hold on to outdated and arguably worthless trading psychology concepts means that modern trading is stuck in a rut, and we should not be surprised that there are so many failures.

The markets, much like science and human evolution, are constantly developing and changing, but how can old concepts be used to a trader’s advantage if they are outdated and fail to adapt to changes in the markets?

Too many traders are repetitively practicing to the same old trading psychology mantras without using their own common sense. For example, if a trader is following a purely mechanical approach to trading, but at the same time that approach is not working in terms of profitable outputs, then is it a worthy approach?

Here at Trade View, although we take a somewhat mechanical approach to our trading through the use of semi-automated systems or robots, there still exists the human element, that which overrules the signals that our robots output.

If a mechanical system is not working, we won’t simply “control our emotions” or “maintain our discipline” and carry on with a losing system, we will make the necessary changes and adjustments to our systems that are required for the current environment.

What is the solution to this obstacle in contemporary trading?

Modern trading psychology clearly needs a new approach and some fresh ideas so that traders can enjoy the successes of the successful few and move away from the questionable conventions of the majority. Adapting to new trends and looking for a different way of thinking can be the crucial element for a successful trader and this relates to trader psychology as well.

Traders do not have to work by the same rules of emotional control and discipline if they can make refinements and find something else that works sets them apart from the herd.

In fact, research into the true worth of these old conventions, which has involved neuroscientific analysis on traders’ thought processes, actually encourages them to look at these psychological concepts from an entirely new angle.

These scientific findings suggest that emotions and discipline are indeed important influences in decision making, but in some cases we rely far too heavily on them. So how can the concepts of emotionless trading and strong discipline continue to work with this new evidence?

Taking a fresh look at emotions and their role in trader psychology and success

Traders are used to being told that they should not make trading decisions based on emotions such as greed, regret, hope, or the “fear of missing out”. However, this new approach to the mentality of trading suggests that success is actually less about working towards an emotionless state and more about learning how to acknowledge and use emotions correctly.

There are suggestions that those who are able to look at the human side of trading and the bigger picture of decision making will have an advantage over those that take the traditional, clinical and emotionless viewpoint. So why are traders still being taught to leave their emotions at home?

It is far better for traders to look at their emotions much like any other factor in their data so that their cause and effect can be analysed, which can then be used to the trader’s advantage. Adjustments need to be made where necessary. And limiting any such emotional response removes a key component in decision making and development that can make the difference between success and failure.

For example, at Trade View, when we design and implement various trading robots for certain market circumstances, we are completely mindful of the particular market sentiments that exist and we will make the necessary adjustments to our robots as required. If we stuck to a purely “disciplined” approach where our emotions were “controlled” and we did not make these adjustments, then we would no doubt lose money.

Discipline is no longer seen as the crucial mindset within trading that it once was

Discipline and emotionless trading did go hand in hand at one point. But just as experts are re-evaluating the role of emotions in trader psychology, they are also suggesting that the traditional viewpoints on discipline should also be overhauled.

Placing too much attention on being disciplined and focusing on the same old trading motions means that traders are disregarding their common sense. Emotions and irrational mindsets, factors which we have been taught to ignore, are actually very beneficial as the markets too can sometimes be very irrational, but they are always right.

We often hear the market pundits say: “Rule #1 – Stick to your plan. Rule #2 – Stick to rule #1”. But research shows that some of the best and most successful trading decisions come from going against the grain of the “masses” and thinking completely differently from what one would normally find acceptable.

Summary: it is time for a big change in the teachings and views of trader psychology

In short, there appears to be a strong case for a new approach to the psychology of trading, and perhaps a complete rewrite of the traders’ handbook, because the old conventions and mantras of controlled emotions and strong discipline are coming from the mouths of the failing majority and have little relevance on modern trading.

Traders that follow the pack and fall into that unfortunate 95% are sure to keep repeating the same patterns of failure and poor decisions of these old-fashioned types of advice. It is time to embrace the alternative viewpoints of understanding and analysing emotions just like data, so that more traders have the chance to enjoy the success of that the unconventional 5% do.

This is why here at Trade View we concentrate on developing a systematic approach to trading which not only involves developing multiple robust systems to combat various market conditions, but also to make sure that our traders are going against the grain and thinking about both the human aspect of trading and the up and coming algorithmic (robot) trading concepts. It’s time to join us and change your trading success.

Tell us how you feel about what we have discussed in the comments below, or contact us for a free no-obligation discussion of how we might be able to help you with your trading goals.

Join us in our next In-House Systems Building Workshop to start learning how to automate your trades and develop trading and money management strategies that suit your needs.


This Post Has One Comment

  1. Michael Spicer

    Good read

Comments are closed.