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Trading Psychology -vs- Trading Method

It is said that trading is 90% psychological and 10% methodological.  Does this then imply that regardless of trading method, a trader that has control over their emotional issues will thus be a profitable trader, or will it be impossible to ever control emotions without the proficient implementation of method?  The trading method viewpoint will suggest that not only are these statistics not the case - trading psychology does not exist.  Trading method will be the determinant of profitability, and this will be done through:   (1) the ability to understand the method's inherent strengths and weaknesses (2) the ability to maximize these strengths and minimize the weaknesses.


The Trading Method Viewpoint 

Trading psychology has become so widely discussed and promoted through books and consultants that it has become a very convenient rationalization and excuse for losing.  Why take the responsibility for a lack of work ethic and trading without any concept of plan, an honest assessment which would be a ‘hit’ on the trader’s self-esteem – when you can just blame it on trading psychology instead?

Trading psychology is ‘something’ that a trader creates from existing personality traits that are not initially related to trading, but surface from trading without method understanding.  The outcome of course is fear, but wouldn’t this be the case when doing anything that was perceived as ‘dangerous’, and which was being done without the necessary understanding and skills?  Trading, with its inherent characteristic of accepting financial risk while participating in unknown outcomes, is certainly ‘dangerous’, and thus the more preparation and understanding that is needed.

Trading Scenario

Consider the a trading plan which has the following three setup types:  (1) initial which your intended trade entry (2) first continuation which is used to enter a trade in case you have either missed your initial entry, or you decided that you wanted more confirmation because it was a counter direction trade (3) second continuation which is intended as a trade add on setup, but is also one ‘last’ chance to enter a trade.

You get an initial sell setup that triggers, but you do not take the trade = trade1.  The trade breaks cleanly and goes to what would have resulted in a partial profit, and then before price goes down further, it retraces back to the area where the sell was done.  This price holds so the swing remains short, and from this hold of what is now resistance, you get the trigger of your first continuation setup BUT you don’t take this trade either = trade2.  Why wasn’t the trade taken?  You decide that after missing the initial entry that you have missed the trade; your emotions and biases tell you that the ‘move’ has gone too far.  Again, this trade breaks cleanly, not only adding to the gains of trade1, but also giving a partial profit on trade2.

Price now consolidates between the lows and the price resistance that you would typically be using to stay short if you had taken either the initial trade, or the first continuation trade.  Instead of the swing reversing after consolidating, it continues down again, and with this continuation your second continuation setup triggers = trade3.  AND AGAIN - you don’t take the trade.  After all, if you didn’t take either of the first two trades, how can you possibly take this trade; maybe you were wrong when you thought that the move had gone too far to take trade2, but certainly that’s the case for trader3.

Like trade1 and trade2, trade3 is a profitable trade.  This swing has really turned into a great directional move, with each break holding on weak retests – a textbook example of the strengths of your trading method, but YOU have never entered a trade.  You are going nuts!  You are getting into this damn swing - you just can't take it any more.  Another retrace holds as a lower high.  You don’t have an entry setup, but that doesn’t matter, the other three trades were profitable after a lower high.  Isn’t it interesting, the same emotions which wouldn’t let you enter your plan trades, are now ‘forcing’ you to take a non-plan trade.

Instead of YOUR trade going to a lower low and to a profit, it instead goes to a higher low and then reverses into an initial buy.  Bad just got worse, you also don’t exit when the swing goes into buy.  After what you went through to finally get into the trade, you have to try and make it work, and after all the trend is down – right?  TraderA uses this initial buy to exit their profitable sell and sell addon; they decide that they want more confirmation of swing reverse before trading the counter direction.  A first continuation setup triggers and they go long, the swing has reversed, and this trade reaches its first profit target.

TraderB finally ‘gives up’ and exits THEIR short, although with a two point loss instead of the intended one point, and without any consideration of taking their next plan trade, the first continuation buy.  This trader is done for the day, but at least they were ‘right’ all along; the swing had gone too far to enter, and their fears had been warranted – this was a losing trade that they should not enter.

Is this a trading method or trading psychology issue?  What ‘message’ is TraderB going to take from what has just happened.  Will they take the attitude that they should not be blamed, they just can’t trade because of trading psychology?  Or, will they acknowledge that the method did win, that the resulting loss was not a method trade, and even if it was, the loss would have been offset by the prior winners.   Will they acknowledge that THEY made their worst fears come true and not only turned this into a losing trade, they also increased he size of that loss, and then avoiding another method winning trade.

Granted, psychology was involved with what has happened in the described trading scenario, but that is a function of the individual’s ‘core’ personality, and would most probably be an issue regardless of what was being done; if there is ‘risk’ involved, there will be an ‘emotional’ response.  Thus, it is first necessary to separate personal psychology from trading psychology, and the use of this concept as an excuse for trading actions.  Then, if trading psychology is going to be controlled, this will be done through the development and implementation of a tested plan that the trader is willing to follow.  Do not trade with ‘built-in’ excuses for failing, you will have lost before you begin, and will continue to do so with a continued ‘snowballing’ of emotion to the extent where trading will no longer be possible.

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15 comments:

  1. I agree that it's become very blurred and really hard to differentiate between trading psychology and trading method. I feel that any type of business that involves huge risks such as the stock market is a very huge part psychological, but what about what is taught at business major schools? It's really confusing.

    And it's difficult to tell whether or not you did that random pick because you are compelled to do it because of personality traits or as your training as someone who deals with stocks.

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  2. Any successful stock trader has to be in control of their emotions. Once you understand your emotions you are able to prevent them from interfereing with your business choices. This stock education is super informing.

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  3. Just like in any other business planning is very important. The trading plan with the three set up steps are very key. These are very helpful investing tips for a serious stock trader.

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  4. Its always good to differentiate between persoanl psychology and trade psyachology. This trading method is different from penny stock that tend to take long to mature. I have learnt alot.

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  5. Stock education is needed to know about the investment method that involve the psychological part of us which should really be checkmate when it comes to investing. We can actually run at a huge loss since we might be working with emotions.

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  6. As far as I'm concerned,your trading method will determine whether you will make profit or not..that's why you just don't dive into trading without the necessary knowledge like the free stock course

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  7. One of the investing tips is that is necessary to separate personal psychology from trading psychology. This will make one investment not to be a waste bevbeca of involving emotions.

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  8. When it comes to volatile markets such as penny stocks it's better to separate emotions from the trade. However, we're humans and every now and then emotions take over.

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  9. No matter how much stock education someone has, every now and then emotions will take over and they will always try to justify it. Your article on trade psychology is very insightful.

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  10. As difficult as it may be it's better to try and stick to a trading method than being swayed by psychology. It's an interesting facet of trading that can bring about many interesting results.

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  12. It is also worth mentioning that investing tips can have an impact on how the trader makes his/her decisions. Trading psychology has a deep impact on trading practices.

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  13. It can be very difficult to stick to your trading method especially when things are not going your way. It's interesting how trade psychology affects decisions.

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  15. I think that it's important to note that stock trading is all in the mind. People need to start realizing that all stocks have ups and downs. Therefore, you should be willing to loose what you invest.

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