What separates winners from losers? The answer is not just knowledge of the trading environment, but also an understanding of our personality
make-up and how it needs to interact with the market in order for the trader to emerge with consistent profits. Here you will learn why an
understanding of our own personality is the key to successful trading, and how the emotions of greed, fear, pride and hope are fatal to trading success.
Here you will gain an insight into how and why price movements occur and how, over a period of time, you can capitalise on these moves and how you can
trade with the odds of success being firmly in your favour.
Successful Day Trading is 80% psychological and 20% methodical. Self knowledge is the key to market
success. A trading method by itself, no matter
how well thought out, cannot be successful if it is not applied in the correct manner. It is in the application of a trading method that many traders
end up losing. Consider the analogy of a high performance racing car. No matter how aerodynamic or technically advanced, it needs to be driven. An
advanced piece of engineering such as a racing car needs to be driven by a person who can drive it with care. Just as a disciplined driver is needed
to race a car, a disciplined trader is needed to apply a trading method. All traders have heard the word “discipline”, but few really understand what
it is and why it is so important to develop it.
“When dealing with people, let us remember that we are not dealing with creatures of logic.
We are dealing with creatures of emotion, creatures bursting with prejudices and motivated
by price and vanity.” --Dale Carnegie
Intelligence, knowledge and talent have to be applied. Any person who is successful knows
that application requires discipline, self-control and confidence in one’s abilities. Björn Borg
was a great tennis player, he had talent. However, what always gave him the edge when
playing was his mental control, which earned him the nickname “Iceman”. He combined
talent and discipline to achieve his success and you must do the same.
We are all put in situations where, after they have occurred, we look back and feel that if only
our emotional control had been better. You are going for a job interview and role- play with a
friend beforehand. You come over as assertive and confident. In the interview itself,
however, the confidence goes. You practise a best man’s speech, it flows well and sounds
great; however, on the day, delivery suffers as you feel nervous and shy.
All the above we can associate with. The fact of the matter is, when the pressure is on, our
actions are influenced by our emotions. The more important the scenarios, the greater the
influence will be.
Trading is no different. As soon as money is committed, logic can go out of the window and
basic emotions take over. Consider the difference between paper trading and trading real
time. Whilst paper trading, you earn very good profits, you are confident and optimistic. You
see a very lucrative business opportunity, so you now decide to open an account and trade for
On studying your charts you see an opportunity, a perfect double bottom and prices low in
historical terms, now is the time to buy. You ring your broker to place the trade; however, the
overwhelming confidence of paper trading has now deserted you. Perhaps you had better
double-check the formation. After much deliberation you decide to phone the broker and the
trade enters the market. For the next two days prices rise dramatically, your profits grow; you
feel great, what an easy way to make a living. The next day prices drop and your profits are
cut in half. You feel uncertain; perhaps you should take the profit now before it gets away.
You decide to wait. The next day prices fall further and close below your mental stop loss.
Your system is telling you that you should be cut. However, you only have a small loss and it
should turn around and you will soon be back in profit. The next day, to your horror, prices
have collapsed and the majority of your equity is now lost. Your reaction is now one of
anger, why didn’t you bank the profit when you had it! The market’s move is totally illogical,
you feel anger, pain and frustration, you are now totally disillusioned and fed up, and all you
want to do is exit the trade.
The above is a hypothetical yet common example of how traders who have made money on
paper suddenly crumble under the strain of real trading. Many people deride paper trading
and say it is of little use. However, providing you know the pitfalls in advance, it is a great
way to mentally prepare yourself for the day you have to trade real money.
Of course nothing will take the place of the real trading arena; however, practicing the basics
on paper is a very useful exercise. To ridicule paper trading is similar to saying soldiers
should not go on manoeuvres because the bullets are not for real! In conclusion, paper trading
is useful if we adopt the right attitude to it, (i.e. we make it as realistic as possible and we
Going back to our hypothetical example, it is clear that the trader was making investment
decisions based upon his emotions rather than logic. No matter how good the trading system
was that he used, he would still fail due to his lack of discipline and self-control. This is not
to imply that you can trade any system with discipline and be successful; however, a
disciplined trader with a mediocre trading system has the edge on the best trading system in
the world if its operator lacks discipline.
To develop discipline you need to acquire total confidence in your abilities, i.e. acquire selfcontrol.
You can do this by acquiring knowledge, practicing on paper and real time trading
experience. Nothing replaces real time trading, but preparation in terms of understanding the
markets and how you should relate to them will give you a distinct edge in the quest for the
The unique world of trading futures is one that encourages traders to reject objectivity and
logic in favour of the basic human emotions of greed, fear, hope and pride, with disastrous
consequences. Let’s take a closer look at the markets and the psychological problems they
Trading requires you to operate in an environment with few rules and little structure. Most
people need order and rules for guidance, it is the way their lives have been structured since
childhood. Man is brought up in a society that is held together by rules and laws that are
imposed by an external authority.
Society is structured, and it is its definitive structure that makes people feel comfortable.
Laws and rules are perceived as protection when our security and well being are threatened.
We can, for instance, go to the police or Courts to look into and act on our grievances.
In contrast, the trading environment has no clearly defined rules and no structure. It would
be, in society terms, total anarchy. The market moves where it wants, whenever it wants. The
society of trading has no governing body that makes or enforces rules; there is no judicial
body to appeal to should the investor feel prices are not moving in the right direction. This
anarchy can be extremely unsettling for investors if they think prices should go up and they
actually decline. There is absolutely nothing we can do about it. The market does not care
whether investors make or lose money, it has no conscience, and it is a natural phenomenon
and never has to justify its actions.
Every trader tries to take money from everyone else. Everyone is trying to make money at
everyone else’s expense. It is a uniquely harsh environment, everyone is against you and you
are against everyone else. One analyst compares it to a medieval battle - a man used to go to
the battlefield and hill his adversary while his opponent tried to do the same to him. The
winner took the loser’s weapons, his chattels and sold his wife and children into slavery.
Today traders to battle on the Exchanges instead of on the field. When you take money away
from a trader, it is not that different from drawing blood, he may lose his home, his chattels,
and his wife and children may also suffer. Is this description a bit exaggerated? Perhaps;
however, there is no denying how hostile the trading environment feels when you trade in it,
to stand alone can be, and is, uncomfortable.
Standing alone is uncomfortable because it makes people do one thing that most feel uneasy
about, which is taking responsibility for one’s actions. Most people like to delegate
responsibility, blame others and make excuses when they don’t succeed. Most people simply
cannot face the simple truth that they are responsible totally for the consequences of their
actions. A person can go for a job interview and convince himself that he did not get the job
due to a personality clash with the interviewer. A lawyer can drink too much before an
important case and convince himself he lost because the Jury was biased, a salesman can
convince himself that it was his product that was not up to scratch and not his presentation.
The trader, however, has nowhere to hide when interacting with the market. He is really
competing against himself, and the market will judge every day how well he is doing. This
confrontation with our own personality, our strengths and weaknesses graphically exposes, is
something most people would rather avoid.
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