Posts Tagged “trader psychology”
I’ve written on several occasions about the considerations involved in trading for a living or trading full-time (see this and that). Most of what I talked about in those pieces was the financial and performance aspects of it all. James Altucher, though, looks at things from the other side of the equation in his post 8 Reasons Not to Day Trade. Here’s the list.
- Depression: Altucher suggests that most day traders will suffer a bad patch that will make them suicidal. While things may not be quite that bad, the psychological impact of poor performance can definitely be destabilizing.
- Overeating: I actually see this as one side of a two-sided coin. The other side is not getting enough exercise, which tends to be more my problem. Sitting at a desk for hours on end is definitely not conducive to keeping a narrow waistline.
- Blindness: I can speak from experience here. Staring at charts all day definitely does my eyes no good and can sometimes lead to major eye fatigue. I do try to set up my desk configuration to the least stressful setting possible, but the hours still add up.
- No Social Life: This one is a bit of a mixed bag. Sometimes trading war stories can improve your social life. Altucher’s point, though, is that you’re so focused on the markets that you really don’t want the distraction.
- Blood Pressure: We all know how stressful trading can be. Add in a poor diet, a lack of exercise, and not getting out into the world of real people and you definitely start ticking those check boxes for risks of a heart attack.
- Unproductive: Let’s face it. Trading can be very financially rewarding, but it’s not very productive in the grand scheme of things. Traders face this question all the time. Michael Lewis talked about it in his book Liar’s Poker. (If you haven’t read that one, by the way, I strongly recommend it.)
- No Career: Day trading is very unlikely to be beneficial to any sort of career you may want when you decide you can’t take it anymore. Networking is limited since you have no social life or co-workers (although Currensee certainly alters that equation!). You don’t develop any marketable skills or have any demonstrable achievements you can list on a resume.
- It’s Impossible: The odds of being a successful long-term day trader are very, very low. The burn-out rate is high for exactly the reasons mentioned above. This is true for institutional traders just as much as individual ones. You just don’t see that many “old” full-time traders.
Now, of course, trading for a living doesn’t necessarily mean trading full-time. I’d contend that it’s better if it isn’t. Certainly, there are those who are well suited to the full-time gig. I can think of a guy I worked with who’s just a natural, but he also has a lot of outside interests to keep things fresh for him. He’s not all markets all the time. The point is, don’t feel like you have to dedicate all your waking hours to the markets. You don’t, and if you try to there are consequences.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
------- Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
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In case you haven’t heard, the global Forex market is growing. Actually, more like exploding. As with any growing trend, market researchers seek to study and better understand the motivations of the people participating in this financial phenomenon.
Recently, some 3,000 Forex traders participated in a survey of what makes them tick. The full results (and there are some pretty neat stats in there) can be found here, but here are the bits that caught our attention in particular:
These findings are just one example in a recent move to better understand the inner psychological (and technological) profile of the Forex trader. Identifying these characteristics is crucial in this growing, increasingly social financial market. Need we remind you – $4 trillion traded daily. Everyday. Think about that for a moment.
All this talk about research and insights inspired us to do our own market study. We wanted to explore the Currensee community as a microcosm of the great Forex population, and the results were astonishing:
Our research results can be audited here. We believe our methodology to be ironclad.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
------- Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
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Confidence is a HUGE factor in trading. On the one side, the lack of it can create all kinds of anxiety and fear, over-thinking things, and not being able to pull the trigger (analysis paralysis). On the other side, too much confidence can lead to being cavalier with risk and taking poor trades. In this post I’m going to focus on building confidence.
Start Slowly
There’s no need to rush into trading. It’s really easy to get caught up in all the excitement of the financial markets, but try to avoid that. They aren’t going anywhere, after all. Give yourself time to learn and develop your skill set. A great many new traders see the dollar (or pound or euro or yen) signs and become blinded to all the rest of it, eager to get going and grab hold of their share of the winnings. It isn’t that easy. Trading is like any other activity. It takes time to get up to speed and develop the required competency.
Build a Strong Foundation
If you dive headfirst into trading without taking the time to think things through, you’re definitely more likely to be part of the majority who fail rather than the minority who succeed. I made a big deal about foundation building in The Essentials of Trading, and I harp on that repeatedly in my blog posts and other exchanges with new traders. Work your way through the process of developing your trading plan. If you’ve taken the time to sort this stuff out, it will help to give you confidence in your trading as you move forward.
Practice, Practice, Practice
Athletes practice skills to gain mastery and to be able to execute them under pressure without thought. Traders should do the same thing. There are all kinds of different demo trading accounts available these days. There are a lot of little things you can pick up demo trading. Some of it is the basic stuff regarding order-entry, prices, P&L calculations, and other mechanics. On top of that, though, you can also practice using your trading system or methodology to gain confidence in your ability to trade it effectively.
Go to Live Trading Early
I am a huge proponent of dipping your trading toes into the live markets as quickly as possible. That said, I’m not talking about jumping into the deep end without knowing how to swim. Once you’ve mastered the mechanics of trading using a demo account, it’s a good time to start playing for real. At this stage, however, it’s not really that much about profits and losses. It’s about your trading psychology. As just about anyone who’s ever made the transition from paper trading to the real thing will tell you, it’s not the same. When you’re money is at risk it can really change the way you think, and by extension, the way you trade. That’s why you should…
Start Small
When you make the initial move to live trading, do so with the smallest amount of money you can reasonably get away with. You are going to make mistakes. The cost of those errors can be thought of as trading tuition. You need not make that tuition bill a big one, though. A very small account means very small losses. How small an account you can get away with will vary considerably depending on the market you’re trading and how you trade it. And be sure to give yourself enough wiggle room in there to make sure a few bad trades don’t knock you out of the game.
Practice Some More
Once you’ve had a good taste of live trading, go back to the demo trading once more to really solidify your final trading action plan. Through the live trading experience you should learn what things you can and cannot handle or do in trading. Take that back to the demo trading and incorporate the new information into the way you set up your trading plan. This is just like being an athlete who using their experience in games to fine tune things during practice to get ready for the next competition. You should do the same thing as a trader.
Ease Your Way into the Market
Working through the steps outlined so far should help you become less afraid to trade and more confident in yourself. Even still, you don’t want to go piling into the market. Take it slow. Allow your comfort and confidence in real-money trading to build gradually by starting small once more. You’re still going to make mistakes (though hopefully fewer by this point), so keep their cost down and their impact on your confidence to a minimum. You’ll also invariably take losses. That’s something you’re going to have to learn to live with. It will probably take a bit of time, but that too will be helped if the losses are small. As you feel more comfortable, gradually trade larger, working your way up to the level of risk and exposure which suits you best.
Final Thoughts
The question is frequently asked how long it takes to get to consistent trading profitability. For some people it will happen relatively quickly while for others it will take longer. How long it will be for you will be impacted by things like the timeframe you trade and your personal base risk tolerance. Don’t try to compare yourself to others. Go at your own pace. If you have the commitment to doing things the right way, to developing as a trader, and to being prudent in your actions, you will eventually get to where you can trade confidently.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
------- Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
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There’s a poll on the Currensee Facebook page which asks the question, “As a trader, which of the following psychological factors do you find the hardest to overcome?” The possible options are:
Patience
Fear
Greed
Lack of Self-Confidence
The two most common responses I saw among the traders who left notes along with votes were Patience and Fear. Casting back in time (way, way back!), I think I can remember my own progression. Here’s how it went.
Greed
Let’s face it. Most of us get into the market because of the potential to make a lot of money. Generally speaking, this doesn’t end up being the thing which keeps people there, though. Most folks who stick it out over the long run tend to have additional reasons. They enjoy the intellectual challenge. Or maybe it’s the “game” perspective. For some it’s the competition. These additional reasons give a trader purpose when the realization hits that they probably aren’t going to make 1000% returns every year.
Of course there’s also the micro greed that can take place on a trade-by-trade basis. It’s a definite trap to think mostly about how much you can make. Folks who do it too much don’t last very long. I can certainly attest to what can happen when the risk side of things is ignored. Fortunately, I think I got passed that.
Fear
When I got my start in trading, back in the Jurassic Era, there wasn’t much in the way of demo trading. What we had then was literally paper trading – keeping track of buying and selling in a notebook. When I got to the point of needing to develop trading on live prices I had to do it with real money. I was all of 18 at the time and not exactly flush with cash. The money I traded was all that I could scrape together. On top of that, I didn’t have experience actually putting in orders, so you bet there was a fear factor.
Practice tends to reduce the fear aspect of things. As time went by, I got comfortable with both entering trades (over the phone!) and having money at risk in the markets. The fear factor faded, except on the occasional instance when I goofed something up and had a position I didn’t mean to have. That can get your heart rate going pretty quick!
Patience
Once you get over the hurdle of being afraid to pull the trigger, the pendulum can definitely swing in the other direction to being overly eager to do so. I have definitely gone through periods where I just let things run away with me. This sort of thing often happened after a good string of results. Can you blame me? If you’re on a good run you want to keep it going. That tends to make you forget your trading rules, though, which is never a good thing.
Actually, some folks get caught up in revenge trading which can also be a lack of patience situation. This comes about when you take a hit in the market – often one bigger than you probably should have – and you’re eager to make that money back. There’s a scene in the Trader video where Paul Tudor Jones takes a hit in the markets and talks about making the losses back with interest. The difference between him and the rest of us, though, is that he clearly didn’t get impatient, though he certainly did make the money back, and then some.
Lack of Confidence
Once I got over the three previous issues (mostly, at least), confidence became the thing which did the mental damage. I am not primarily a rigid system trader. That means my own discretion weighs heavily in my trading decisions. As such, when trades don’t go well, it can be a confidence shaking situation.
System traders have a simpler path to evaluating their trading and do discretionary traders because there is no human element (or at least there shouldn’t be). It’s just a question of whether the system is working properly. With a discretionary trader, though, the methods employed have to be evaluated as well as the trader’s application of them. For those inclined to be hard on themselves (as I can be), a period of underperformance can create a crisis of confidence. If you’re prone to shaky confidence, you might be better off being a system trader rather than a discretionary one.
Charting Your Own Forex Path
The progression above was my own path through the comment mental pitfalls of traders. There was certainly overlap, and some things supposedly put behind me reappeared at different points to trip me up. Your own path may be quite different. It’s good to know what’s underlying your mental hurdles, though. It makes them that much easier to overcome.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
------- Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
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One of the lighthearted discussions that have been going on at Currensee alludes to what traders listen to when they are trading. Some obviously prefer music, while others have financial channels on in the background. Still some prefer having the financial channels on but fully utilizing the mute button, which is one way to avoid outside opinions from influencing your trading.
Obviously, right now many of us have the World Cup matches on in the background. You can’t help it. How many times do you need to hear either, “We think there is value in the markets right now” or, “Gold, the US Dollar and the Yen are gaining because markets are risk averse!”
The one thing that you will notice about a World Cup striker is when they have a chance to score a goal, they will try without fear. Meaning that when the ball leaves their foot, it is headed towards the keeper as hard and as fast as it can possibly get it there. Sometimes the ball is shot errantly, but still, everyone knows what the objective was for the striker.
Traders learn that when an opportunity knocks, you have to be as quick to enter that trade as you possibly can. Waiting for confirmation that your idea was correct will often times cost you valuable pips, and potentially have you caught in a squeeze play. Sometimes traders will enter a trade and it will turn out to be a loser, yet still everyone knows what the objective was for the trader.
Those are two straightforward examples of having an objective and believing in it. Can we say the same about the FOMC right now? Have a look back at the FOMC statement from Wednesday: “Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad.” Come on, blaming Greece and others for the lack of economic growth in the US? You can’t be serious. Isn’t China’s economy bigger than Greece’s? And didn’t they just revalue the CNY because their economy is growing at a solid clip?
Unlike its peers that solely focus on inflation, the Fed’s job is to also maximize employment. How many more jobs would have been created in the US if the markets had just left Greece alone? I dare say that more jobs have been impacted by China of late than by Greece. If anything, yields are lower, which should make it attractive for those that can access credit to borrow money right now.
Traders don’t go around blaming others for their losing trades. They blame themselves, they recoup and start over. Why is the Fed blaming “developments abroad” for their inability to restart the economy and create jobs?
Many of us still point to the Fed’s reluctance to withdrawal policy from 2004 to 2006 as the catalyst that started the current recession. As outgoing Fed member Donald Kohn said recently “I don’t think we know enough at this point to answer with any confidence the question of whether monetary policy should include financial stability along with price stability and high employment in its objectives”. That is the complete opposite of trading without fear, right now it sounds as if the Fed needs an objective to believe in again.
This report is for your information only and does not constitute investment or business advice or an offer to buy or sell securities.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
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The question of whether someone really should not be a Forex trader is one that’s not often brought up in discussions between market participants. It’s almost as if the baseline assumption is that the sole criterion is that you want to trade. While I’m a believer in the view that just about anyone can learn, there are limits to that. Ignoring the obviously physical and mental disabilities, here are the ones I think are most important.
Lack of Impulse Control
If you cannot keep yourself from acting on impulse – meaning making snap decisions without a plan – then you’re likely not going to do well in trading. Successful trading means applying a consistent edge. That, in turn, requires a plan that is being followed, not making random trades when the mood hits.
There is probably some confusion here when the subject of gut instinct comes into play. Here’s the deal, though. If you’ve only just started trading, you have no gut instinct. That comes from long experience. If you’re a rookie making gut trades, for your own good you should stop now. Any success you’ve had to this point is almost certainly a function of luck, not skill.
A Troubled Emotional State
We all go through periods when we’re in a mixed up emotional state. It could be relationship issues, family difficulties, the death of a loved one, stress at work, or any number of other things that put you off your game. These are not good times to trade. Granted, trading can be an escape from the emotional strains in some cases, but that’s only if the trader can consistently execute their normal work and strategy without it being impacted by what’s going on in the rest of their life.
Trading has a way of really exposing emotional problems, even among the most stable of individuals. If you’ve already got some mental strains going on, trading is likely to either make it worse, or to see you feed on that emotion in destructive ways – like trading angry. It is best to stay clear of the markets when these sorts of things happen if there’s any chance of spill-over or distraction.
Looking for a Quick Buck
Trading is not a get rich quick program. Any systems or broker ads that lead you believe otherwise are being deceptive. As any trader who’s been around more than a year will tell you, trading is a marathon, not a sprint. If you come into the market looking to make a fast killing you are almost certainly going to blow your trading account up because you’ll end up taking much too much risk. Basically, you’ll be a gambler rather than a trader.
I could probably toss in “those who think trading is going to be easy”, but that might rule out almost every new trader.
That all said, though, the things I’ve noted above can all be viewed as changeable. Lives can calm down. People can learn to follow a plan rather than just do whatever occurs to them at a given time. The gambling impulse can be replaced by a more long-run view. That means there’s hope for just about everyone, so long as they do right by their expectations.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
------- Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results. Investor returns may vary from Trade Leader returns based on slippage, fees, broker spreads, volatility or other market conditions.
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There has been a lot of discussion of late on Currensee about trading and more specifically what the keys are to successful trading. Many involved in the discussion would love to trade for a living. Some involved in the discussion are actually doing it, while others would like to be, and still others dream to be trading fulltime. Do you have what it takes to not only be a successful trader, but to trade for a living?
As you might imagine, there is a huge difference between a successful trader and one that trades for a living. One trait that is necessary is belief in a strategy that you have tested out and are comfortable with in different environments. That means not only in volatile and oscillating markets, but also in the trading environment that you are exposed to. The latter may be more important; for example, do you trade in the same room as your friends or spouse? If you are losing money will you be harassed? Do you have to be somewhere at 2pm just when you should be putting a trade in?
Even if the above factors are not obstacles to your trading, and you have enough capital, are you able to overcome the usual psychological obstacles that inhibit many traders? For example, you just went short EUR/USD at 1.2070. It has traded down to 1.2050, but your T/P level is 1.2015. Just like that it has popped up to 1.2085, so what do you do? You put the trade on because you thought it was going down, which it did, but now you are in the red on this trade. This also happens to hurt all your trading performance statistics if you are trying to build a track record. Most traders – I should know, as I have sat next to many who think that they can trade over the years – say, “When I’m back in the money I am going to close this trade.” It goes back to 1.2065 and, as expected, you close.
Now, was this the right thing to do? I mean, since all trades go from Point A to Point B in a straight line, of course it was the right thing to do! Not. You walk away, then come back a few minutes later and EUR/USD is 1.2015. Not good. You lose 50 pips on your next trade, and you keep wondering what is going wrong.
Well, first of all, less than .01% of all trades move in a straight line. You picked out 1.2015 for a reason. It’s basically the same thing that an Olympic skier does before a race – they envision the course, they conquer the obstacles, and they succeed in going down the mountain in Olympic form. If you picked 1.2015 and didn’t get stopped out, then you need to stick to that trade unless conditions change. Don’t get me wrong, sometimes the market will never hit that 1.2015 mark, like Olympic skiers missing a turn, but at least you have the opportunity to adjust as compared to a skier that misses just one turn.
If you have a strategy that you are comfortable with, then you need to let your trades play out. We’ll revert back next week with a follow-up post on the psychology of trading.
This report is for your information only and does not constitute investment or business advice or an offer to buy or sell securities.
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Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.
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