BLOG #7 Trading Pyschology

This blog post may well be a bit of a shorter one, but essentially I want to talk about trader psychology and some of things that I have learnt across my journey. In particular would like to share these with you my readers to hopefully help you avoid some of the pitfalls of trading psychology.

I’m mainly focused on this at the moment as I truly believe that most markets currently are in a bubble (and I covered off why in my thoughts and rambling post yesterday – see it here). While the post yesterday was focused on crypto, I think by the same analysis it hard to argue against other more established markets being bubbles.

So what do I mean by trader or trading psychology?
Essentially what I mean here are emotions and how these influence trading. Really what I believe and what I’ve read, there are two powerful emotions that affect a trader, and these are:

• FEAR; and
• GREED.

Both of these are some of the most powerful emotions that influence human behaviour, so it stands to reason that they would influence a trader. I’m not going to go too much into psychology itself, as it is not an area I’m qualified in. If you want to read more, I highly recommend Dr Alexander Elders book – Trading for a Living and Dr Daniel Crosby’s The Behavioural Investor. For a more generic book on the matter, have a look at Daniel Kahneman’s Thinking Fast and Slow.

Something else which I think is important for a trader to watch from a psychological aspect is:

• EGO.

I think ego is one of those things which can really lead to a trader blowing up their account, so definitely something to watch out for.
So now I’ve got the context out of the way, on to my thoughts.

Fear
I’ve spoken about fear in a couple of posts, but I reckon one of the most common forms that fear affects traders is FOMO or fear of missing out. FOMO is dangerous as it has often caused me to chase a trade, usually too late in the cycle, which lends itself to a poor risk-reward ratio.
Fear in the past has also caused me to sell a position early, which usually results in the trend resuming, just without me along for the ride.

So really there are two types of fear, well at least as far as I’m concerned. Both need to be respected and managed if you want to continue on the trading journey.
So how do I manage fear? Position sizing, position sizing and position sizing, with a helping of backtesting and suitable stop placement. Essentially, I manage my fear by never taking a big position (always less than 1% capital at risk initially), setting a stop and knowing that I a trade which is non-profitable is a possibility. These steps have served me well, and I don’t feel as though I’m really beholden to fear any longer (look, I admit I hate seeing a position go against me, but I understand that it’s part of the game). In Steve Burn’s words, each trade is just one of the next 100. It is actually a potent sentiment!

​Greed
Greed is the second major psychological factor that gets traders into trouble, doubly so in a bubble.

Personally, greed usually manifests itself as taking too big a position or visualising what I’m going to do with profits before I realise them. The first form is the more dangerous one to account; the second one leads to poor decisions and early exits (see fear above).

How do I manage greed? I have a trading plan that I regularly review which guides me on when to enter a position, when to exit and how to work out my position size.

The other aspect of greed is often brought about from watching other ‘traders’ get rich quick from penny pump and dumps and crypto. I’ve personally felt these feeling quite frequently lately, and I manage them by remembering what happened to me when I traded without proper risk and money management techniques. In short, I had lots of big winners, but also lots of small winners.

Ego
Personally, my Ego has often tripped me up (shout out a whirlpool compatriot who keeps me honest on this one).

Why is Ego dangerous. Ego makes you trade in dangerous ways because you think you know better than your system, you think your more intelligent than other traders, and you think you’re a brilliant trader. That’s how I used to feel anyway. The market is great at humbling traders egos, but sometimes they creep back in.

So how do I manage my ego. Once again, I follow my plan, remind myself of the lessons I have learnt and remember that I’m not a shit hot trader. I make mistakes, and if I want to be successful, I have to keep these to a minimum.

Once again, thanks for reading and happy trading.

Nick the Trader Guy
May
2021