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Market psychology - mindset

Market psychology - mindset

Foreword

The definition of mind set, according to the Wikipedia website, is a set of rules, methods, or systems that a person may have that is so entrenched in their psyche that it creates a powerful reason for them to continue adopting or accepting past behaviours and choices. The challenge with having such biases is that it often becomes difficult to reduce its effects upon analysis and decision making processes. On the other hand, a mind-set can also be seen as part of a person's philosophy of life.

Take for example, having a millionaire mind set. While anybody can become a millionaire; not everybody will. This is not because it is not achievable, or out of their reach, but because they have never understood the importance of having a millionaire mind set. They do not understand that a millionaire thinks differently to most other people. If you study any wealthy person, you will soon notice that they have a different mind set, as well as different habits. They have a different take on both problems and opportunities. It follows that different thinking patterns feed through to different actions and strategies.

The average person may think that millionaires are successful because they were “lucky" or in the “right place at the right time." In reality “luck" and being in the “right place at the right time" was the end result of their different thinking. The good news is that everybody can develop a millionaire mind set. A person just needs to be serious and committed to becoming wealthy. The same approach applies to having the right trading mind set. This section covers a variety of “mind set" articles.

Cruise control

Many traders, at some point in their career, have experienced what can be called mental cruise control. This tends to happen when a trader has worked very hard to develop the right kind of trading personality and mental approach, and has achieved it. From having and consistently maintaining this successful trading state, the trader's mind is numbed to the emotional influences of trading environments. Eventually, the task of maintaining the successful trading state becomes a mundane activity. This causes the trader to feel as if he is losing his "grip", because he is no longer actively maintaining that control.

Think of yourself doing some mundane activity like copying 10 pages from a book. Initially, you probably would not make any errors. But as you go through it (say at an average pace), you are likely to make several errors along the way. Some might be spelling errors, like leaving out a character from a word that you may not even realise until you very carefully review what you have written. Other errors might be skipping over entire words, starting at the wrong line, writing a character like "e" as an "l" and then having to scratch it out, etc. At first, your mind is actively devoted to the task, but at some point, you start to become weary of the activity. This causes your mind to transition into a sort of "cruise control" mode, and so the process of going from what you see in the book to the gestures you make with your hand starts to falter.

Personal integrity - a pillar of self-esteem

Successful traders have high self-esteem. They have got to. Trading skills are hard to develop and much easier when one has high self-esteem. People with low self-esteem have not developed high regard for themselves. Throughout their lives they have tended to compromise their ideals and seek out guidance and direction from others. By doing so, they have often been exploited, and by the time they have become traders, they are out to prove their self-worth. They want to show others that they should not have been mistreated, and that they can gain mastery over their domain. It is dangerous to be in this position. Since trading is not an arena where most people are winners, many traders with low self-esteem are setting themselves up for failure. It is vital to determine whether one of your motives for trading is to raise your self-esteem. Here is a brief assessment that addresses personal integrity, which is a pillar of self-esteem. See how well you do.

In this assessment, you will be presented with two moral dilemmas. Read each carefully and respond as honestly as possible. Write down your responses. The purpose of this exercise is to increase your awareness, so think about how you would actually behave in the situation, rather than how you would prefer to behave.

You are a member of a club that is very important to you. Many of your close friends are members. You greatly admire the president of the club. John, a very close friend of yours, has recently had a falling out with the president. He resigns his membership and the president tells everyone to avoid any further contact with John. What would you do? Would you avoid any further contact with John or would you listen to his side of the story and decide what to do next? Would you still be friends with John even though the rest of the group ostracised him?

Your company is bidding on a contract that could fund your department for the next two years. Without this contract, you will lose your job. The funding decision hinges on a final presentation by the head of your department to a government agency. There are several flaws with your company's manufacturing plans, and the head of your department avoids talking about these issues. When one of these flaws is raised, your department head deceives the director of the government agency. On the one hand, the jobs of you and your fellow employees are at stake, but on the other hand, other people's lives and taxpayer money are at stake should this deception continue. What would you do? Clarify the deception? Say nothing and justify the action? Say nothing at the presentation, but resign in protest?Personal integrity is a critical component of self-esteem. Integrity concerns the consistency between our values and actions. It is often easier to bow to social pressure and avoid conflict, but we pay a price for such behaviour: we lower our self-esteem. What did you do in these moral dilemmas? Did you yield to authority and social pressure or did you look towards your own values for how to behave? If you succumbed to social pressure or authority, you may have low self-esteem. People with high self-esteem, and especially seasoned traders, follow their own instincts rather than looking toward others. Consider where you stand.

Expect realistic rewards

Even the most successful people seem to undermine their own success. Think of all the U.S. Presidents, politicians, CEOs, professional athletes, and famous actors who have achieved substantial success, yet blew it on a couple of preventable mistakes. There are numerous explanations for such behaviour, but one possibility is expecting unrealistic rewards from one's accomplishments.

Becoming successful is not easy. It often requires extreme self-control and discipline, along with risks and sacrifices. Humans have the ability to strive for goals through making sacrifices and delaying immediate gratification for a greater good. For example, university students and professionals may accrue a great deal of debt to gain appropriate education or credentials. Traditional work values dictate that one should postpone short-term gratification now and reap the benefits later. Many times it is worth making the sacrifices. It will pay off. But sometimes, some people may incorrectly construe the rewards for these sacrifices as more gratifying than they actually will be. When they eventually do achieve success, they may be disappointed. It is at this point that one may see very successful people undermine their own success. They may commit reckless acts in order to undo their success. It is hard to know exactly why successful people may undermine their success through reckless acts. One reason may lie in Alfred Adler's "inferiority complex." Adler proposes that all people experience feelings of inferiority in early childhood, but some experience greater feelings of inferiority than others. These early feelings of inferiority compel one to strive for superiority. Individuals try to cope with deep-seated feelings of inferiority through achieving superiority. Perhaps, part of the dynamics around blind ambition is a secret need to satisfy feelings of inferiority.

Upward mobility and superiority over one's peers, however, requires extreme discipline and self-control. By focusing all of one's energy towards success, one may neglect important psychological needs. The person may fail to build satisfactory personal relationships, or fail to develop a true and genuine sense of self-esteem. They may define themselves in shallow terms and expect their needs for self-respect and self-worth to be satisfied once these terms are met. This neglect may surface later in the form of undisciplined and reckless behaviour. This could all have been prevented had the person developed more realistic expectations of reward. One cannot neglect his or her psychological needs now and hope that they will be satisfied later. Humans have core psychological needs: one must appreciate oneself for who he or she is, develop the interpersonal skills to sustain long-term meaningful relationships, and understand one's true place in the society and the world. These needs can be hard to meet, but unless they are met, they will continue to haunt people.

They lie in the back of one's mind, no matter how much success one achieves. So as you put in time and effort to become a successful trader, do not over-estimate the rewards your trading will bring. Even if you make a great deal of money, it would not help you satisfy your psychological needs. You have to make sure that these needs are met first. There is no point in waiting. Work on satisfying these needs now.

What in the world... .com

For weeks people expressed their surprise and dismay over the Enron and WorldCom situations. For the average person, these events did cast a dark cloud over the investment markets in the U.S. and abroad. The media consistently reported that people had lost value in their retirement funds, had become averse to investing in other global giants, and had lost confidence in the strong image of American corporate value. As you listened to the news reports, did your eyes open wider and your thoughts race about how such large-scale problems can go unnoticed or unmentioned? As a trader, you are directly affected by such events, after all, they impact market volatility, share prices, and trading volume to an extent that the exchanges have to step in and slow down the action.

How have these events affected your trading psychology? Avoid the inclination to say that they have not, because any knowledgeable trader will tell you that it would be very rare if your trading psychology, at some level, had not been influenced by these situations. With experience comes understanding and appreciation of market activity, and every good trader grows to develop some sort of a trust in and love for the markets. Often, after events like the ones mentioned, traders can identify a small nagging doubt about the future of the markets, and primarily about the value of their trading and investment activity. Some traders even experience feelings of guilt or regret for being associated with something that people are regarding negatively.

When ignored, such small doubts and feelings can grow to impair the trader's confidence and serve as an excuse for bad choices made as a result of lowered confidence or negative sentiment. As a trader, it is your responsibility to recognise these doubts or negative sentiment, and to objectively address them. Consider how "scandals" like Enron and WorldCom really affect the markets. Are the prices dropping because the man-on-the-street are selling their 100 or so shares? Or is it because professional traders expect these people and millions of others to sell their shares, or still, is it because such situations provide an excellent platform for professionals to make large and profitable moves? Keep in mind that a situation closer to you in time will usually seem to have a far grander impact than in the overview picture of the markets. Maintain your self-awareness and objective self-evaluation to see through those dark clouds (and beyond skies that are too clear).

An ambitious perspective

Ambition can be defined as the strong desire to achieve an end goal. Naturally, a sense of commitment to acquire the object of that desire often follows, given that the ambitious individual does not deem the situation hopeless. Successful and experienced traders know that commitment is a critical attribute to any trader's trading personality and approach. But although ambition may be helpful in the regard that it spurs commitment, it can also lead to the development of what might be called an ambitious perspective. This occurs when the strong desire to achieve an end goal overshadows the trader's knowledge, thereby influencing his focus and effecting his decisions negatively. The object of ambition can be anything, from a certain level of profit on a specific trade to admiration from colleagues for having an outstanding return. To better understand how an ambitious perspective might be formed, it's helpful to consider the source of the ambition. Most often, ambition is correlated with a feeling of need, which may stem from being dissatisfied with oneself or situation.

In many ways, ambition is regarded as a positive characteristic, because it is a way or an expression of a desire to improve oneself. However, it can rapidly develop into a negative characteristic when it becomes excessive, eventually leading to an ambitious perspective. This generally happens when an individual does not have a realistic self-image, and in the trader's case, when the trader does not have a true and realistic assessment of his skills and experience at any given point in time. When this occurs, the trader is inclined to set unrealistic or unattainable goals. Setting unrealistic goals for trading performance will result in several undesirable characteristics, one of which is an increasing focus on trade results. As a trader, it is key for you to maintain your focus on the activity of trading and not on the results.

Additionally, an ambitious perspective is likely to lead to weakened confidence and the inability to take responsibility for actions. All these will ultimately result in losses, which of course, will create a vicious circle, causing any trader undue stress and frustration. There are two very good ways to ensure that you have a healthy degree of ambition. One is to periodically review a professional assessment of your trading personality, skills, and experience. The other is to continually remind yourself to focus on your trading activity, not on your trade results.

Overconfidence - old habits are hard to break

Overconfidence is one of the most prevalent psychological problems traders face. Overconfidence may reflect deep psychological conflicts for some people or universal cognitive biases to which all humans are prone. Sometimes, however, overconfidence is simply a matter of having difficulty breaking old habits. As the old saying goes, "practice makes perfect." But sometimes, over-practised trading strategies may be executed too "automatically" even when the setup is not quite right. Sometimes, it is necessary to learn alternative behaviours, or "relearn" how to trade. It is vital to hone your trading skills so that you can execute trades freely and intuitively. The mind has limited resources, and through practice, one can engage in multiple tasks simultaneously, and "expand" the mind's limited capacity. The best example of automatic processing is driving a car. When you first learned to drive a car, it was very deliberate: You carefully hit the brakes when you anticipated a potential road hazard and focused your attention on accelerating when the trouble had passed. As you gained driving experience, however, much of your driving behaviour became "automatic" in that you no longer needed to pay attention to it. Now, as experienced drivers, you can easily do many tasks while driving: adjusting the car radio, glancing in your mirrors, keeping track of your speed.

A similar psychological process occurs as trading experience is gained: you no longer need to carefully evaluate certain trade set-ups closely. You now can act on a "hunch" or your "intuition" and be right most of the time. This form of automatic processing allows you to trade efficiently. You can do more with less psychological energy. But what happens if trading on "automatic pilot" no longer works? Market conditions are continually changing and a strategy that worked last week may not work today. When this happens, you must learn to use a new strategy. This may be harder than it seems, however.

Have you ever tried to change your approach after you have developed a skill? Have you tried to improve your golf swing, or learned a new way of doing things after years of practice? In some ways, it is harder than starting over. You have to learn a competing method and try to stop using your old method. For example, consider a person who is learning to drive a manual transmission after driving an automatic transmission car for several years. In many ways, it is like learning to drive all over again. You have got to hit the clutch pedal as you hit the brake pedal, shift into first gear, and carefully let your foot off the clutch as you move forward. But there is a big difference from when you first learned to drive: You have already driven for years and there is a strong tendency to forget about concentrating on a new skill and just do it the "old way." That is, you may forget to hit the clutch when you brake, or shift into a different gear without hitting the clutch. This is a form of "overconfidence." One forgets that he or she does not know how to drive a manual transmission and reverts to the "old" and automatic way of doing things. The same thing can happen when you try to learn a new approach to trading; you may trade "automatically," if you are not careful. When learning a new skill, be focused and deliberate. Pay attention and focus more closely on each action, until you replace your old method with your new method. Remember, old habits are hard to break, but if you pay attention, and practice, you can replace an old approach with a new one.

Overconfidence - old habits are hard to break

Overconfidence is one of the most prevalent psychological problems traders face. Overconfidence may reflect deep psychological conflicts for some people or universal cognitive biases to which all humans are prone. Sometimes, however, overconfidence is simply a matter of having difficulty breaking old habits. As the old saying goes, "practice makes perfect." But sometimes, over-practised trading strategies may be executed too "automatically" even when the setup is not quite right. Sometimes, it is necessary to learn alternative behaviours, or "relearn" how to trade. It is vital to hone your trading skills so that you can execute trades freely and intuitively. The mind has limited resources, and through practice, one can engage in multiple tasks simultaneously, and "expand" the mind's limited capacity. The best example of automatic processing is driving a car. When you first learned to drive a car, it was very deliberate: You carefully hit the brakes when you anticipated a potential road hazard and focused your attention on accelerating when the trouble had passed. As you gained driving experience, however, much of your driving behaviour became "automatic" in that you no longer needed to pay attention to it. Now, as experienced drivers, you can easily do many tasks while driving: adjusting the car radio, glancing in your mirrors, keeping track of your speed.

A similar psychological process occurs as trading experience is gained: you no longer need to carefully evaluate certain trade set-ups closely. You now can act on a "hunch" or your "intuition" and be right most of the time. This form of automatic processing allows you to trade efficiently. You can do more with less psychological energy. But what happens if trading on "automatic pilot" no longer works? Market conditions are continually changing and a strategy that worked last week may not work today. When this happens, you must learn to use a new strategy. This may be harder than it seems, however.

Have you ever tried to change your approach after you have developed a skill? Have you tried to improve your golf swing, or learned a new way of doing things after years of practice? In some ways, it is harder than starting over. You have to learn a competing method and try to stop using your old method. For example, consider a person who is learning to drive a manual transmission after driving an automatic transmission car for several years. In many ways, it is like learning to drive all over again. You have got to hit the clutch pedal as you hit the brake pedal, shift into first gear, and carefully let your foot off the clutch as you move forward. But there is a big difference from when you first learned to drive: You have already driven for years and there is a strong tendency to forget about concentrating on a new skill and just do it the "old way." That is, you may forget to hit the clutch when you brake, or shift into a different gear without hitting the clutch. This is a form of "overconfidence." One forgets that he or she does not know how to drive a manual transmission and reverts to the "old" and automatic way of doing things. The same thing can happen when you try to learn a new approach to trading; you may trade "automatically," if you are not careful. When learning a new skill, be focused and deliberate. Pay attention and focus more closely on each action, until you replace your old method with your new method. Remember, old habits are hard to break, but if you pay attention, and practice, you can replace an old approach with a new one.

I am not a pessimist - I am a realist

"I am positive Amazon's share price is going up substantially next month," John says while taking a coffee break with his buddy Fred. "What makes you think so?" Fred asks sceptically. John replies, "Next month school starts, and students and teachers will need to buy books; that should increase sales, and thus, the price of the share." Fred counters, "Maybe, but it may not be that simple. That is just one of many possible factors and the price may depend on several other factors that you may not have considered." Disappointed by his pal's lack of emotional support, John shouts, "You are such a pessimist." Fred calmly replies, "I am not a pessimist; I am a realist; trading is not as simple as you think it is."

Pessimism can be a person's worst enemy. If one thinks a goal is impossible to achieve, he or she will not be willing to mobilise resources, and work tirelessly to achieve it. But extreme and unrealistic optimism is the trader's far more disreputable enemy. If you have too much confidence in a poorly devised trading plan, you will end up losing money. There is some truth to the idea that pessimists can often be realists. It is worth considering this proposition in more detail, at least philosophically. Research scientists have compared optimists to pessimists as they played games of chance and estimated their odds of success. The findings of these studies are counterintuitive; pessimists were more realistic in their estimates than optimists. The optimists over-estimated the probability of winning while the pessimists were scrupulously accurate.

These are intriguing findings: Pessimists do appear at times to be realists. Now, it would not be sensible to conclude that one should be a pessimist in order to be a more accurate gauge of one's trading outcomes, but it is worth considering the possible advantage of having a sceptical view, occasionally. Most people have a strong tendency to feel in complete control and somewhat omnipotent. When it comes to trading, however, this mind-set can be misleading. It is often more useful to think that pessimism may actually reflect realism. When you think you have got a fool proof plan, it is often useful to step back and question it. Ask yourself, "Am I being a little too overconfident? What can go wrong? Maybe I better be a little more sceptical and self-critical before I take action." In other words, it is sometimes advantageous to think that perhaps, "Pessimists are actually realists."

Do you deserve to make lots of money and fast?

The world's most successful financial market players believe in themselves and their ability to win. They are not cocky and arrogant, but they are certain that they are able to take profits out of the market. More importantly, they believe that they deserve to win. That is, they have a belief system that is conducive to winning as a trader. It is essential that you make sure you have such a belief system. Do you sometimes act as if you do not deserve to win? Do you declare that you can learn how to take big gains out of the market one day, and decide that you will never catch on the next? Do you consistently make gains, only to consistently give them back, and then some? Deep down inside, you may not believe making money rapidly and easily, without backbreaking labour, is honest work. Did you grow up hearing the axiom, "Money is the root of all evil"? And is it possible that these beliefs interfere with you making a great deal of money? There is a powerful human need to maintain logical consistency among our beliefs. When we hold contradictory beliefs, we feel conflicted and uneasy. Thus, it is vital that we identify our own personal beliefs that are not conducive to trading, question and refute them, and ease conflicted and uneasy feelings by resolving contradictions among opposing beliefs.

Reflect for a few minutes on the extent to which you feel you deserve the profits you make, for example. Deep down inside, do you believe you deserve to be wealthy, or at least accumulate a lot more capital than you have at the present? Do you believe that money is a limited resource, and that by winning you are taking money away from others? Such beliefs are not consistent with trading success, so if you hold these beliefs, you may want to try to refute and change them.

Consider this outlook: Money is a means of exchange that provides us with circumstances and experiences we could not otherwise have. There is plenty for everyone. When we attract abundance and prosperity into our lives, we are able to support our loved ones, others, and ourselves more fully.

Affirm at the start of each trading day that you are a calm, confident market participant who deserves the best outcome the day has to offer. With practice and persistence, this perception will become reality. It is all a matter of acknowledging your true beliefs, identifying those beliefs that contradict your desire to win in the markets, and refuting them. Once you resolve contradictions in your belief system, you will find that you have developed the mind-set of a winning trader.

Controlling fear through stress prevention

After an extra-long commute in rush hour traffic, John arrives at his trading office an hour late. He is groggy and uneasy. He had an argument with his wife after dinner yesterday and had difficulty sleeping for the third night in a row. He drinks a cup of black coffee in an effort to increase his energy level, and looks at the progress of a swing trade he has been watching for the past week. He sees that he has lost more than the 5% he had planned. He hits his fist on the table, and yells, "How did it go down so fast!" Angry and frustrated, he thinks, "I cannot take it anymore." He shuts off his computer in disgust and goes for a walk.

Sound familiar? John is "stressed out" and unable to think clearly, but there is a lot John could have done to prevent this "stress attack." People experience stressful emotions when they unexpectedly face a barrage of obstacles that preclude them from reaching a desired goal. People vary on how stress influences them. Some people are extremely "stress resilient" in that they can encounter many stressful events, yet still function in a relatively calm manner. Others are more vulnerable to stress, and experience extreme anger, fear, or frustration upon encountering just a few stressful events. Regardless of where you stand on this characteristic, there is a lot you can do to prevent stress from getting the better of you, especially if you are a novice trader who finds many aspects of trading stressful (for example, putting your money on the line, or dealing in an ultra-fast paced chaotic environment).

It is useful to practice stress prevention. Scientists have shown that stressful emotions can build up, and if not released occasionally, one can be overloaded by stress. Laboratory animals placed in stressful situations, for example, die if the stressful events are continuous and enduring. Thus, it is essential to have a routine to release stress, and let your mind rejuvenate. You cannot completely remove stress from the trading environment, but you can prevent the stressful aspects of trading from making you feel overly anxious and fearful. Here are some tips on how to develop an effective stress reduction plan:

  • Avoid caffeine - Many people feel that caffeine helps them wake up in the morning, but many times, caffeine will elevate your nervous system too much. It operates in the background and makes your nervous system hyper-alert to the slightest form of stress. Trading is stressful enough; you do not need to pre-elevate your nervous system, only to feel extra nervous when you face a stressful trading event.
  • Exercise regularly - Many successful traders view exercise as a key component to creating a calm and relaxed mind-set. It is vital that you regularly release tension that builds up during the trading day. Exercise ensures that pent-up frustration and tension are released, and do not build up to influence subsequent trading decisions unexpectedly.
  • Minimise background stressors - Daily hassles, such as minor arguments, traffic congestion, or feeling over-extended can work in the background and add up to be as equally stressful as a major life event (such as the death of a loved one). Try to minimise these hassles, and do not ignore them by trying to pretend they are not important enough to deal with immediately. They can accrue and cause you great strain in the long run.
  • Do not exceed your trading skills - If you are new to trading, do not put extra pressure on yourself by trying to achieve trading goals that you cannot achieve. For example, keep position sizes small and have clearly defined risk limits. If you push yourself beyond your skill level, you will not only feel extreme.

Learning from past mistakes

In a conversation with his trading coach, Jason remarks, "I do not understand why I am not profitable. I have made at least three winning trades a day, but when at the end of the week, I notice that I have lost money. "Obviously, you are making quite a few losing trades, but what are you doing differently on the losing trades compared to the winners?" replies his trading coach. "I just do not know, but I must admit, I really do not want to know," answers Jason.

Jason's response may seem evasive, unaware, and in the end, unproductive, but it is understandable. When we have made a mistake, such as a series of losing trades, our first instinct is to avoid accepting that it has occurred, cover it up, and refuse to think about it. In the short term, it soothes our tattered egos to avoid thinking about past mistakes. In the long run, however, if we do not admit our past mistakes, closely scrutinise them, and in doing so, learn from them, we will never hone our trading skills, enhance our trading performance, and become consistently profitable traders. When you have been making losing trades, and consistently losing money, it may be especially difficult to admit you have made some mistakes. But, keep in mind, moving forward to achieve a long-term goal often means moving backward, or at least it feels that way. Looking at what you are doing wrong makes you feel like you are not progressing, but what really matters is that you learn from failures, rather than the fact that you have failed. If you fail and learn nothing from your failures, you will, indeed, not move forward, but if you view failures as a springboard from which you can jump to new heights, you will move forward.

Why is it so hard to admit a mistake and scrutinise the possible reasons for the mistake? There are a variety of reasons, both fleeting and enduring. One is simply a matter of sunk costs. We have put in so much effort and energy into developing and executing a series of trades with our particular methods that we are hesitant to admit that it was possibly all a waste of time. In other words, it is sometimes harder to take a psychological loss than take a financial loss. Other folks just don't know how to admit mistakes. It takes a strong ego to admit mistakes, and some people are so motivated to "defend" their pride, that they cannot acknowledge a mistake for fear that it will prove they are both an incompetent trader and a generally incompetent person. It is vital that you identify the psychological reasons that prevent you from admitting your mistakes, since if they are deep-rooted psychologically, and you do not address them, it will be extremely difficult for you to examine your faults and make modifications. Once you know the reasons, and acknowledge them, you can take steps to making significant changes to your trading strategies. Careful self-monitoring is the key. Keep a trade journal of all your thoughts, emotions, and trading strategies. Also keep a detailed record of the trade setup, time of day, and market factors. With these detailed records, you can study these events and discover the factors that discriminate your winning trades from your losing trades. Perhaps your losing trades were all at the open, or perhaps you were feeling "stressed out" during your losing trades. A careful examination of your journal entries will identify these factors.

You may also want to get into the right mind-set when looking for these factors. Just relax, calm down, and get in an introspective mood. Keep the big picture in mind. This is an activity where encouraging thoughts are useful: "Right now I am not doing well, and I may continue to do poorly, but I am going to identify what I am doing wrong, change it, and in the long run, I am going to be a consistently profitable trader." Look at a past mistake as a springboard from which you can move forward. By cultivating an open mind, you can accept your failures, examine them, learn from mistakes, and significantly enhance your trading performance.

For the pure love of the game

In systematic studies, psychologists have discovered that peak performers have a true passion for what they do. Whether it is art, sports, or business, the people at the top are not primarily motivated by fame, glory, respect, or status. They are driven by the pure love of the game. Winning traders, similarly, have strong interests in the markets, and this passion is the driving force that puts them at the top, year after year. But many novice traders are drawn to the markets so as to meet deep-seated psychological deficits and needs. Trading with these motives often leads to disastrous consequences. A brief case study of Ray, a novice part-time trader, illustrates the point. Read it, think about it, and consider whether or not you can relate to it.

Ray was a successful engineer who traded the markets for 10-years, but he never had a winning year. In his worst two years, he lost 95% of his yearly salary. When asked about his trading progress by friends and family, he enthusiastically told them about how thrilling the markets were, and how he liked to trade so as to feel that rush of excitement. He also spoke of how the riches he planned to make trading were going to help him buy a big house in the hills overlooking the city, and gain the respect of his friends and family. As you might see, Ray had ulterior motives for trading: he was out to gain status, respect and approval. With each trade, he put his self-esteem and his worth as a person on the line. He also tried to use the markets to ease his boredom. He did not love trading in its own right, but used trading as a means of satisfying powerful psychological deficits. Such an approach to trading can produce catastrophic results, as it did in Ray's case. It is vital that you evaluate the true motives that lie behind your trading, and make sure that you are doing it because you love it, like the intellectual challenge and feel fulfilled just because you trade.

Ray clearly had psychological needs that should have been addressed before embarking on a trading career, but it is interesting to note that in other areas of his life, Ray was a successful person. He was considered a top-notch engineer and a skilled athlete. He loved playing sports, and unlike trading, he did not care if he won or lost; he just loved to play. It was enjoyable, and in contrast to trading, he never talked about how he had to prove himself to others or how he hoped to earn bragging rights. If Ray could have just applied the carefree approach he used to succeed as an athlete to his trading, he would have been much more successful. If he would have just traded because he enjoyed it, rather than focusing on the respect and approval he wanted as a result of it, he would have probably had several profitable years.

Can you relate to Ray's predicament? What motivates your trading? Is there an enjoyable skill that you have honed in which you take a carefree and focused approach? Try applying this carefree and focused approach to your trading. A key ingredient to trading success is the proper motivation: Be motivated by the intellectual challenge. Follow your passion for trading. Do it because you love it.

Thinking optimistically

In the 1970s, a Dr. Martin Seligman conducted an influential experiment in which he taught laboratory animals to become helpless upon encountering seemingly hopeless situations. Laboratory animals were placed in a chamber that had an electric grid on the floor that was used to deliver a shock. When an animal felt the shock, it jumped out of the shock chamber into a safe chamber. Half of the animals, however, were physically restrained from escaping to safety. In subsequent exposures to shock in which all laboratory animals were unrestrained and free to jump into a safe chamber, the previously restrained animals did nothing. They did not try to escape; they just sat there, motionless and beaten. They experienced "learned helplessness." The other half of the animals, as expected, jumped out of the shock chamber to safety upon feeling the electric shock.

Dr. Seligman viewed his animal study as having parallels to humans. Initially, he surmised that when humans experienced dire situations that seemed to have no apparent solution, they acted in a helpless manner, as if there were no possible means of escape. Since all seems hopeless, one might as well give up instead of searching for solutions, and taking specific action. The most obvious criticism by many was, "Humans are more sophisticated than laboratory animals; a human would come up with more possible solutions to a hopeless situation because humans can think." Dr. Seligman later amended his original theory to account for how humans think about the "hopeless" situations in which they find themselves. It is not the objective "hopeless" situation that causes one to give up, but the interpretation of the situation. How one explains the cause of the dire situation accounts for how one copes. If one thinks, "I have always been incompetent and this is just another instance of how incompetent I have always been," he or she will tend to view the situation as hopeless and want to just give up. But, if one thinks, "this is a temporary setback and I will be able to get past it," he or she will search for solutions to change matters and overcome the dire situation.

This kind of optimistic versus pessimistic thinking style has a direct bearing on how one copes with trading losses. For example, suppose one finds oneself in the midst of a serious drawdown. The helpless and pessimistic approach to viewing this situation is to attribute the cause to an enduring personality trait, such as "I am incompetent in all that I do; trading is no different, and that's how I got myself into this mess." When one interprets situations in this way, one is bound to feel extreme disappointment. A more productive and optimistic approach would be to attribute the failure to a specific cause that is temporary and easily changeable. For example, one may think, "My trading strategy must be ineffective; I will have to come up with a new method, and when I do, I can recover from this drawdown." A trading strategy is specific and can be changed. By focusing on these changeable reasons for failure, one will feel more optimistic and feel he or she can find effective solutions.

Trading is a tough business in which one must often persist in the face of defeat. Your thinking style dictates your persistence level. It is unproductive to think pessimistically, and attribute your failures to enduring personality traits, which are not easily changed. Instead, attribute failures to temporary specific causes, which you can change. By looking for specific aspects of your trading that you can actually change, and believing you can change them, you will face setbacks with optimism rather than despair and helplessness.

The ideal trader personality - finding the right blend

The ideal trader personality style consists of a combination of experience, skill, knowledge, discipline, and intuition. The problem with ideals, however, is that they sometimes exist only in our imagination, with few actual candidates who fit the bill. Consider, for example, the traits of discipline and intuition. A profitable trader must trade the plan, and that means following rules. But most rule followers live "by the book." They tend to seek out security and certainty, and prefer facts to abstract theories and ideas. Yet there is an intuitive side to trading that is equally important. The market only follows the rules when it does; the rest of the time it goes another way. There are an endless number of inputs and it takes an intuitive mind to piece them all together to come up with a reasonable plan of action.

Perhaps no person has the ideal trader personality. At best, all we can hope for is the right blend of core personality traits. And thus, it is useful to know where you stand in terms of your personality, so you can adapt and change, and bring your trader personality closer to the ideal. Appreciate the characteristics that accentuate your trading while recognising the characteristics that do not. Once you identify your personal limitations, you can either develop the personality traits you need, or devise trading methods to work around your limitations. The typologies proposed by philosophers and psychologists are numerous and complicated. But a common and simple way many people classify people is to focus on the extent to which they approach life as an artist or as a scientist. The artsy person thinks in abstract rather than concrete terms. He or she knows how to use intuition to look at the world. The artist sees reality as a subjective illusion, with each person creating his or her own reality. The scientist, in contrast, believes that there is a single true, objective reality. "If you cannot measure it, it is not there" is a credo most scientists live by. "There are cold hard facts out there and it is possible to find them." Perhaps few artists are steadfastly so abstract, and few scientists believe in a universal reality. But as fuzzy categories, these are useful stereotypes, and ones that are apt to trading.

Which type describes you? Are you more of the scientist or the artist? Are you a blend of these two types? Some traders are 90-10 in favour of science. They are usually interested in developing computerised trading systems that generate automatic buy and sell signals with as little discretion as possible. This type of trader may fall into the trap known as paralysis-by-analysis, an ailment in which far too much time is spent tinkering with the computer program than trading. One may spend more time back testing and mining historical data than decisively putting on a trade. It is useful for these traders to work at bringing the blend into more of a balance by injecting more art or human intuition into the trading process. And for these people, it is useful for them to practice trusting their intuition and taking action rather than being stunned by indecision. The opposite end of this spectrum is the all-art, no-theory type traders. Their perception of the market is based entirely on abstract feelings, and a spontaneous emotional response to stimuli. Naturally, this rarely works. Although an intuitive feel for the markets is useful, it is essential to also look at some "objective" inputs, consider them carefully, and make a sound decision based on the data. What type of trader are you? Where do you fit in the spectrum between art and science? Take some time to find out and adjust your trading personality accordingly. You will find that the right blend will help you trade profitably and consistently.

The extra weight of psychological baggage

In a deep discussion with his trading coach, Johan confides, "I win sometimes, but when I lose, I lose big." His coach asks, "Why are you putting on big trades? Do you see a high probability setup that warrants increasing your position size?" Johan admits, "I do not have a good reason. I just want to put on a big trade to make huge profits." Frustrated with Johan, his coach says, "But if you do not have a sound reason for the trade, why put it on and take such a big risk?" Confused and flustered, Johan says, "I just need to make big profits. I have got my dreams and ambitions. I want to be a success, so I will finally get the respect I have always wanted."

Johan is human. He craves success and trading offers him a way of gaining success in life. But Johan carries around a lot of "psychological baggage." In other words, he has unresolved past conflicts that use up his limited psychological resources, interfere with his concentration, and do not let him focus objectively on his trading. His motives to trade successfully are coloured by unmet psychological needs, and this baggage prevents him from trading calmly and without bias. Not all traders carry psychological baggage, but if you are one of them, it would be wise to acknowledge problems you have in this area and work them out.

There are many kinds of psychological baggage (since it is not a precise scientific term in the fields of clinical psychology and psychiatry, but it suitably addresses a prevalent issue.) Carrying psychological baggage with you is not exactly the same thing as merely having disturbing memories of past trading losses; it is deeper than that. For example, many traders face severe drawdowns in which they have made trade after losing trade before finally hitting a winning streak. During the times of severe drawdown, some traders, especially novices, may feel a little disappointed, and thus, they may be carrying around a little psychological baggage, but not necessarily a lot. Ideally, a trader with no psychological baggage views the drawdown as nothing more than one of the everyday vicissitudes of trading. Trading is based on odds, and the odds are such that even a top-notch trader may face a drawdown. So it is best to look at a drawdown as nothing more than a minor temporary setback and press on. But for the trader with psychological baggage, the drawdown may take on greater significance: it may represent a "personal failure." When a minor event starts to symbolise a "bigger issue," it often reflects long-standing unresolved psychological conflicts. When a trader starts thinking, "I do not have the skills to get past this drawdown," or "This drawdown exemplifies my ineptitude as a person," he or she is carrying psychological baggage from the past into the current trading situation. Although psychological baggage is often deep seated and reflects long standing unresolved conflicts, it can be resolved over time through intense self-reflection and introspection.

Carrying around psychological baggage influences what you do. Regardless of how much actual financial capital you have on the line in a given trade, the trader with psychological baggage has personal emotional capital on the line as well. In addition to the money, such traders have their self-esteem and self-worth on the line. The trade holds colossal psychological significance, and should the trade be a loser, its impact has even greater personal impact. When the pressure is on, even the best of us may wither under the strain. The weight of psychological baggage puts even more pressure on the trader. There is a hidden agenda in each trade. Not only must the trade be a winner, but it must also validate one's personal value. Trading is hard enough without placing extra pressure on oneself. Do not carry extra dead weight by carrying heavy psychological baggage. Lighten your load. Identify your psychological baggage and cast it aside. You will find you can think more clearly and decisively. You can focus your attention more easily, trade your plan, and watch the profits roll in.

The advertiser's dream

Image is everything. We are bombarded with advertising images on radio, television, and more recently, on our computer screens. These images work on both conscious and subconscious levels. We see an attractive model next to a racy new sports car and the message is that we too can have a desirable mate if we buy the new car. Sometimes we are not entirely aware of how these powerful images may influence our behaviour. In a classic psychology study, for example, Dr. Robert Zajonc demonstrated that mere exposure to an image increased subjects' preference for it. The more we see an image, the more we like it. The image of a company or share can also have an impact on our trading decisions. Whether it is seeing commercials touting how a company is changing the world on Sunday morning infomercials shows or just a financial analysts talking up a share, these images impact our preference for the share. Upon seeing these advertising images, we may irrationally believe that the share has more growth potential than it actually does.

A study by Dr. Donald MacGregor and colleagues illustrates how the image of a company can bias decision-making. The better the company image, the higher the perceived growth potential. In their study, a group of advanced business students was asked to make decisions regarding a set of industry groups on the New York Stock Exchange. Examples of the industry groups were computer software, pharmaceuticals, railroads, and managed care. Unknown to the participants, half of the industry groups consisted of high performing shares (greater than 20% return) while the other half consisted of low performing shares. Participants rated each industry group on whether they had a positive (for example, value, activity, and strength) versus negative image. They were also asked to estimate the rate of return for each industry group. The more highly an industry group was rated on value, activity, and strength, the higher the estimated return. However, a company's image had no relation to actual market performance, as measured by weighted average returns for the industry group. In other words, participants let the image of the company influence their forecasts.

This study shows how images can have a powerful influence on our decisions. We encounter many images in our everyday lives, and it is essential that we identify the potential influence of these images on our judgements. Do not let these images bias your price forecasts. Be aware that, sometimes, you may have a positive image of a company that may override your logic. Try to minimise the influence of these attitudes. Re-evaluate your trading plan and make sure that you are basing your decisions on specific evidence, rather than hype or image.

Realistic and justified optimism

Most self-help gurus preach the virtues of optimism: "The only difference between millionaires and you is that they have a positive attitude, and if you think positively, you too can be a millionaire." Positive thinking can do wonders when used in the right context and combined with actual talent and rock-solid skills. For example, if you are a talented, well-trained professional, it is vital that you believe in your proven skills and training, push yourself to the limits, and realise your full potential. But what if you do not have extensive training, a proven track record, and real talent? Is it still a good idea to be optimistic under these conditions? Without proven skills, an unfounded sense of optimism can do more harm than good, especially when it comes to trading.

It is crucial to make a distinction between realistic and unrealistic optimism. A realistic optimist has genuine self-confidence when it comes to a given skill. He or she has practiced the skill under a variety of circumstances, and knows that he or she can perform well even under extreme pressure. Realistic optimists do not exaggerate their abilities. Indeed, they may even tend to underestimate their talents, but nevertheless, they know their limits and have a good idea of what they can and cannot do. Unrealistic optimists, in contrast, are unsure of their abilities. They are so unsure that they tend to overestimate what they can do because they are afraid to face the fact that they may not be very talented, or have the requisite skills for success. For the unrealistic optimist, optimism reflects a "defensive" motive to protect one's self-esteem, or a lack of genuine self-esteem in this case.

A realistic and justified sense of optimism is essential for trading success. Unrealistic optimism can be fatal. For example, if you have a very poor trading strategy, it is not realistic to believe that it will produce profits over a long series of trades. Unless one carefully and objectively monitors the performance of a trading strategy, and determines its actual success under a new set of market conditions, the equity in one's trading account will quickly vanish. A realistic measure of performance must be taken, and one must find a new strategy should the strategy prove unprofitable. Unrealistic optimism often leads to inaccurate estimates of failure, since the trader is more concerned with protecting one's ego than in looking at a trading strategy or method objectively. It can also lead to inaction; one may fail to take necessary precautions to protect capital. Unrealistic optimists often risk more capital on a trade than their talents warrant.

An experiment by psychologists Radcliffe and Klein shows the harmful consequences of unrealistic optimism. Study participants were asked to estimate the odds of experiencing an adverse outcome, in which an "objective" estimate of the actual probability was known. Unrealistic optimists underestimated the odds of the adverse event compared to realistic optimists. They also allowed their unrealistic optimism to bias their judgement. When presented with information regarding how they could reduce the probability of the adverse event, they did not review it closely, compared to realistic optimists. They did not show proper concern and did not take necessary steps to protect themselves from the adverse event.

It is vital that you be aware of the need to protect one's ego. We all want to be successful, and sometimes, this motive is so strong that we overestimate our abilities to the point of holding unrealistic beliefs. That is why it is necessary to keep things as objective as possible. Keep scrupulously accurate records of your trading performance, such as your win-loss ratio. Carefully look at your past track record, and limit your risk accordingly. If you have not yet developed the skills to trade profitably across a variety of market conditions, it is crucial that you manage your risk. By doing so you can continue to trade, build up your trading skills, and survive the learning curve. But whatever you do, do not be unrealistically optimistic. Make sure your performance estimates are based on concrete, objective facts.

Expanding your psychological limits

Your mind has limits. You can only attend to and process a limited amount of information. Psychologists view the mind as analogous to a computer. Long-term memory is similar to a hard disk in that an almost unlimited amount of information is stored permanently, even when the computer is turned off. Your attention, or conscious thought, in contrast, is similar to computer RAM. The amount of attention you can devote to a particular task is restricted. You can only attend to and process limited amounts of information, and when you move beyond the limit, the information is not processed. In this way, attention and "short-term" memory is similar to RAM in a computer. You can hold only a small amount of information in your mind for only a short time. Your mind is also limited in terms of "processing capacity." Like a CPU in a computer, not only is the amount of information you can process limited, but also the speed at which you can process, analyse, and understand information. The mind may be analogous to a computer, but it is not exactly like a computer. You cannot do a "computer upgrade." You can't simply increase the mind's processing power by merely putting in additional RAM or replacing the CPU with a faster processor. You are stuck with what you have, so you must make the most of it. That said, however, there is still a lot you can do to squeeze every bit of power out of your mind. You can expand your mind beyond its natural limits.

One way to increase the amount of information you can process as a trader is to "over learn" some of the common tasks you do while trading. It is similar to how people learn to drive a car. At first, one must focus attention on each driving task separately in a deliberate, focused manner. But, over time, one can monitor speed, look for road hazards, and engage in several tasks automatically, and still have plenty of attention to talk with a friend or insert a CD into the car stereo. You may have noticed that trading tasks can be "over-learned" in much the same way. For example, you probably have noticed that over time, you can identify signals that precede a pivot point almost automatically. With practice, a lot of steps that you once had to perform deliberately and methodically can now be completed will little effort. Many times, "intuitive" decisions merely seem as if they are a "gut instinct," but may in fact be based on a several valid and reliable inputs and signals that were processed automatically.

A second way to increase processing power is to free up mental energy that is used up by other psychological processes. For example, handling stress, and mulling over interpersonal conflicts uses up precious psychological energy. This valuable energy is better spent on monitoring trades. By spending leisure time resolving interpersonal conflicts or effectively coping with daily hassles, you will have more psychological energy to devote to trading after the markets open. Rest and relaxation are also important. When you are tired, you cannot devote very much energy to planning your trades or monitoring their progress. You will be more likely to act impulsively, entering a trade too early or too late because you did not have the energy to patiently wait to make a prudent trading decision. So make sure that you get extra sleep. Take naps during the day, if you have to, and ensure that you are alert when it counts during the trading day. Do not forget that the mind has limits. You can only work with what you have. If you take the proper steps, however, you can free up some of your limited psychological resources. By over-learning common trading tasks, you can expand your attention. And by getting adequate rest and resolving interpersonal conflicts, you can further free up psychological energy that is wasted on tasks that don't involve trading. By taking concerted measures to free up energy, you can expand the limits of your mind, and trade more effectively.

Risk seeking - a lack of discipline may be personal

A trader must have discipline. One must develop a scrupulously detailed trading plan and strictly follow it. The more detailed the trading plan, the better. When every single detail is carefully spelled out, from when to enter to when to exit, it is easier to follow the plan and stick to it. One of the main reasons that traders lack discipline is that they try to follow a trading plan that is just not detailed enough. Too much of the plan is left unspecified, and usually, a trader enters or exits at the wrong time. Most people can learn to be disciplined, however. Through training and practice, almost any trader can learn to carefully plan a trade and follow the plan. That said, there are some traders who are sensation seekers. They crave excitement. Trading gives them a thrill. Even with extensive practice, it may be hard for them to follow a plan, no matter how hard they try. It is useful to determine if you are one of these people. If you are a sensation seeker, it is important to identify this potential problem, and work around it.

Sensation seeking is just one of many personality traits that may prevent some traders from following their trading plan. Sensation seeking is a term coined by psychologist Dr. Marvin Zuckerman at the University of Delaware. According to Dr. Zuckerman, sensation seeking is a powerful need for varied, novel, and complex sensations and experiences. These needs are so strong that the sensation seeker is willing to take physical and social risks for the sake of such experiences. Sensation seeking is related to the fight-or-flee response, a very primitive biological response in which animals must either fight an aggressor or flee to safety. Most of the time, humans control the fight-or-flee response in order to follow social conventions. People are not lower animals living in the wild. In order to get along and get ahead in society, they must learn to inhibit this base level fight-or-flee response. The ability to inhibit this response, according to Dr. Zuckerman, has significant genetic components. Dr. Zuckerman claims that specific areas in the brain are responsible for the inhibition of the fight-or-flee response, with some individuals able to inhibit this response more easily than others.

Sensation seeking consists of many different facets. People who are prone to sensation seeking tend to crave new and exciting experiences. These new and exciting experiences are often non-conventional and usually illegal; examples include spouse-swapping, illicit drug use, and heavy drinking. Sensation seekers get bored easily and seek out new and exciting experiences to combat boredom. Sensation seeking is not necessarily a bad trait. Indeed, moderate levels of sensation seeking in specific contexts can be beneficial. Sensation seekers tend to be unconventional. They are not afraid to seek out new experiences, and are usually original and creative. They are likely to make new discoveries or break new ground. This independent streak can be useful for trading, where independent decisions and the ability to break away from the masses are crucial. Traders who tend to seek out interesting and novel experiences can more easily tolerate the stress associated with unknown market conditions or the uncertainty of a new trading method. It is adaptive to be a sensation seeker at a minimal level, but at an extreme, sensation seeking can be problematic. For example, when it comes to trading, extreme sensation seeking is often associated with a lack of discipline and impulsive decisions. But trades must be executed in a calm and rational manner. The person who is high in sensation seeking may feel a need to put on trades for excitement, or may get bored easily while monitoring trades, and make an impulsive decision to ease the boredom. Scientific studies have shown that individuals high in sensation seeking enjoy risky gambles; they place higher bets than individuals low in sensation seeking just to get a thrill. Unnecessary risks often spell disaster when trading.

It is important to identify whether you a sensation seeker. Do you seek out unnecessary risks? Are you a thrill seeker? Do you crave excitement? Are you easily bored and see trading as a way to spice up your life? A moderate amount of sensation seeking can be useful for trading, but at an extreme it can hamper success. You may need to take preventative measures if you are a sensation seeker, such as using the automatic settings on your trading platform to enter and exit a trade according to your trading plan, or place an order with a broker. It is vital that you determine whether you are a sensation seeker. And if you are, find ways to work around this issue before you make too many risky trades that quickly wipe out your trading account.

High standards

But there are times when one may set standards inappropriately, a little too high for a particular context. For example, some people are extreme perfectionists. They set standards higher than they can possibly achieve. A pathological example of this is found in people who experience frequent bouts of depression. These individuals set high standards they can't meet, and feel like failures when they cannot reach them. This can happen to traders who set profit objectives beyond their skill level. They may feel disappointed and helpless because they never meet their expectations. But usually, traders set unrealistically high standards in other ways. A common ailment is analysis-paralysis. Some traders have such high standards that they over-think and over-analyse market data before entering or exiting a trade. This often leads to hesitation and self-reproach, and tends to undermine one's trading strategy. Timing is everything and if you cannot enter and exit trades at the right time, your trading account will take big hits.

Another common example of overly high standards is illustrated in the belief that one must not miss an important trading opportunity. Some traders think they must find every opportunity to make money in the markets, and they fear they may miss even one trading opportunity. They find this possibility hard to accept. But seasoned traders will warn you that setting your sights on finding every opportunity will produce undue stress. You will be much more successful if you remind yourself that you just cannot expect to trade every possible opportunity.

So how does a trader set appropriately high personal standards for trading? One way is to maintain a high level of discipline. For example, outline and follow a very detailed trading plan. Define specific entry and exit strategies, and use appropriate risk management. Once you outline your plan, it is important to follow it. Do not let yourself stray from your plan. And do not focus your immediate attention on how much profit you are making on each trade. Instead, concentrate on whether or not your profits are "justified" in that they are a direct result of following your trading plan. Remember, it is better to have a "justified loss," which results from showing proper discipline and following your plan, than an "unjustified win," which happened because you abandoned your plan. Setting high personal standards is a key prerequisite to success, but there is a right way and a wrong way to set these standards. Do not be an extreme perfectionist. Execute your trading plan effortlessly, and make sure you stick with it. High levels of discipline are one of the best ways to set high standards for your trading, and they will help ensure you trade profitably and consistently.

Patient traders are winning traders

Winning traders show patience. They wait for the ideal market conditions before entering a trade. And when they enter a trade, they follow their trading plan, even if it means patiently waiting for the right time to exit. But many traders are impatient. They impulsively jump into trades that they should not have made. And at the first sign of danger, they sell. Why can they not wait? Trading experts suggest that it may be a matter of focusing on immediate gratification rather than waiting for profits to come after a realistic amount of time. Dr. Van K. Tharp, for example, suggests that impatient traders are obsessed with profits. Rather than focus on what is required to trade profitably in the immediate future, they dream about how great it would be to spend future profits immediately. Similarly, Ruth Barrons Roosevelt observes, "Some traders are in a hurry. They want to make money, and they want to make it today." But profitable trading takes time and patience.

How can you learn to become more patient?

  • First, it is necessary to admit that you are impatient. This can be difficult to do. It is hard to admit our limitations, but the first step in solving any problem is admitting that you have one.
  • Second, as you monitor trades, practice looking at events objectively. Pretend you are watching a television show about yourself. Pretend the character on television is not you. Watch how impatient you are. See yourself as an objective observer would see you, and then, think about how you might act more patiently.
  • Third, realise that your impatience may be a signal that you need protection from the potentially harmful consequences of a trade. When you are afraid of facing a potential loss, you may impatiently close a trade for fear of experiencing a bigger loss. Rather than allow these fears to lurk in the back of your mind, it is better to face consequences head on. Can you afford to lose capital on a series of trades? Or are you making up dire consequences that do not exist? It is necessary to consider the consequences of your actions and decide if you can deal with them. If you know you can handle the potential negative consequences easily, you will feel calmer, and be able to control your impulses.
  • Fourth, examine the situations that preceded your impatient behaviour and avoid them in the future. Identify the times when you were the most impatient. Were you tired? Were you hungry? Were you risking too much? Situations are powerful determinants of behaviour. The best way to control your impatience is to avoid those specific situations where you are likely to act on impulse.
  • Fifth, examine your self-talk, which is the dialogue you use to talk to yourself as you trade. Scrutinise your underlying attitudes and beliefs. People who are impatient want rewards now, rather than later, and their thoughts reflect this obsession. They think, "It is either now or never" or "If I can't get what I want right now,

I never will." It is essential to identify these beliefs and refute them. If you find yourself thinking, "I must make a profit," or "It will be unbearable unless I make a profit," you will act on impulse. Similar beliefs are, "My hard work must pay off now" or "I cannot wait any longer." When you notice yourself thinking such statements, refute them. Remind yourself that you can wait. In "Overcoming 7 Deadly Sins of Trading," Ruth Barrons Roosevelt suggests supportive beliefs that can help you trade patiently: "Time is on my side. The market moves in its own rhythm, and I can move fast or slow depending on its pace. A person is able to create wealth slowly through trading."Do not give into the temptation to act on impulse. Trading takes time. Do not think that you absolutely must make profits immediately. Stay calm. You may not make profits immediately, and you do not need to, but if you build up your skills, and gain valuable trading experience, you will eventually make the profits you want. It's just a matter of patience.

You can go your own way

Winning traders go their own way and do their own thing. They do not care what anyone else does. But there is a strong compulsion to live up to stereotypes and expectations, especially when it comes to thinking what you should do as a trader. You may think, "A real trader makes a trade every single day, sideways market or not. A real trader is not afraid of risk, no matter how big. A real trader can make money just by reading the tape."

Perhaps some traders live up to these expectations, but if you cannot, it does not mean that you cannot trade profitably. Trading guru Martin Pring suggests that traders recognize their propensity to protect their pride and ego. Rather than hide behind a facade of overconfidence, it is essential to admit that you are human, fallible, and can make mistakes. Once you admit that you are human, you will feel free and be willing to look at your trading approach more objectively. It is also vital to focus on potential risks before considering potential profits. Most traders are eternal optimists, (you have to be in order to master the markets), but holding overly optimistic expectations may lead to foolhardy trading decisions. It is more important to focus on how much money you may lose than how much you can make. If you focus on what you can lose, you will avoid risky, low probability trading setups. You will search for less risky trades that have a better chance of making a profit.

Winning traders have an accurate awareness of their personality and limitations. Rather than believe that they should be tough minded, cold, and rational, they accept the fact that they may be tender minded, emotional and intuitive, if that is the way they are. They do not care what they are supposed to be like; rather, they accept who they are and work with it to trade at their best. Some traders are fearful when the heat is on. Although becoming fearful when facing risk limits that other traders may take in stride may not be ideal, it may be the best some traders can do, and that is all right. They may need to adjust their strategy to fit their personality. For example, if they have trouble with discipline, they may need to use automatic settings on their trading platform to set protective stop losses and give them a sense of security that they need to stay calm and rational. Waiting for such market opportunities may mean that they have to pass up trades that are so volatile that they will be stopped out easily. They may pay a price for passing up high probability setups because they are not able to take a risk, but is the price all that great in the end? Why take a trade that you cannot manage? In all likelihood, you will end up losing. You could play the game of pondering, "what if I took a high risk trade?" or you could accept the fact that some setups are more consistent with your personal style than others. Traders who accept their limitations can then make the best of the talents and personality they have, rather than worry about what someone with a different personality and different financial resources could do. If they are better suited to long-term investing rather than short-term trading, they make long term trades. The bottom line is the amount of profits a trader makes, right? If traders try to make trades that are not suited to their personality, then they will not make the profits anyway. So in the long run, it is wise to trade in a style that fits your personality and preferences.

Trading to suit your personality is not the same thing as cowering in self-doubt and fear. To trade like a master, it is vital that you take risks and trade different markets and use different trading approaches to find what works for you. Make small practice trades if you need to, but do not stand aside because you are afraid of losing. Whatever you do, though, do not follow anyone's lead but your own. Trade with a style that suits your personality and allows you to trade at your best. If you match your personality to your trading style, you will end up as one of the few who take home profits in market to market.

Do not be afraid to be yourself

There is not one right way to trade the markets. It is tempting to emulate your favourite "Market Wizard," but in the end, it is essential to match your trading style to your personality. Some traders, for example, carefully back test a strategy before using it. They scrupulously estimate the probability of success for a trading strategy in an attempt to forecast how it will do under current market conditions. They are methodical and somewhat compulsive in their approach. But based on their personal psychology, they know that they are most comfortable when they have considered all possibilities and taken reasonable precautions to ensure success. Other traders are more easy going. They take risk and uncertainty in stride, and are not afraid to formulate their trading plans as they go along: "Back testing is of little value. History only repeats itself occasionally. You have got to go out and find opportunities as they happen." Which approach is best? Again, the approach you use to trade the markets depends on your unique personality.

That said, the single most important factor for trading successfully is self-confidence. You can have a fool proof method, but if you do not have confidence, you cannot use the method effectively. Developing a sense of confidence takes hard work. You must accumulate real life experience. You must live through various market conditions, and see how you react. Once you have rock solid confidence based on a wealth of experience, though, the way you approach trading is a matter of preference.

Some people are naturally optimistic. They tend to look at the world through rose-coloured glasses, believing that all turns out well in the end. If you have proven skills as a trader, an optimistic attitude can keep you at the top of your game. By pushing yourself to the limits, you will consistently perform at your best. (On the other hand, optimism can hurt you if you do not have well-honed trading skills. Many novice traders over-trade, abandon risk limits, and lose big when they are overly confident.)

But not all successful traders are extremely optimistic. Indeed, many successful traders are sceptical, cynical, and think, "If I am not careful, I could lose capital." They are confident in their ability to trade profitably, but they know themselves. They believe in preparing carefully for a trade, and prefer to over-prepare. Before they execute a trade, they must be fully satisfied that they have covered all their bases. They think and re-think their strategy. They even worry a little about whether it will work. But in the end, they trust their approach, and they are confident that all their preparation and worry will pay off.

Research studies have shown that you must be yourself in order to achieve a high level of performance. Trying to be someone you are not just because you think it is the "right" way to trade often does more harm than good. For example, if you take optimistic people and make them question their skills unnecessarily, their performance suffers. Similarly, if methodical, pessimistic people try to avoid going through the motions of checking and re-checking for possible flaws, their performance suffers. It is vital to remember that there is no one right way to trade. In the end, you must find what works best for you. Through trial and error, you must discover what you need to do to make profits in the markets. The only standards that matter are your own. In the final analysis, it is just you, the markets, and no one else.

Beliefs about money: A possible source of self-sabotage

Do you have trouble following your trading plan? Many novice traders do. They develop a plan with specific guidelines as to when to enter and when to exit a trade. The night before it all seems so clear, what they are going to do and how they are going to do it. But when the markets open the next morning, they are persuaded by a little voice to throw the plan out the window. It is a common ailment, and many times, people abandon their trading plans because they secretly do not want to make money as a trader. They do not know how trading fits into their lives. They question whether they should be trading, and they secretly believe that it is wrong to make money. If you have these beliefs, it is vital that you identify them, and change them, before they continue to sabotage your trading efforts.

Have you ever heard the saying, "Money is the root of all evil"? Writer and financial adviser Jerrold Mundis provides an interesting analysis of this belief and its veracity. Some people believe that money is corrupt and that anyone who has it is corrupt. Some people think that people with money are greedy, unprincipled, and insensitive, and that it is cleaner, purer, and virtuous to live with only a minimum amount of money. Mundis argues that if you hold this belief, even if it in your subconscious, "you do not have a chance" to have money and live prosperously."

Mundis notes that many people believe that the saying, "Money is the root of all evil" is a warning from the Bible, but the actual meaning of the Biblical passage is quite different. The Biblical phrase in the book of Timothy is, "The love of money is the root of all evil." Mundis argues that it is the lust for and coveting of money for its own sake that is problematic. Money in and of itself is not evil. Mundis points out that money is not even real. It is a human abstraction. You cannot eat money. You cannot build a house with money. Money is just intangible currency we use to purchase concrete goods and services. What you do with money is up to you. If you want, you can build a homeless shelter or start a charity with the money you make. Money is not evil. It is what you do with it that counts.

Some traders find it useful to set aside a portion of their profits for charity. It allows them to know deep down that should they do well as a trader, they can make a clearly defined social contribution. Other traders see trading as a way to take care of their family, a very noble motive. So if you are holding back because you believe that it is wrong to make money trading, it is important to explore this belief. Traders have many reasons to make profits in the markets. It is not merely an aimless quest for money. Professional traders have a rare talent, and feel fulfilled because they express their talent by trading profitably.

If you are trading merely to acquire money in order to gain fame and status, you probably would not last very long. But if you remind yourself of the more noble motives for trading, such as taking care of your family or making a social contribution with some of your winnings, you will feel more at ease as you trade. You would not think of yourself as "corrupt" or "indecent." It is vital that you look deep inside yourself and identify why you trade. If you truly believe it is what you are meant to do, you will be more willing to put in the time and effort to hone your trading skills. The little voice in the back of your mind will be optimistic and upbeat. You will think, "I am doing the right thing." Rather than sabotage your efforts, you will cultivate discipline. You will work hard, practice trading techniques, develop a solid knowledge base, and soon, you will become a profitable, disciplined trader.

The humble trader is the winning trader

Trading can be frustrating at times. You put in a heroic effort, but it does not always pay off in the way that you had hoped. When you finally do win big, you naturally want to celebrate. You may even get a "swelled head," and feel invincible, as if you are on top of the world. Why not celebrate? You deserve it. It is healthy to occasionally pat yourself on the back for a job well done, but do not get too full of yourself. There are many tales of expert, skilled traders who were at the top of the field and the idol of many, but due to changes in the markets, ended up busted. Just when everything seems to be going well, market conditions change, and methods that once brought in steady profits suddenly stop working. That is why seasoned traders suggest staying humble. You must stay humble, and focused on continually honing your trading skills in anticipation of the next major change in the markets. A humble approach to trading will help you stay calm and focused.

Getting a swelled head often interferes with maintaining a calm, objective, and unemotional mind-set. Basking in the glory of success can be intoxicating. You may start to think that you are invincible, as if you cannot lose. You may then start bragging to your friends about how well you are doing, or start spending money extravagantly. When that happens, it may be the start of your demise. In a subtle way, you will start to put extra pressure on yourself to perform up to especially high standards that are almost impossible to maintain. You will try to keep up your reputation. You may dread a failure because should you fail, you will have to admit to yourself and friends that you were not as invincible as you had claimed. At that point, you will have trouble staying objective. And once that happens, it is bound to impact your trading. The added pressure to perform, along with the psychological need to save face, will take a toll on your limited psychological resources. You will have less energy to focus on your trading, and you will likely make trading mistakes that will lead to your downfall.

It is important to keep your ego out of trading. Do not build yourself up, but do not overly criticise or condemn yourself either. Stay realistically upbeat and focus on developing your skills as a trader. Work toward excellence, not perfection. You have to be good, but not perfect. You must have top-notch trading skills, but you do not need to be the best trader in history. When you take your ego out of the picture and stay modest, you will find it easier to concentrate. And when you focus on the process of trading, rather than the prize, you will trade more profitably.

The complex emotions of loss

John has just taken a big risk and lost. He has been watching a share for the past month and it has been going down. But today an earnings report was released. Yesterday, John had a strong hunch that actual earnings were going to beat analysts' estimates. In preparation for the possible price move, he bought 1000 shares, expecting it to go up substantially after the earnings announcement. He was so sure that the share was going to move in his favour that he did not use a stop-loss. Unfortunately, when the actual earnings were reported, it missed analysts' expectations by quite a bit, and the crowd was watching. The price fell hard and fast. John lost a large portion of his trading account, and he is understandably upset. He blames fate and he blames himself. He is now experiencing a variety of intense emotions: anger, guilt, fear, and disbelief. This mix of emotions is complex, but unless John learns to cope with them and move on, his financial loss may also have long-term emotional consequences.

John blames fate and himself. He asks, “Why could events not go my way? I should have been more sceptical. I should not have trusted my intuition. I should not have risked so much. I should have used a stop-loss." John's reasoning makes some sense. He feels disappointed for trusting himself and angry at external events for not going his way. He feels guilty for losing, as if he has let himself down. He wonders what he could have done to prevent the losing trade. He tries to pretend that it just did not happen. He thinks, “Maybe I could have risked less or prepared for the trade more. I should have studied every possible factor that was driving the price down, and accounted for them in my plan." John's feelings are a natural response to the loss. The internal dialogue that underlies his emotions is also understandable. He wants to undo this event that he views as devastating and humiliating.

How should John cope with these emotions? First, he needs to stand back and look at things logically. Right now, his emotions are getting the better of him. Some positive self-talk would work well right now. Sure, he risked more than he should have, but that does not make him a bad person, and it was not necessarily a bad idea to do what he did. There are times when traders abandon their risk limits, so taking on extra risk in and of itself is not a bad thing. Perhaps John should have thought of other factors that may influence the price or considered these factors when developing his rationale for believing that earnings would beat analysts' forecasts. If he had objectively looked at the evidence rather than go with an unfounded hunch, he might have fared better. That said, seasoned traders go with hunches, so doing so is not inappropriate. In addition, information is not always accurate, so even if he had studied all the available information more closely, he might not have been able to anticipate what would happen with complete certainty. In the end, John should ease up. He tried his best, showed courage by putting on a risky trade, and should pat himself on the back for his efforts. He may have made a few mistakes, but he is only human.

Second, he needs to decide what he has learned from the experience and do things differently next time. What should he learn? It depends on his experience. There is not just one right way to trade. For John, he may decide never to fully trust an unsubstantiated hunch again, to avoid risking more than he should considering the size of his account, or to consider the advantages of using a stop-loss. Other traders may draw the opposite conclusions, depending on their market experience. He could accept that hunches are right most of the time, but wrong at others. He could decide that risk and loss are commonplace in trading and that he shouldn't get very upset about it. And he may decide that there is absolutely nothing he could have done and hope for the best next time. In the end, he has to decide for himself what, if anything, there is to learn. It is entirely his call. The main point is that when facing a loss, traders need to do two main things: Avoid extreme emotions through monitoring and changing self-talk and quickly decide what lessons are to be learned from the experience, if any, and just move on.

When facing a loss, it is hard not to become consumed with guilt and anxiety. But these emotions usually get you unnecessarily upset. Rather than focusing on the next trade, you end up mulling over something that you could not have changed. It is often better to take losses in stride and move on.

Do not deliberate - just do it!

James is considering whether to implement one of two trading strategies. Both strategies offer good odds of success, but James does not want to make a rash decision. He wants to carefully consider both the upside and downside before he commits. James is in a deliberative state of mind; he is trying to consider all alternatives in a logical, impartial, and comprehensive manner. Great thinkers, such as Benjamin Franklin advocated prudent decision-making in which the pros and cons are carefully compared. Similarly, contemporary decision researchers suggest that people can avoid making common decision-making biases through even-handed consideration of all possible alternatives. Research has shown, for example, that cultivating such a deliberative mind-set helps one be receptive to incoming information and decrease the influence of self-serving decision-making biases. However, a study by psychologists Dr. David Armor and Dr. Shelly Taylor suggests that deliberating between two alternatives may not always be beneficial. In some cases, it may be wise to just quickly choose an alternative and focus all one's energy on achieving an objective; in other words, just do it.

In a well-controlled experiment, participants were randomly assigned to one of two conditions. In the deliberative condition, participants were asked to decide between two equally effective strategies to obtain a reward, before using one of the strategies to reach an objective. In a second condition, participants were not given a choice, so they would immediately focus all their energy on using a single strategy to achieve the desired goal. There were clear advantages to focusing on a specific strategy, rather than deciding between two options. Participants who did not deliberate showed greater determination, commitment, curiosity, and confidence than those who did. They also viewed the task as less difficult and performed better.

Trading often requires making a quick decision, but no one wants to make an uninformed or impulsive decision. Prudent decision-making is the hallmark of success. Dr. Armor and Taylor suggest, however, that there are some situations where a great deal of deliberation is actually an impediment. Some trading decisions may be such situations. Your psychological energy is limited and spending too much time and energy may exhaust your limited psychological resources and hamper performance. So sometimes it is useful to stop deliberating, and just do it. Just implement the trading strategy and focus on the outcome. You may find that you will achieve greater profitability in the end.

The intuitive trader

Stan and John have been following a share and trying to anticipate the pivot point. Stan declares, "After looking at the troughs and moving averages over the past 30 trading periods, the facts indicate that the pivot will be exactly at 50. I am positive; it must be right at 50." John replies, "Exactly 50? Maybe around 50, but I would not be that precise." These two traders have very different personality styles when looking at information and drawing conclusions. Stan wants to just focus on objective facts. He is a "tough minded" decision maker. John, in contrast, is more intuitive. He sees so-called "facts" as merely subjective interpretations. Like many seasoned traders, John relies on an abstract feeling he has for the markets and trusts his intuition. He is an intuitive trader.

How do you observe the world and gather information about it? Do you just want the facts and the specific details and none of that "touchy-feely" stuff? Or are you more intuitive? You do not believe in facts. You think reality is subjective, merely an artificial construction that differs from person to person. You prefer to think in theoretical and abstract terms. Perhaps you are a little of both. Philosophers, such as William James and Carl Jung, have relished demarcating various "types" of people. "Types" are ideals that do not really exist in a pure form. They are merely loose categories we use to make sense of the world. They reduce information overload, but often distort. Despite the inaccuracy of placing people in categories, it does often seem that some people fit more into one "type" than another. Take, for example, what James called the "Rational" versus the "Empiricist," or what Jung called the "Intuitive" versus the "Sensor." Sensor types prefer cold hard facts and see the world as rational, predictable, and orderly. Intuitive types are more fanciful, and see the world as random, theoretical, and conceptual. This typology may also apply to the way people approach trading. Which type of trader are you?

A trader who is a sensor, for example, may want to know the specific price level where technical resistance begins. He or she would prefer to follow a specific set of rules to identify precisely where resistance begins. An intuitive trader, in contrast, merely views the "rules" to identify resistance as just guidelines, which may work sometimes but not always. For example, perhaps resistance will be a round number or a previous peak or trough, perhaps it will not. No one knows for sure; such guidelines are just possibilities, not hard and fast rules. Sensors look at market concepts literally, believing they are true-life entities, rather than just abstract concepts. An intuitive trader looks at the markets in a figurative sense. All signals and indicators are subjective in the end, may be a little inaccurate, and are a mere approximation of reality. There is a good chance that they will be wrong and that is all right.

When it comes to the markets, it is generally advantageous to be an intuitive trader. Reading the technical charts and getting a feel for the markets is subjective. Trading decisions are merely based on educated guesses. It is not exact, but mushy, random, unpredictable, and conceptual. It is not linear, matter of fact, and predictable. Expert traders and trading coaches have long noted that sensors have difficulty learning to trade. They want to find all the specific facts and unfailing rules that can be used to forecast the markets. They tend to think that if the "right" set of signals can be discovered, they can make big profits. It would be nice if it were that simple, and if it were, there would be a bunch of smart people with Ph.D.s in economics and other fields who would be billionaires, but there are not. Why? Because the markets are so complex and chaotic that it takes intuition, hunches, and a kind of creative and artful mastery to win consistently. The logical analysis of facts and figures can only go so far when you are trying to trade the markets, which have inaccurate figures and are largely inexact. So if you are a "natural" intuitive type, you have got a head start. And if you are a sensor, try to nurture your more intuitive side. Become an intuitive trader, and you will see your profits grow.

Out of control

Most successful traders have come up with unique mental exercises to prevent this cruise control mode. What works will differ for each trader's personality. The key is to come up with activities you can alternate over time and that will help you consistently think actively.

Traders often talk about "losing control", or trying to maintain control and discipline. When your money is on the line and the market prices are zigzagging up and down, it is easy to feel over-excited, a little on edge, and feel that you might break down and have an "anxiety attack." Why do people lose control and how can traders maintain control? Some people have personality styles that may precipitate a loss of control. Here are some of the most common ones:

  • Impulsive Personality - The impulsive personality is exemplified by the "gambler's instinct." These individuals like a thrill and are always trying to seek out excitement. Some scientists speculate that a genetic influence underlies impulsive personality, but it is mostly psychological. Impulsive persons often have trouble becoming self-sufficient and finding a true meaning around which to organise their lives. They are often bored and try to find thrills to ease the boredom. Compulsive- or problem-gamblers often have an impulsive personality. Such individuals may also be attracted to trading. They love the thrill and excitement of putting on a trade. At an extreme, impulsive persons may not trade very consistently. They are often tempted to put on trades, even in low probability trading opportunities. That is not to say that impulsive people cannot be good traders. It is possible that they can make money in the short term, but they have trouble maintaining long-term success. That said, having a little bit of an impulsive side is useful for trading. In the end, one cannot be afraid to take a risk, and people who are a little bit impulsive can do so more easily that people who are over-controlled.
  • Anxious and Fearful Personality - Some people become fearful easily. When they experience fear, they lose control. They expend all their psychological resources combating anxiety and have little energy left to monitor their trades and maintain discipline. They often execute a trade too late and close out a trade too early. If one has an anxious personality, the easiest way to maintain control is to minimise risk. Only trade money you can afford to lose. Minimise the amount of money you risk on each trade and have well-defined exit strategies.
  • The Perfectionist - Some people not only get anxious easily, but also are extreme perfectionists. They prefer to trade only a "sure thing" and fruitlessly try to find as much information about a trade as possible. They analyse and over-analyse and often fall prey to "analysis-paralysis." Ironically, this need for over-control often leads to under-control. Perfectionists are easily frustrated in uncertain situations, especially trading, which is very unpredictable and uncertain. When easily frustrated, perfectionists often make decisions out of desperation: they just want the confusion and uncertainty to end. They get in too late and get out too early, just to get the decision-process over with.Does one of these personality styles fit you? It is not an exhaustive list. You may fit into more than one of the categories, but it is useful to find out what your trading personality is. Gain the awareness you need to become a consistent and profitable trader.

Behavioural finance - a more credible field

In contrast to traditional finance and economics, which tries to look only at concrete indicators in an attempt to make accurate economic forecasts, behavioural economists assume that forecasts are prone to inaccuracy. People make forecasts and people are fallible; they are "irrational" in that they do not base their decisions on a logical analysis of all available information. Instead, they use "rules of thumb" and shortcuts. The use of these shortcuts often produces inaccurate predictions. According to behavioural economists, it is because people use these shortcuts that share prices are more of a reflection of "investor psychology" than traditional fundamental indicators. The work of Daniel Kahneman has influenced many behavioural economists. In a number of illuminating experiments, Kahneman, and his late colleague Amos Tversky, demonstrated that humans are risk averse and inefficient processors of information. They make quick and dirty decisions rather than ones based on careful logic. Some of the heuristics that have been applied to the understanding of the markets are the availability heuristic (believing a share or sector will go up in price because it is easy to recall past instances from memory) and the representative heuristic (if a share has characteristics that are similar to a kind of share that usually goes up, then it will go up).

From the vantage point of a psychologist, it is not surprising that economists have had difficulty making accurate market forecasts: Investor behaviour is hard to predict. Psychologists, such as Clark Hull, tried to predict behaviour in the 1940's and found that they could not. Since then, they have known that it is difficult to predict people's behaviour, and thus, the financial markets. But what have economists been trying to do? It seems as if economists have been fruitlessly trying to develop complex mathematical models to predict the markets. Many people believe it is possible to develop such models, and at the same time, view investment psychology as on the periphery, misguided, or a little "New Age." If you think that, consider this: Psychologist Daniel Kahnemanwon the Nobel Prize for Economics. Perhaps winning the award may not change the minds of some folks who just find psychology full of "psycho-babble." And winning a Nobel Prize does not prove the validity of a theory (Remember Scholes and Merton's involvement in LTCM). But perhaps more people will consider the findings from investment psychology and behavioural finance more seriously. We hope they will.

All the pieces fit

Imagine that you are putting together a large jigsaw puzzle. You have worked on it every day for weeks and you are almost at the end. You are down to your very last piece. You place it and stand back to look at the beautiful scenic picture, but you are dismayed. You frantically look for a piece you may have missed...You cannot find it. There is not much you can do but to accept the fact that the one piece will remain missing. You are still very satisfied and have a sense of accomplishment in completing the puzzle. But had you had that last piece, you would feel very different - a lot more satisfied and accomplished.

A winning trade is very much like a completed jigsaw puzzle. Before you make the trade, you have your signals, indicators, ideas about the markets, just like you had the pieces before you started putting together the puzzle. You also had an idea of what a winning trade will be like. If all the pieces fit, you have a winning trade, but if you are missing one, you would not. You might be impressed or feel accomplished about making whatever trade you made or perhaps about effectively cutting your losses short on it, but the bottom line is, you did not get that winning trade (just like in the example above, you did not get the complete picture).

The difference in the jigsaw puzzle and winning trade scenarios is that in the case of the puzzle, you really do not have any control over what pieces you get in the box. And in the other, you have complete control over the tools, indicators, signals, etc. that you choose to use and how you choose to use them. Many times, you identify what might be a good opportunity and evaluate it to find that most of the pieces are there, but that maybe there is one factor that is unclear or just not there. If you pay close attention to your thought patterns throughout the trade, you will find yourself being on the indecisive side and possibly even questioning your entry. If you are a seasoned trader, you have most likely experienced what it feels like when all the pieces are there and fit. The trade goes smoothly and you have complete control. Your decisions are objective and accurate, your timing impeccable. Identify an opportunity where all the pieces fit and you will have identified a winning trade opportunity.

Guaranteed

Let us suppose that you are a dedicated artist and you have devoted your entire life to your artwork. Your one goal is to have your work seen and recognised by an untouchable role model. If I could guarantee this in exchange for you giving up your fear of and reaction to heights (at least this once), you just may get over your fear so fast it would seem like you never really had it to begin with. If we were to change the story to say that there was only a 25% chance of the result (i.e., it was not guaranteed), you may not be so willing to go up there. You would, at the very least, hesitate. The guarantee of the ending, or at least your belief in it, is what drives you to conquer your greatest fear.

We have heard innumerable traders say that they are not sure how profitable (if at all) they could be as traders, but that they are going to give it a try. What if they are given a guarantee that they will be very profitable; all they have to do is reach an unquestionable level of commitment and dedication? Naturally, with such a guarantee, the trader will most likely exert tremendous effort. When the trader does not perceive a guarantee, there is doubt and hesitation, but when he does, there is a fierce purpose. You, like these other traders, may not realise that you have already got the guarantee. By virtue of having unquestionable commitment and dedication to developing your trading personality and skills, you will succeed.

Understanding your trading personality

Prior to moving on to actually developing your trading plan, you will need to take a little time to focus on analysing and understanding the results of your trading personality assessment. The reason you want to look at this before you move on is because the way you are going to approach the process of developing the details and specifics of your trading plan is going to depend on this information. The goal of this exercise is to increase your understanding of your strengths and weaknesses when it comes to trading. Having a sufficient level of understanding will mean that you know what your capacity is for risk management, understand how you respond to stressful situations, know what level of control you have over your emotions, understand whether you are an independent thinker or tend to be heavily influenced by specific or certain types of outside sources. You will also know how self-confident you are, what can build or break down that confidence, whether you are able to think independently or if that is something you need to work on, and so on.

You are going to use this information to decide how to design your plan. Ideally, it will leverage all your strengths to their full potential and protect you from all your weaknesses. Practically, you will succeed by having your trading plan customised to your personality to a certain extent, and beyond that, you will need to separately work on your trading skills to hone your strengths and correct your weaknesses. For example, you might discover that for whatever reason you have a tendency to panic in stressful situations, which causes you to jump into obviously bad trades and possibly even exit out of good ones. To address this, you can prepare to incorporate some personal rules into your trading plan. You may want to incorporate, for instance, a rule that says you have to wait for 2 or 5 minutes after your decision and before you actually make the trade. You might even have a quick checklist of questions to make sure that you are not acting in a panicked way. Keep in mind that normally, because you have the trading personality you have, you are likely to design your trading plan to mirror your trading personality, weaknesses, biases, and all. This process of analysing and understanding your trading personality will allow you to consciously steer away from that.

But really...

You are waiting to put on a trade…You start to feel the pressure of creeping doubt and panic. But really, what is the worst that can happen…Right? Most traders who ask themselves this question are quick to respond that they will hold the position (or roll it over) long-term until the trade becomes profitable. The question and its popular answer ease the trader's uncertainties and tend to help address feelings of a lack of preparation. But at the same time, the question indicates a lack of confidence and the answer demonstrates that the trader is uncomfortable with or does not accept the idea of realising a loss. To avoid asking the question might be a start, but unless the underlying issues are addressed, they will sabotage the trader's performance.

One of the primary underlying issues is the trader's lack of confidence which can stem from a variety of reasons depending on the trader's personality. It is important to isolate any lack of confidence you might be experiencing. By paying close attention to the reasons behind your decisions and notating your levels of confidence in your trade diary, you will uncover any lack of or over-confidence that may be hindering your performance. It is also important to take note of other related emotions such as feelings of a lack of preparation which might also ultimately contribute to a lack of confidence.

Another primary underlying issue is the trader's inability to accept a loss or at least his discomfort with the idea of taking one. Trades resulting in profit or loss should be viewed equally neutral, and no trade decision should be categorised as a "worst case scenario" decision. Managing trades, both winning and losing ones, is part of routine trading activity. Assigning any kind of label, with positive or negative connotation, is a clear indication of an emotional bias towards one type of result versus another. Although it is natural to have such a bias, it indicates a focus on trade results instead of on trading activity or decision-making process. Completely dissociating emotional biases from the basis of any trading decision is a critical aspect of making correct trading decisions. It is interesting to consider that if you quantify the likely results of a "worst case" trade, you will find that it is very unlikely to be more profitable than having established and adhered to an effective stop loss methodology. So if you find yourself asking the "worst case" question, take the time to think about why you are asking it.

The actions can bias opinions

"Actions speak louder than words" is a common saying that we usually apply to others. Some people say one thing, but do another. Most people tend to believe that a person's true intentions are reflected in one's actions, despite what one voices as his or her intentions. There is scientific evidence that we also tend to apply this saying to our own behaviour as well as others. For example, if you hold the belief that vanilla ice cream has little taste compared to more exotic flavours, you will tend to avoid vanilla ice cream. But, suppose you were in an expensive restaurant with friends and decided to yield to the group pressure of having a scoop of gourmet French vanilla ice cream, which you not only eat, but also pay a premium for it. You would probably eat it, and you would probably like it, somewhat. Research has shown that you would also tend to change your opinion of vanilla ice cream. There is a strong human tendency to maintain "logical consistency" among our behaviours, attitudes and beliefs. Because you ate the vanilla ice cream, and spent a lot of money for it, it is logical to start believing that you must have liked it. Your prior attitudes would be changed by your actions. That is, actions speak louder than words. Thus, the easiest way to change a person's belief is to get that person to behave in a way that is opposite to his or her prior beliefs.

Another everyday influence of actions influencing our beliefs concerns consumer behaviour. When shopping for a new car, have you ever noticed that once you made your decision, you tend to prefer your choice? For example, you may have had trouble deciding between a white car and a silver car while in the car dealership, but once you drive the car off of the lot, you prefer whatever choice you made. You justify it. You say, "I think I made a pretty good choice." You may also start to notice how many other cars on the road that are of the same colour, which further demonstrates how correct you were in your decision-making.

These psychological processes also work when making investment or trading decisions and it is important to be aware of them. Once you commit yourself to a specific course of action, there is a strong tendency to justify your decision. This justification bias can distort incoming information that suggests that you should change your course of action. The amount of justification you make depends on several factors. You are especially biased when your decision is explicit and unambiguous, irrevocable and hard to undo, made with a high degree of desire, important to you, and made in public. The justification bias is powerful, but can be neutralised. The more you are aware of it, the less impact it will have on your decision-making processes. So, gain awareness of it, not only in your trading decisions, but in other areas of your life as well. Notice how your attitudes, beliefs, and opinions change after you take decisive action. Determine how much your actions speak louder than your words.

The origins of self-sabotage

In formulating his psychoanalytic theory of personality, Sigmund Freud postulated two biologically deep-rooted instincts as the driving forces behind all human behaviour: life instincts and death instincts. The life instinct works on the pleasure principle. Humans are driven to seek out pleasure and avoid pain at all costs. The need for continual pleasure and gratification is a strong and pervasive motive that must be curtailed.

In Beyond the Pleasure Principle, Freud postulated the death instinct. The death instinct is less conspicuous and less powerful than the life instinct. Freud noted that all humans ultimately end up dead, and so it is logical to postulate, "the goal of life is death." Well, maybe? Although we may all die in the end, do people secretly strive to kill themselves off? Is there a pervasive and basic human motive to seek out death and self-destruction? I doubt it. Towards the end of his life, Freud doubted it also. Freud did not have very much evidence to support his idea of the death instinct. All of his evidence was anecdotal. For example, he noted that his patients kept mulling over their past defeats in life rather than picking themselves up and moving forward. He also noted that many soldiers had a difficult time forgetting past trauma experienced during battle upon returning home from war. Although this "evidence" does not necessarily support the existence of a death instinct, it does show that it is often easier for people to stay put than move forward.

It may be reassuring to know that while you are putting on your trades, that there is not a core biological motive secretly compelling you to naturally destroy yourself. So, what are the origins of self-sabotage? The origins are socially learned rather than inherited and biological. Self-sabotage is closely related to the concept of fear of success. Individuals with a fear of success have heard societal messages that they will not succeed in certain realms. For example, women hear the message, you cannot succeed in a "man's world." Ethnic minorities are told that they cannot break through racial barriers, and children from a working class neighbourhood are told that they would be better off pursuing work in a blue-collar job. In many ways, it is much easier to stick with one's familiar environment than break out into a new direction. It is ironic that at the heart of self-sabotage lies a strong desire to achieve success in an area that had previously been closed. Although a person strives to break through a societal or psychological barrier to be more than their parents or society told them they could be, they may experience a psychological "tug-of-war" between striving for success and secretly believing the societal impositions against success one heard while growing up. In the end, overcoming a fear of success concerns identifying these societal impositions, recognising that one secretly believes them, and convincing one's self that they are false. That is a lot easier said than done, but that is part of the struggle to maintain one's existence and defeat the "motive" for self-sabotage.

Winning is the only thing or is it?

Vince Lombardi, the great football coach, once said, "Winning is not everything; it is the only thing." This quotation emphasises the virtue of setting a clearly defined goal, and working tirelessly to achieve it. But an over-emphasis on winning at all costs can be detrimental, especially when it comes to the hectic and challenging world of trading. Winning is surely important. If you lose too often, you will eventually wipe out your trading account. But it is vital that you look at winning from the proper perspective. Many new traders face early success, only to give it back to the market soon after. This often occurs when traders are overconfident. As a result of minimal skill and a bout of good luck, they thrive, but in the end, their wins are not justified. And eventually, they "blow out." When it comes to short-term early wins, it is possible to win with little skill. This early success, however, tends to put novices into the wrong mind-set. They erroneously think that they have the requisite skills to trade consistently and can just focus on maintaining a winning track record and the prestige and bragging rights that go with it.

But in the long run, an unbridled need to win can lead to failure. For one thing, the more a trader focuses on winning, the more he or she is likely to "choke" under the pressure. Extreme stress and pressure can enhance performance if a task is well practised and relatively easy. But trading is not easy, and for the novice trader, it is outright impossible, whether one knows it or not. For example, traders must filter trade set-ups through their own personal psychology, and when engaging in a challenging psychological task of this sort, stress and pressure will bias and distort perceptions. It is essential to cultivate a calm, relaxed, and focused mind-set. But when one feels that winning is all-important, it makes one feel uptight, nervous, and scattered.

There is another sports saying more fitting to trading: "It is not whether you win or lose; it is how you play the game." In terms of trading, successful trading is a matter of building rock solid trading skills and using a well-defined plan consistently. Trading is a matter of capitalising on odds by implementing a strategy over and over so that the law of averages works in your favour. Across a set of flawlessly executed trades, you will come out with a profit. If you follow your plan haphazardly, you cannot take advantage of the odds. Your track record will fluctuate sporadically with your wavering discipline. Winning is not nearly as important as consistency and sticking with a game plan. So when you are trading, remember you are "winning" even when you are losing as long as you are following your trading plan. By following your trading plan consistently, you may not win on any given trade, but across a run of trades, you will be a winner.

Trigger-phobia

For quite a few traders, one of the most difficult obstacles to success is having to pull the trigger. You know the symptoms. We spend months learning how to trade, and read a dozen books on technical analysis, but when it comes time to put our money on the line, we sit frozen at our desk, unable to execute. There are several distinct strains of this "trader's disease." One is the trader who spends his whole life searching for a mechanical system that will forever free him or her from the burden of having to make trading decisions. Of course, no such system exists, and the trader will flit from one system to the next, never finding the Holy Grail and never quite succeeding at trading.

Another type of trigger-phobia is seen in the person who spends months preparing for the big day, learning practically everything there is to know about technical analysis, online trading and market psychology. But the big day never arrives, as the would-be trader remains locked in learning mode, intent on absolutely perfecting his or her technique before taking the plunge. In the end, this quest for perfection will always be an excuse for not trading. So how does one get out of such a rut? The simplest path is to accept, both in theory and in practice, that losing trades are a fundamental part of winning. Be perfectly clear on this: There is no trader on earth, no matter how successful, who has not taken many losses along the way. In fact, some traders make small losing trades most of the time, but more than offset them with a relative handful of winners that are significantly bigger. The ratio between winners and losers comes down to trading style, which itself relates to how one deals with risk. Whatever one's style, successful trading requires one to see the small losing trades as natural and unavoidable steps that must be taken to arrive at the winners.

Leave these emotions in a basket by the door

Hope and optimism represent wonderful attitudes to weave into your everyday lives. But they can be detrimental when applied to a market position or financial decisions. In fact, using hope and optimism as a part of your trading program can be dangerous to your wealth. Have you ever heard yourself whispering, "Please, please make this share go up." It usually means that we are holding a position that has gone against us; maybe even past our unexecuted protective stop loss. Hope, shellacked with a coat of panic, motivates us to send that plea heavenward. More hope makes us declare staunchly to our friends and ourselves (when our share is tanking), "It is a good company. It will come back" (Most of us have muttered those words more than once.) Optimism makes us add, "After all, the market has an upside bias."

The most profitable traders keep these emotions out of their trading decisions. To accomplish this, try imagining a basket by your office door. Each morning, before you enter, mentally drop those emotions in the "basket." Further, create a plan for each trade before you enter the trade, with the entry price, protective stop, and profit target. Once in, manage your risk accordingly. A well-thought out plan will keep unwanted emotions; from hope and optimism, to fear and panic, from creeping into your trades. Then you can trade calmly, with the confidence born of your discipline, knowledge and experience.

Transparent state of mind

Suppose that we could listen in on a typical trader's thoughts as he is trading, without him knowing it. It is likely that we will hear thoughts incessantly streaming through his mind. He will be reacting to what he sees on his trading screens, thinking about the patterns he is watching, mentally reviewing his trading plan techniques, considering possibilities for how a particular trade might turn out, making associations between decisions he is trying to make and past experiences, etc. The overall sense conveyed by this type of fast-paced, complex thinking is one of tension and anxiety, even if the thoughts are seemingly logical and controlled. Now suppose that we could listen in on a very successful, experienced trader's thoughts. Here, we are likely to have a very different experience. We will probably hear minimal (if any) thoughts that are reactions to what the trader sees and hears in his environment. Instead, a calm, confident, commanding state of mind will be conveyed, as if environmental stimuli harmoniously "flow through" his mind without disturbing him. This is what successful traders mean when they talk about achieving a transparent state of mind.

This type of mental disposition allows the trader to act according to his knowledge and trading plan strategy, without interference of any of the typical emotional triggers. For instance, suppose that price activity on an active trade unexpectedly spikes up in volume. This is a potential emotional trigger and will almost always cause a novice trader to start reacting. Once a mental reaction has occurred, it is very difficult to control it. And even if the trader succeeds in the one instance, it is likely to be repeated and will mentally tire him. By achieving a transparent state of mind, the trader's essentially numbing his mind to the sort of stimuli that have such effects.

Many traders assume that the ability to think transparently inevitably comes from the experience of trading for a long time. This is not true, because even amongst the most experienced traders, there are many who have not been able to master this ability such that they can consciously invoke it while trading. The few (and the more successful) who have realised the importance of achieving this state of mind have achieved it through a conscious effort, by understanding and practising. Mastering the ability to be in a transparent state of mind is a process that can often be achieved through daily meditative practices.

Dennis Kozlowski - a psychological case study

The downfall of Tyco International CEO and Chairman Dennis Kozlowski has something to teach us about the psychology of success. Mr. Kozlowski resigned his position at Tyco and was been indicted on charges of conspiracy, tampering with physical evidence, falsifying business records, and sales-tax violation. Apparently, Mr. Kozlowski purchased paintings worth $13 million without paying state and local sales taxes. He took delivery of the paintings in New York, but had his art dealer ship empty boxes to Tyco's out-of-state headquarters as a decoy.

Upon reading this account, one wonders why Mr. Kozlowski would allow his career and life to be upset for such a trivial matter as the avoidance of paying sales tax. Mr. Kozlowski truly exemplifies the American dream. He came from a blue-collar neighbourhood, worked his way through college, and worked his way up to head of Tyco from an entry-level position. Under his leadership, he transformed Tyco from a small manufacturer of electrical conductors into one of the world's largest conglomerates. In the last four years alone, he earned $450 million in salary, including options, and bonuses. His wealth afforded him a lavish lifestyle, which included helicopters as an everyday means of transportation and an exotic vintage ocean-racing yacht. It is puzzling why Mr. Kozlowski would risk his wealth, position, and reputation to avoid paying sales tax on paintings for his art collection. This question begs for a psychological answer. Perhaps, Mr. Kozlowski's behaviour stems from unresolved psychological issues. Although he was successful in business, he may have felt that he did not truly deserve his success. For years, he may have felt that he could not maintain his level of success and was secretly waiting for his success to come to an end. When the end did not come fast enough, maybe he unconsciously decided to speed things up by doing something reckless.

A different explanation is offered by the fact that the conglomerate Mr. Kozlowski worked so hard to build was not very successful in the last few years. Maybe, Mr. Kozlowski's scheme to avoid sales tax was an unconscious way of quitting without admitting to himself or the business community that he really was not the "Most Aggressive CEO," as Business Week lauded in a cover story, or that such a leadership approach is ineffective in the current economy. Perhaps, he cherished his reputation as a dominant business leader so much that he did something reckless as a way to exit Tyco, while leaving his reputation intact. Without long-term professional psychological assessment, we can only speculate as to the true reasons for Mr. Kozlowski's behaviour. However, based on our interpretation of the available information, you can see that psychological conflicts play an important role for maintaining success. One can achieve huge success, but unless one gains awareness of unresolved psychological needs and finds an adequate resolution, these unresolved issues could lead to a subsequent downfall.

One more thing in the back of your mind

When you have a psychological conflict, it is in your best interest to resolve it as soon as possible. As an old saying goes, when you ignore a conflict, "it is just one more thing in the back of your mind, taking up space and time." Freud said it 100 years ago and contemporary cognitive psychologists have proved it: there are limits to the psychological energy the mind can expend. The more issues you leave unresolved, the more these issues build up "in the back of your mind" and the less psychological energy you have to address them. When built up and left unresolved, there is a high probability that these conflicts will creep out when you least expect it. Not everyone has unresolved conflicts that sneak out of the unconscious and influence his or her trading behaviour, but it is wise to make sure that you are free of psychological conflicts. Do you have unresolved conflicts that lie in the back of your mind? Studies have shown that it is difficult to push these conflicts out of consciousness and pretend that they do not exist.

Now, you will need to combine what you perceive to be the advantageous aspects of your preferred methods and any variations that you came up with. As you combine methods, be sure that you are not creating a conflict within the system, for example, a certain price pattern potentially having more than one meaning or signal. You will usually find that you will come across such situations. In these cases, you need to find out what factors are causing the conflict and either eliminate one or more of the causes or add another rule to your method that blocks the conflict. Ironically, the more you try to deny the existence of these conflicts, the more limited psychological energy you waste. Rather than trying to ignore conflicts, it is better to acknowledge and face them head on. Most of the time, the mere acknowledgement of your conflicts will produce a quick resolution.

Even if you are not the kind of person who has a lot of past conflicts to resolve, there are some conflicts that all traders must face at one time or another. There are many beliefs about trading that hold some validity but are hard to accept. For example, novice traders must acknowledge and address the possibility that a series of winning trades may be due to a run of good luck, rather than trading skill. It is better to acknowledge this possibility than pretend it has no basis whatsoever. Remember, it takes more psychological energy to pretend that you have trading skills you do not have than admit that you need more practice and instruction. By admitting your potential limitations, you can spend your limited psychological energy more fruitfully by refining your skills to become a top-notch trader.

There are similar beliefs that some traders may be afraid to acknowledge but should. For example, a trader may think, "Perhaps I was a good trader at one time, but the market conditions have changed and I may not be able to keep up my reputation as a successful trader." All traders face this possibility at one time or another. It may be valid or it may not. But regardless of the validity, allowing such a belief to lay in the back of one's mind takes up psychological energy. It is better to acknowledge the possibility, and if it is false, remind yourself that it is absurd, or if it is true, take the necessary steps (such as learning new trading strategies) to prove it wrong.

Many beliefs always lie at the back of your mind and when you feel in a dumpy, disappointed mood, these beliefs can move from the back of your mind to the forefront. It is not useful to ignore them. It is better to acknowledge them immediately. Once you do, you are more likely to be able to say to yourself, "that may be true, but it is of no consequence right now." Then, you better spend some time later dealing with it. Conflicts in the back of your mind can have an impact. Make sure that you face your conflicts, spend time examining them, and try to resolve them. If you can do so effectively, you will have at least removed one of many things from the back of your mind, and free up psychological energy.

Visualisation is a strategy for success

Many professional and ultra-successful sports figures use the power of visualisation to help them reach the most proficient level possible in their skill-set. Far from "hocus pocus," the art of visualisation is fast becoming a respected method for bolstering performance. Again, the most outspoken proponents of visualisation are athletes, but other advocates include surgeons, entertainers, and even business people who mentally envision how they will act and react to various adverse situations that might happen during an important meeting.

How can visualisation help traders? Here is an actual example of a successful trader who uses it. "There is a fountain at the entrance of the building where my office is located. One morning I arrived early, so I sat on a bench and gazed at the fountain. I imagined myself at my trading desk. I saw myself calmly executing each trade according to my well thought out plan. When my protective stop loss was triggered, I exited the trade with no emotion. When my profit targets were hit, I quickly assessed the situation and decided whether to exit or continue to manage the trade. I only spent a few minutes 'day dreaming,' and soon rose off the bench and went to my office. "A wonderful thing happened that day," he continued with a smile. "I made some of the best trades of my career. In fact, the day played out much like I imagined it. Now, each morning I sit in front of the fountain and visualise myself executing trades as effortlessly as I can. At the end of the day, I leave my office with energy to spare and measurable bottom line results." Try using this simple but effective method before your trading day begins. Go to a quiet place where you would not be interrupted for a few minutes. Sit silently and imagine yourself efficiently preparing for the trading day. Then follow the trader's example above, seeing yourself entering and exiting trades calmly and confidently according to your plan. The more you practice visualisation, the more you can cultivate and maintain a calm and focused approach to trading.

Everyone needs R and R

Responsibility and respect are the bricks of a successful foundation, yet practically no one ever talks about it. Still, they represent two critically important components in our trading careers and, ideally, fortify every one of our actions. When our trades are going well, many of us proclaim it to the world by making comments such as, "I am becoming an incredible trader. I made fifty-percent on my trading account in the last six months!" Conversely, when we are doing poorly and racking up the losses, we tend to blame it on anyone but ourselves: "I followed the advice of so-and-so Online Trading Room yesterday and took a big hit. The guy who gave the recommendation was nuts!" It is human nature to want to be right ... to take credit when things are rosy and blame results on others when our lives turn sour. To maintain trading success, however, we need to take 110% responsibility for each decision that affects our trading account's bottom line. Our wins, our losses . . . we are accountable for ourselves, to ourselves as relates to the outcome of each of our trades.

Respect for money, itself, is the second "R." Do you treat your money carefully? Do you pay your bills on time? Do you spend thoughtfully? Do you throw crumpled R20 notes on your dresser, or wad them up in your pocket? Cash carefully organised in your wallet shows that you respect money and the power it has. And, chances are, if you treat money carelessly in everyday situations, you may treat it without respect in your account. Try consciously giving your money added respect. Do not risk losing it by chasing trades, overtrading, or maxing out your account on a high-risk trade. Ask yourself, when entering a trade, if you are respecting your capital. As long as the answer is "yes," your respect for your money will enhance your trading techniques. Even if you already do so, focus on taking full responsibility for all your trading actions, and increase the respect you have for money. It is an enjoyable exercise and one that may bolster your bottom line!

Easing the burden of decision

Is there anyone who does not feel at least a twinge of nervousness when he or she initiates a trade? It is quite natural to feel butterflies when one's bid or offer is hit, even for someone who has traded successfully a thousand times. Similarly, the pianist who has practised a Chopin scherzo for weeks might feel nervous in the moments before a recital. Experience teaches us that one can never be so polished or practised as to completely avoid feeling some amount of anxiety. Accepting one's own fallibility is a crucial step for mastering the inner game of trading, and if you have a problem with anxiety, it is vital that you identify this issue and take steps to work around it. Some novice traders are so paralysed by their extreme anxiety that they have trouble even putting on a trade. One way many traders attempt to avoid feelings of anxiety entirely is by employing a mechanical trading system. Allowing the system to make some decisions for you will alleviate some of the pain anxiety brings. You can get a feel for trading: when to enter, when to exit, how often a trade produces a profit. This experience may take some of the mystery out of trading and allow you to control your anxiety.

Alas, no trading system will completely free one from the nervous uncertainty of not knowing how a trade will turn out. And even if such a system did exist, over time it would affect the tempo of the marketplace just enough to critically impair the system's usefulness. Consider a trading system that can generate a closing-bell "buy" signal. If you were to act on this signal every time it occurred, it would eventually create a pattern of buying that would be detectable by someone else's trading system. That person would start to anticipate your buy order, buying just ahead of you. And yet another system trader might learn how to jump in ahead of you both. This is not to put the knock on trading systems in general. Many of them actually do work, and if you have a problem controlling your emotions, using a mechanical system will allow you to trade. But keep in mind that no system works so well that one can sit back and relax while the trading profits roll in, month after month, year after year. No mechanical system is fool proof, and if it were, the creators probably would not want to release it to the public. (If you do choose a mechanical system based on strong historical results, make sure you follow it long enough to "replicate" prior results; do not abandon it prematurely.) A mechanical system, however, does allow the extremely nervous person to develop a feel for trading. So if you are a novice trader who has problems controlling anxiety, try using a mechanical trading system for a little while. It may help get you on the right path to mastering the markets.

Losses

Let us say you are down ten thousand Rand. You may think, "Oh gosh! I just want to get that money back." You do not want to end the day down ten thousand Rand, so you are not coming to the market to win anymore. Your attitude shifts and you are now coming at it not to lose. Pretty soon you end up down R50 000 and you think, Oh my, gosh, that could have been a trip to Jamaica. All that time you have just been digging. But the first thing you have to do to get out of a hole is to stop digging! And the best way to stop digging is to throw the shovel down. You just have to say, "I am done for the day and I will come back tomorrow when it is a brand new day." So many people take a really small situation, where they are only down a thousand or so, and they turn it into a loss of ten thousand trying to get that one thousand Rand back.

Some successful traders will use a stopping point of few thousand Rand loss. If they are down that much then they are done. They just cannot stomach losing that much or they will start doing stupid stuff. They get away from the market. They go running or they work in the garden. Because if they are sitting there watching the market, they are still going to be involved and they might say, "Oh, wow, that is a perfect trade! I have to take that." But they know that their mind is distorted at that point. It is probably not a perfect trade. It does not take them very long to get over it. Once they are away from the market, they get over it pretty quickly, but if they keep staying there then the situation just gets worse, and worse, and worse.

Admitting our incompetence

In order to become a top-notch trader, you must have accurate insight into your own limitations. But most novice traders do not. For example, behavioural economist Dr. Terrance Odean has shown that online traders tend to trade beyond their skills. They do not have an accurate picture of what they can and cannot do. These biased exaggerations of abilities are not restricted to traders. It is a widespread phenomenon. Research studies suggest that when it comes to estimating how well you are doing as a novice trader, it is best not to trust your intuition. Dr. David Dunning and colleagues argued in an article in "Current Directions in Psychological Science," that most people are "blissfully unaware of their incompetence." This tendency to overestimate one's abilities has been documented in several studies. When people are asked to take a test measuring abilities, such as thinking logically, writing grammatically, and spotting funny jokes, they tend to overestimate their performance: they think that they are performing well above average (60% and above), yet they are actually performing in the bottom 25%. This research finding is not restricted to taking tests. People in a variety of settings and skill areas overestimate how well they are doing. Debate teams in college tournaments wrongly think they are suburb debaters. Hunters think that they know more about firearms than they really do, and medical residents think that they know how to diagnose patients more accurately than they really can. Studies have even shown that when people are offered money to estimate their performance accurately, they still cannot do it.

Dr. Dunning and colleagues suggest that poor performers are "double-cursed." Not only do they perform poorly, but they also lack the psychological ability to perceive that they are doing poorly. So what do poor performers do compared to top performers? Poor performers start with the belief that they are "good performers" and do not take the time to develop a method to assess their actual performance. Top performers, in contrast, try to gauge their performance accurately, and tend to avoid worrying about whether they are "good performers" or not. Indeed, studies show that they actually underestimate their performance. When they see how others have performed on a similar skill, they are surprised how well they do compared to others. Fortunately, poor performers are not doomed to remain at the bottom of the heap. In their experiments, Dr. Dunning and colleagues have shown that when poor performers are shown how poorly they do, and are given instruction on how to improve their skills, they perform better and are more accurate with regard to their performance estimates.

These studies offer ways that novice traders can improve their trading performance. First, one should be aware that novice traders' intuitive performance estimates are grossly exaggerated and take active steps to ignore them. Second, create an objective log or record of your trading results, such as a trader diary, so that you know exactly how well you are performing. Third, get some trading instruction to improve your skills (trading coach, mentor, workshops, etc.). As your skills improve, you will perform better and your estimates of your performance will be more accurate. So keep these guidelines in mind. An objective and accurate estimate of your abilities is vital for trading success. Make sure you have one.

The big ego - knowing when to control it

A big ego reflects an exaggerated view of one's abilities. Such a mind-set can be fatal for trading, where accurate and realistic perceptions of one's skill level are crucial. A big ego often reflects low self-esteem. When people feel inadequate, they often tell themselves that they are superior so as to bolster their feelings of incompetence. It is hard to escape this dynamic process of "ego defence." Everyone feels inadequate every now and then, and thinking, "I am doing great" can soothe unpleasant feelings of incompetence. It is probably not a good idea to do this very often, but doing so from time to time is relatively harmless, and it may even be a useful strategy when used sparingly. Just as with any pleasurable activity, telling yourself that you are a smart and brilliant trader has its time and place. It is fun occasionally, but if you do it too often, you may never look at your trading skills objectively, and take the necessary steps to build the skills you need to become a successful trader. It is best to restrict such self-enhancing strategies to off hours rather than during the trading day.

A big ego is not entirely bad. Once in a while, it can be used as an effective motivator, especially when you have a severe drawdown and feel like you just want to give up. Sometimes it is fun to dream of how success as a trader can make life wonderful. If you are motivated by having a nice car or a big house, you will work extra hard to get those things. For many people, it is quite motivating to dream of how the big money you will make trading can help you achieve important life goals. But at the same time, you need to put these goals in the proper perspective: It is fun to dream. But it is dangerous to be solely motivated by big money and bragging rights and if you allow yourself to be motivated to seek out these goals to build yourself up, you will be putting too much of your identity and self-worth on the line with every trade. This approach will fail in the end. You will put too much pressure on yourself to succeed. You will put yourself under extra stress and may "choke" at critical decision points while trading. So when you are trading, keep your big ego under control. How do you control a big ego? It is not easy. It requires brutal honesty when assessing your trading skills. You have got to get an accurate assessment of your skills, identify your weaknesses, and build skills to compensate. Focus on performance rather than potential rewards to your ego and social status. Doing so will help you control your big ego and prevent it from marring your trading record. Many traders have a big ego, and many traders have failed because of it. If you have a big ego, learn to control it. Your long term success depends on it.

The "can-do" attitude

At a dinner party Stan tells everyone, "I have decided to quit my job and go into trading full time." In a concerned tone, his brother-in-law warns, "Lots of people try to trade the markets, but end up losing big time. What makes you think you are any different?" Stan replies, "I can do anything I set my mind to. I have been selling insurance for 20 years and I am used to customers rejecting me, but I do not let it get me down. I just ignore it, and look for the next opportunity to sell. I will just apply that same positive mind-set to trading and I will be successful." Such statements exemplify the "can-do" attitude. "Think positively" is a dictum often heard in business. Such a positive mind-set is essential for trading success. Some seasoned traders warn novices, "Trading is a profession where you should go in expecting to lose money more often than not." So if you have a positive and optimistic attitude, it will help you cope with the grim realities of trading. Trading lore is replete with stories of novice traders who work hard to achieve big rewards, yet success eludes them, over and over again. A positive and "can-do attitude" helps matters. If you are the type who can "take a licking and keep on ticking," it will help you persist in the extremely competitive world of trading. Upon facing loss after loss, you will be able to try time and time again, until you hit the key big winning trades that will replenish or substantially add to your trading account balance.

That said, it is important to consider the limits of a "can-do" attitude. A positive mind-set is only one factor that produces trading success. You also must have adequate skills. One of the common problems among traders is overconfidence. Traders are overconfident when they merely believe that they can beat the markets yet do not have the trading techniques or skills to back up their beliefs. Many times, people believe that they have skill and knowledge when they actually do not. This type of overconfidence is not restricted to the trading realm. For example, teachers are quite familiar with students who claimed they studied "hard" for a final exam, and were furious when they failed. Studying "hard" for some students is a few hours, but for the students who received an "A+," studying "hard" may have meant 20-hours of concerted study the week preceding the exam, and 400-hours of study based on previous coursework. Becoming a skilled and seasoned trader requires even more commitment, work, and experience. A "can-do" attitude will get you nowhere unless you know how much work is necessary to attain a goal, your skill level, and base rate odds of success. So know your limits. It is vital to have a positive mind-set when you approach trading, but at the same time, you have got to make sure that you have the requisite skills. A positive mind-set combined with expert level skills will produce success.

Refuting core beliefs - a remedy for the fear of failure

Our outlook and expectations dictate how we approach trading. For example, if we are extremely fearful, we will be reluctant to take risks, and at an extreme, we may even be afraid to even put on a trade. Our expectations, whether conscious or unconscious, have a powerful influence on our trading performance. Traders face many common fears, and underlying each fear are core beliefs and assumptions that should be identified and refuted. For example, in his book, "Trading in the Zone," Mark Douglas identifies trading fears that are responsible for many trading errors: being wrong, losing money, missing out, and leaving money on the table. Many of these fears reflect a fear of failure.

The best way to neutralise a fear of failure is to identify the core assumptions that underlie this fear and refute them. Albert Ellis, a prominent psychologist, claims that behind the experience of all emotions, such as fear, is a set of core assumptions and beliefs. Many times these core assumptions are "maladaptive" in that they restrict our actions. Rather than face problems head on, we avoid dealing with them, trying to deny their existence. Oftentimes, however, it is useful to merely identify our false underlying assumptions and change them.

The core assumption underlying the fear of failure, for example, is the belief that one must be thoroughly competent, adequate, and achieving. Ellis claims that holding such a belief produces fear and anxiety, which for traders often produces hesitation and self-doubt. The development of this belief is understandable. As we grow up, whether it is at home, school or work, we often face adverse consequences for not being scrupulously proficient, and we begin to believe that we must be thoroughly competent, adequate, and achieving in everything that we do. We pay a price for this belief, however. If we believe that we must always be competent, we will expend all our precious psychological energy mulling over the negative consequences of failing, rather than focusing on what we are doing in the here-and-now to implement our current trading plan. Traders who believe that they must be thoroughly competent spend all their time worrying about what they did wrong, what may go wrong, and how they will recover should they fail. These thoughts are distracting and obscure the flow of immediate experience, and the ability to read current market activity with unfailing accuracy.

Do not let a fear of failure interfere with your trading success. You do not have to be perfect. As any seasoned trader will tell you, one is bound to make mistakes occasionally, and if you are consumed with avoiding them, you will be so anxious and fearful that you will make even more mistakes. So refute the core belief that underlies the fear of failure. Remind yourself that it is not useful to believe that you must be thoroughly competent, adequate, and achieving. No trader can live up to that standard, and ironically, trying to will actually lead to incompetence and failure.

Protecting the self

Jessica has been trading for six months with little success. Her trading account balance is down over 50% and she feels discouraged. She tells her trading coach, "I just want to give up. I am not cut out to be a trader. I have been a successful businesswoman for 15 years. I see myself as an ambitious and competent person, but I just cannot master trading." Jessica has a strong need to protect her self-image, her self-view. She sees herself as a competent person, but her lacklustre performance as a trader contradicts this view of herself. To maintain a positive view of herself, she would rather just give up trading. Protecting our self-view is a powerful human motive. It is so powerful that when we encounter feedback that contradicts it, we are willing to do anything to protect it. As a novice trader, Jessica is different than most. She is trying to cultivate an objective view of her trading performance, and incorporate the negative self-view of herself as an unskilled trader with her generally positive self-view as a competent person. It is hard to resolve this conflict. To do so Jessica's even considering giving up trading altogether, but most novice traders do not give up so easily; they continue to trade, even if it means ignoring their lack of skill and poor performance. Accurate and objective assessments of performance are vital to achieving trading success, however. It is essential that you gain awareness of the powerful need to protect one's positive self-view, and do not let it distort your performance estimates.

An experiment by psychologists Joyce Ehrlinger and David Dunning illustrates how people overly rely on their self-views to make performance estimates. These researchers manipulated participants' self-views. All participants were asked to estimate their skill level and success on a performance task. However, the researchers were able to alter participants' self-views; for some participants their self-view was enhanced by making the task easy, while for others, their self-view was deprecated by making the task difficult. As expected, people with enhanced self-views over-estimated their skill level; they predicted that they would do well on a subsequent performance task although their actual performance on the task did not confirm this overly optimistic prediction. Estimates of performance were based solely on one's self-view, regardless of its accuracy. Thus, when one has an overly positive self-view, his or her estimates of performance are biased.

This study shows the powerful influence of protecting one's self-view, even at the expense of holding a distorted view of one's performance. When we make a winning trade, it is likely to enhance our self-view, and in turn, we are likely to believe our skill level and odds of success are higher than they actually are. Fortunately, there is an easy way to neutralise the strong need to protect one's self-view and correct distorted performance estimates. Keep a precise record of your trading performance, and base your performance estimates on this objective account, rather than on memory or impressions. Doing so will help you fight against the tendency of allowing your self-view to bias your performance estimates.

Self-esteem, independence and conformity

"When we appreciate the true nature of self-esteem, we see that it is not competitive or comparative. It is not about making myself higher by making you lower. It has nothing to do with you. It is the joy of my own being." - Nathaniel Branden.

Dr. Nathaniel Branden is a psychotherapist who practices in Los Angeles. He has written several best-selling books on self-esteem, and is considered by some as a pioneer in the self-help movement. Dr. Branden is not a psychologist in the scientific sense, in that his theories about self-esteem are more based on his philosophical opinions, rather than firm scientific evidence. His background, nevertheless, is intriguing. He was a follower and close collaborator of novelist and philosopher Ayn Rand. Her influence clearly resonates through his writings, and her novel "The Fountainhead" exemplifies key concepts in building and maintaining independence and self-esteem. From the viewpoint of Rand and Branden, self-esteem and independence go hand-in-hand. As quoted above, self-esteem "is not competitive or comparative. … It has nothing to do with you." A person with truly solid self-esteem is an extreme individualist who does not care about how he or she is regarded by others. Being better than others does not motivate such people. They follow their own passion, despite the consequences. In "The Fountainhead," this ideal is presented in the extreme, but it is an informative depiction of the extreme individualist, nevertheless.

The novel revolves around the life of Howard Roark, a creative innovative architect who shuns classical architecture, which is popular among his colleagues, and designs modern structures that fully express his own ideas. He is such an individualist that he can find no clients, and must support his craft by working as a labourer in a quarry or designing modest projects, such as family homes, gas stations, and small office buildings. He frequently emphasises that he is not driven by money, fame, or recognition. He is motivated solely by a powerful need to express his artistic vision. He engages in his craft to satisfy himself and no one else. For him, designing buildings has nothing to do with raising his status or putting down others; he does it only for artistic expression. Another recurring theme in the novel is that he must design in his own way and on his own terms. For example, he would rather quit than let a client make a change to his design. At an extreme, when a change was made to his design of a public works housing project by the city government, he blew it up and suffered the consequences. That may be taking individualism a bit too far, but in a purely philosophical sense, it is a vivid illustration of extreme individualism.

Many seasoned traders are extreme individualists. For them, trading is an art form; they are not concerned with the status and prestige that riches may bring. They love what they do and it is a passion. It allows them to work only for themselves and be accountable to no one. Many are drawn to trading because it offers independence and freedom. But at the same time, you may see that it is hard to be extremely independent. Consider Howard Roark; he was so independent that he could not sacrifice his own personal ideals for the greater good, and unrealistically viewed his own rights as more important than societal norms (and thus, he criminally blew up the housing project). This fictional character outlines the conflict. As good citizens and highly functioning people, we have learned to conform and follow social rules. Yet these tendencies that made us successful people can get in the way of becoming a fully independent trader. So there is bound to be a tug-of-war between following our instincts regarding the market, yet searching for rules to follow. And in the markets, finding a set of universal rules is difficult, if they exist at all. But the more we can cultivate an individualist perspective, the more successful we will be as traders. There are advantages and disadvantages; it is worth thinking about.

First in line and ready for action

There is security in numbers. Have you ever looked at a school of fish in an aquarium? They stay in a big clump because if a bigger fish is nearby and ready to eat one of them, a single fish is less likely to be captured while swimming in the middle of a pack than alone. We humans also "school" in our everyday lives. When speeding along a barren highway, for example, it is easier to do so when in the middle of a clump of cars. As the logic goes, "the highway traffic patrol officer cannot pull us all over, and give a ticket to the whole bunch." It is sometimes easier to follow the crowd, especially when trading. "The trend is your friend" as they say. Well…it is not always so.

It feels natural for many to follow the crowd. Many times, it is to our advantage. If none of our well-to-do friends live on the west side of town, it is in our best interest to find out why, or simply live on the east side with everyone else. But this kind of thinking must be abandoned when it comes to trading. You must learn to anticipate what the crowd will do next, and be the first in line to act alone, rather than wait to follow them. In trading, the primary activity is buying and selling shares in the short term to make a profit. It is hard to do that if you are following the crowd. For example, if you have purchased a large block of shares with the goal of selling it when the price increases a couple points, you cannot wait for the masses to confirm your expectation. Prices move in cycles. If you wait too long for the price to reach a zenith, and for the masses to buy a large amount of shares, and validate your forecast, you may be trying to sell as the cycle moves the price back downward. And at that point, you have missed the buying frenzy, and are likely to be trying to sell your shares at a time when "fear" sets in, and much of the masses are ready to sell their shares.

Ideally, you must anticipate when the masses are ready to buy, have purchased shares at a lower price than they will gratefully pay, and sell them that share during the mass buying spree. You need to be the first in line ready to sell, while everyone else is in an entirely different line, ready to join the masses as they buy. You need to anticipate the upcoming trend, and do the opposite of what the masses are doing. In terms of the practical methods for doing so, that is easier said than done. You have got to have accurate momentum indicators, for example, to anticipate the pivot points. But from the psychological point of view, one must also be ready to cast off what we have learned throughout our lives about seeking protection by following others. In this case, there is not safety in numbers. When it comes to trading, you have got to view the crowd as the opponent, not the ally. You have got to anticipate what they are going to do, and think of a way to capitalise on their fear and greed. As a trader, you must take advantage of the masses, and capitalise on their "herd mentally." You need to be the first in line to think of a way to build up your riches from their fear and greed.

Stay detached and impersonal - it is not always about you

Stan's been in a long losing streak for the past three months. He has a severe drawdown. He is worried and a little scared. He has been trading for two years, and during the first six months of trading, he experienced his first major drawdown. That upset him, but he recovered to trade profitably until his latest drawdown. He tells his trading mentor, "I thought I had it beat. I thought I had mastered the markets and become a profitable trader, but I was wrong. I am not as great of a trader as I had thought. I am really disappointed in my performance." Stan's experience is familiar to many novice traders. He had some initial early success, but then a major drawdown. He now feels disappointment. But should he feel so poorly? Seasoned traders stay detached, and that is something a novice trader like Stan should consider. Expert traders know that it does not help to take trading losses so personally. To some extent, it is not personal; it may just be the nature of the markets.

Upon reading a scenario like Stan's, most novice traders can identify with his thoughts and feelings. "Of course he is upset," they say, "He has lost a lot of money, and he is disappointed." Certainty, it is natural for a person to feel upset and disappointed upon experiencing a severe drawdown. Financially, a great deal of money has been lost, and even if Stan were to return to consistent profitability, it will take some time to build his trading capital back up. Psychologically, Stan received a big hit to his ego. He had thought he had "mastered" the markets, only to learn that his skill may not have matched his expectations. Perhaps Stan should feel disappointment. Oftentimes, disappointment spurs one to take action. If one does not have the skills to perform, one better build up those skills in order to trade consistently, and pile on the profits over time. That said, there is also a case to be made for staying more detached and objective. Disappointment is a natural emotion, but not very adaptive for trading. Trading requires that one do the unnatural, and control one's emotions.

How does one control emotions? Consider this. What is consistent trading about? A large part of it is using a trading strategy that is capable of producing a profit. Sometimes it takes ingenuity to find such a strategy; sometimes it is a serendipitous event. And sometimes it is a matter of learning of a profitable approach from others. But in the end, it is just a matter of odds. It is just like rolling a dice or flipping a coin (in some ways). One expects to make a profit over a large number of trades, but in the short term, even a winning strategy is bound to have a string of losers. That is just the nature of probability theory. A small number of flips is less than an infinite number, so it is quite likely to get a string of a 50 heads out of 50 tosses. So why make it so personal? Why put your ego on the line with each trade? Why gloat when you are lucky enough to have the odds work in your favour and sulk when the odds go against you?

When it comes to trading, you have got to unlearn what you have learned your whole life. It is not all about you; it may just be the odds working against you. In other fields, probability plays little if any role. You put in effort, make sure you meet the expectations of the people who pay you, and you are a success. In the traditional work environment, it makes sense to put a little ego and pride into your work. Your effort and talent often have a direct payoff. But with trading, the odds can still go against you, no matter how much work you put in. You need to consider that "success" can sometimes (but not completely) be a matter of odds. That is hard to accept for most people because it means that when you are a winning trader, to some extent, it may be a matter of the odds randomly working in your favour. That takes some of the glory out of it, does it not? But on the other hand, it helps you cope with a severe drawdown. If you are skilled trader who really has "mastered" the markets, you can feel assured that, if you are trading at peak performance, the odds will soon move back in your favour, and you will again see consistent profits. Taking a detached, unemotional approach may mean giving up feelings of supremacy, but on the other hand, it will help you stay unemotional, take precautions, such as careful risk management, and stay focused on the process of reading the markets, implementing winning trading strategies, and trading consistently.

Hesitation - a plethora of reasons

Humans have a tenacious need to protect their assets and avoid risk. This is especially true for novice traders. It took a long time to build up sufficient capital to trade seriously, and it is understandable to fear losing some of it. Novices tend to seek absolute certainty before taking a risk, and gaining such certainty can take time. But when it comes to short term trading, there is not very much time for long deliberations. Market conditions are in continuous flux. Decisions need to be made relatively quickly, and if one waits too long to execute a trade, he or she may miss a significant opportunity. The reasons for hesitation are many, and it is useful to be aware of them, and make a plan to thwart them. The complex charting software available these days can often increase the tendency toward hesitation more than reduce it. It is tempting to look at as many technical indicators and signals as possible. Doing so, however, can be very time consuming. That is why seasoned traders advise looking at only a few key technical indicators.

Hesitation is usually related to a lack of confidence in one's trading strategy or trading ability. There may be several reasons for this lack of confidence, with some more deep-seated than others. One may not believe that his or her trading plan is adequately developed. Some traders may question their trading plan because they know that they did not spend enough time preparing it. Sometimes hesitation can be an intuitive warning sign, a way of telling oneself not to be too overconfident. In this case, hesitation can act as a motivator. If you feel you are hesitating because you have not prepared adequately, then spend more time preparing for your trades. Learn about new higher probability set-ups, reduce your doubt and indecision, and in turn your hesitation through more adequate preparation. Hesitation can also reflect a deep desire to be right and a fear of being wrong. We are often afraid to face our inadequacies. By putting off a decision, we do not have to face our limitations, and can pretend that we are better traders than we really are. Extreme perfectionists are especially prone to this type of indecision. They continuously second guess and doubt themselves. They believe that if they are wrong, they cannot handle it. This occurs in trading decisions as well as other life decisions. Extreme perfectionists may fatalistically think that once they make a bad trade, it will be the start of a downward spiral and a complete blowout of one's trading account.

Finally, hesitation may relate to low self-esteem or other deep-rooted psychological issues. Individuals with low self-esteem tend to lack confidence in many different life domains. Doubting one's ability to trade, and thus, hesitating to make a trade may reflect a more pervasive, deep-seated self-doubt. People who hesitate may have a conflict regarding their success. They may have a "fear of success" where at one level they strive for success, but at another level, they secretly believe they cannot attain it, or do not deserve it. Identifying and eliminating a problem with hesitation is useful. Chronic hesitation can erode one's trading confidence. One may put on trades, continue to hesitate, miss important market moves, and see his or her equity begin to dwindle. As one's confidence is further eroded, hesitation may worsen. So, if you are prone to hesitation, it is vital that you address this problem early. Identify the reasons for it, and make changes as soon as possible. By eliminating this common and pervasive ailment, you can trade profitably and consistently.

Humility

Why people are initially attracted to trading? For many, it is the money, especially the prestige and status that money can bring. But seasoned traders warn that when money, riches, respect, or any other human needs enter the picture, failure is not far off. It is common lore among those who have been in this business a long time that humility is associated with success, while pride, ego, and avarice lead to failure. Popular anecdotes recount stories of how a successful trader buys a big new house or luxury car and soon fails. The lesson: control your pride.

Pride can be a powerful motivator. We feel pride after making a significant achievement and are especially proud when the achievement has increased our social status. Trading is difficult. Few people master it, so when one is doing well, it is natural to feel a sense of accomplishment and pride. But too much pride often leads to disaster. Pride can be a competitive emotion. Those who are especially proud have a burning desire to brag about their accomplishments and feel superior to others. This can go too far. When people speak of their successes too often, others will resent them, and will be waiting for them to fail. The overly proud trader is likely to feel strong social pressure to continue making large financial gains to save face. There is also a risk of becoming stubbornly proud. Stubborn pride occurs when people have spent so much of their life feeling proud of their accomplishments, and trying to feel superior to others, that they have difficulty admitting when they have made mistakes. At an extreme, the overly proud become afraid to face mistakes and may even deny that they have faults.

Extreme pride can be a danger for trading, and is the downfall for many. Trading is hard enough without introducing additional psychological pressures to feel superior to others, maintain social status, or save face. When pride drives trading decisions, one is likely to take unnecessary risks in order to make big wins to keep up appearances. Controlling pride is vital. It is important to develop internal standards of self-worth. Do not compete with other people. Learn to compete with yourself. Develop your own rules and standards related to your skill as a trader. When you reach your standard, you can feel a little pride, but do not feel the need to tell others about it. If you can feel proud of your accomplishments, without feeling the need to brag about how well you have done, or exaggerate how well you are doing, then you will have learned to feel a true sense of pride and self-worth. Successful trading requires that one knows how to experience the proper amount of pride. When one achieves a goal, it is useful to reward oneself for a job well done. But it is vital to maintain an objective, non-emotional approach. Pride usually prevents one from cultivating this approach. The more you can keep your pride under control, the more successful you will be at making rational, unbiased decisions.

How much are you making?

Tom asks, "So how much money are you making?" His friend John timidly replies, "I am doing all right." Tom boasts, "Wow, I am making so much money today. This market is so easy, right?" Tom is not only bragging about how well he is doing, but he is taunting John. He is trying to intimidate him, and get him off of his game. Some traders are not only interested in trading for the money, but for the competition, and the enjoyment of basking in the glory of success. The competitive spirit can bring out the best in some traders, but for those who are not rugged individualists with rock solid self-confidence, such taunting can shake one's confidence. One may feel a need to compare oneself to others, and beat them at their own game, which often distracts rather than motivates. It is more useful to compare your current performance to your past performance. When you hear that someone is doing better than you, it is natural to wonder whether you are doing something wrong. But, in fact, you may be doing nothing wrong. Another trader's apparent success may be an exaggeration, an outright lie, or just a run of good luck. So it is wise to look only at your own personal internal standards, and not be thrown off by goading comments meant as subtle digs.

Traders, new or experienced, who have not yet developed a sturdy sense of self-confidence or control over their emotions, are easily dissuaded by subtle put-downs. They may question and abandon their trading plans, or trade impulsively to make some big wins to build up ammunition to fire back at the instigator. Seasoned traders, in contrast, filter out goading comments. They expect them, and since they deeply trust their skills and abilities, they do not care what others think or say. But novice traders, or experienced traders with wavering self-confidence, cannot ignore these jabs so easily. Isolating oneself from other traders is a possible line of defence but it is not without flaws. It is difficult to trade by oneself, especially when you are a novice. A social support network can be crucial. Members of the social support network can provide advice, serve as mentors, or provide emotional support. Ideally, everyone should provide support and want nothing more than success for all. But some people just do not know how to be supportive, and can even be exploitive, using you to fulfil their own personal needs to feel superior. For example, they may relish in your losses, making them feel like winners. Or they may need you to share their frustration and pain. They may try to taunt you and disrupt you from winning, so that you will feel as poorly about your trading as they do about theirs. Others are just plain overly competitive, and feel pleasure in taunting their competition, like when a rugby team scores a converted try and then tries to secure their winning momentum by psyching out the opposition. On a trading desk, or when talking with fellow traders, such goading is more subtle. Nonetheless, it is still imperative to decipher the underlying motive and see the put-down for what it is.

It is difficult to cope with subtle attacks on your self-confidence, and perhaps the only way you can fully cope is to develop a strong sense of self-confidence, so that no matter what anyone says, you will not falter. But until then, be on the lookout for those traders who are trying to build themselves up by putting you down. It is often hard to escape them. They are usually loud, obnoxious, and very matter-of-fact in their outlook on the market. Could these traders actually be making the thousands upon thousands they claim? Some may, but it is unlikely. What they are not telling you is how much they have lost. Indeed, they veil their losses by bragging about their wins. Slowly but surely, however, they stop showing up altogether as their trading account all but evaporates. It is poetic justice. Nevertheless, do not let these blowhards stop you from succeeding. When you hear others trying to put you down, and trying to throw you off, realise it is not about you. It is about them trying to deal with their own personal conflicts. Ignore it. Pay attention to what you are doing. Look inward for a sense of validation, and you will be one of the select few who trade profitably and consistently.

Idealism - dare to dream

Dreamers are often exalted because they dared to achieve the seemingly impossible, but unless one's dreams match specific and realistic actions, little becomes of them. Without well-defined plans, aspirations can merely turn out to be pipe dreams. That said, it is often useful to break away from real world constraints and to daydream. Rather than bound our thoughts by the realistic restrictions that stop us dead in our tracks, one can dream about the perfect set of circumstances that will ensure success. Lifting all restrictions, such as cost, internal/external politics, or technology can produce creative solutions to even the most difficult problems. In your mind consider what characteristics describe an ideal trader. What attributes would you list? This exercise can be useful. It will allow you to consider the characteristics that define the ideal trader, and compare yourself to the ideal. A comparison may create awareness of realms that you have never considered, areas that may be impeding your ability to reach the level of success you desire or expect.

For example, perhaps the single most important characteristic for someone to thrive in any field is a pure, unadulterated passion to succeed. Unadulterated means that the primary motivation is to become the best-not the richest, or most famous. The very best traders are people that would be trading even if they were not making big money. It is a passion for trading that gives them the focus to concentrate on their objective, to spend the time and energy to learn this business thoroughly, and to endure the inevitable setbacks indigenous to trading. However, most traders' motives are mixed. Their motivation is often adulterated with dreams of unlimited financial success and la dolce vita. But just because your motivation is weakened by self-serving needs of fame and fortune, that does not mean that you cannot become a successful trader. By airing these feelings and questioning one's motives, a trader can develop the proper kind of motivation. It is better to acknowledge how your motives may be influenced by base human needs than to pretend these powerful desires have no influence.

There are other characteristics that the ideal trader should possess, yet many traders lack. The ideal trader is fearless. He or she can put on a trade with unfailing objectivity. You may know of some traders who are fearless and lose big because they do not take proper risk controls. So although complete objectivity is a desirable characteristic, it must be tempered with a healthy scepticism of the markets. There are instances when the ideals are hard to pin down, and the right balance between risk seeking and risk aversion is one of those areas. The opposite end of this spectrum is the all-art, no-theory type traders. Their perception of the market is based entirely on abstract feelings, and a spontaneous emotional response to stimuli. Naturally, this rarely works. Although an intuitive feel for the markets is useful, it is essential to also look at some "objective" inputs, consider them carefully, and make a sound decision based on the data. Besides the psychological characteristics, one can dream of other areas where working under ideal circumstances can ensure success. An arsenal of tried and true winning trading strategies and virtually unlimited trading capital exemplify the ideal, for example. These circumstances are certainly a fantasy, but thinking of them is a useful exercise. One is able to consider all possibilities, both achievable and unrealistic, and identity how close he or she is to the ideal. Such self-exploration allows you to identify what you can and cannot change, and in the end, it's informative to know where you stand.

The emotional whipsaw

Participating in the share market often creates an emotional rollercoaster in which one moves from the dizzying heights of hope and excitement down to the dreary lows of frustration and disappointment. For example, one minute you can go long on a share, hoping to make a huge profit, only to see the share price drop a few minutes later. It is disappointing. It can be painful. There is a natural human tendency to make the right decisions and to avoid loss, and so when most traders see the share price fall hard, it hurts. The immediate reaction is to just dump the trade, and by doing so, end the emotional pain. Some traders know when to quit and stand aside until they gain their composure. Other traders cannot stay away. The share rebounds immediately; they jump back in too soon, and it falls hard again. They sell, and face even more frustration when they realise that they sold near the low of the move. At this point, they do not know what to do. It is an emotional whipsaw where they are completely confused and uncertain. At an extreme, a destructive cycle of buying high and selling low can occur in which the trader's emotions are a jumble of anger, frustration, disappointment, helplessness, and despair. It is essential that you identify the possibility that you may face an emotional whipsaw and take steps to minimise its influence.

Besides producing a confusing mix of emotions, the emotional whipsaw creates a complete breakdown of trading discipline. Whenever we enter a trade, we have an expectation that the market will move in our favour. But we must always acknowledge that it may not and be prepared for it. The emotional whipsaw occurs when traders do not follow a well-defined trading plan. They enter a trade without clear profit objectives, upfront estimates or risk, and a clearly defined exit strategy. Without a clear plan, they let their emotions lead them rather than their logic. For example, they may enter a trade without a sound reason for anticipating the share price movement. Their decision to enter may be based only on a vaguely defined gut instinct. The trouble with using only your gut as a buy signal is that you tend to put your ego and self-esteem on the line with your money. One tends to want to be right and implicitly believes, "If this trade fails, it proves that I do not know what I am doing." So when the trade goes against the trader, what does he or she feel? Extreme defeat and despair. Since personal, psychological stakes are involved, the feelings of frustration and disappointment are especially pronounced. But trading should be much less emotional. In contrast, consider the person who uses a more objective approach. For example, if one uses a technical indicator as a basis for a trading plan, and is aware of its limitations, little ego is on the line. Sometimes an indicator works and sometimes it does not. It has nothing to do with you or your self-esteem. It is just a matter of chance whether it will work on a given trade. So there is no reason to feel poorly about yourself when a trade does not go your way. You should just execute the trade mechanically, and when it appears to be going against you, close it and move on. There is no need to let self-esteem and emotions get in the way of following the plan.

Allowing your emotions to influence your trading decisions is one of the surest ways of amassing trading losses. It is vital for survival to avoid this detrimental emotional rollercoaster ride. It is wise to recognise a potential emotional whipsaw and make sure that you deal with it. Make sure you enter a trade with a clearly defined plan so that there are no emotions involved. Enter a trade in a certain range, set a protective stop loss, and if you get stopped out, do not ridicule yourself, just look for another trade. Gain your composure. It is like taking a time out and counting from one to ten when you are angry. Perhaps after some time away from the trade, you can re-evaluate the trade setup in a new light. Re-study the original setup and see if it still looks like a good trade. If it still looks good, specify entry and exit criteria and be patient about getting back in. The time spent out of the market gives you a chance to get your emotions under control. Through clear planning, you can keep your emotions out of the picture, and trade objectively and logically.

The gambling analogy - consider the advantages

"Trading is like gambling." Some say trading "is" gambling, but for now, let us just focus on the proposition that trading is analogous to gambling. An analogy is a comparison between two things that are similar in some respects. People use analogies to explain a complicated topic, or to understand a complicated topic. Trading must be complicated, since it seems that 95% of those who attempt to trade end up failing. It is either complicated, and thus, we need to use an analogy to understand it, or it is an impossible task, like trying to survive jumping off of a high cliff. Some people survive the fall, but most do not. If it is impossible, an analogy is not going to give us much help. But assuming that trading for a living is viable under the right conditions, most novice traders are willing to use analogies to understand complex trading issues.

In considering any analogy, it is essential to avoid confusing the analogy with the actual phenomenon that one is trying to understand: Trading is like gambling, but it is not exactly like gambling. A dictionary definition of gambling is "playing games of chance or betting in the hope of winning money." Look at that dictionary definition again. Trading is indeed a "game of chance," since it is not a 100% certainty that one can put on a trade (or a long-term investment for that matter) and be guaranteed a profit. And why do you trade (or invest)? You do so with the "hope of winning money." So from a purely semantic argument, trading is gambling. "But casinos are the only officially permitted institutions that allow legal gambling and the institutions that oversee trading and investing are quit different," is what critics of the gambling analogy shout with fervour. All right. We will give you that one. Here is another debating point that we will give you. In the "Diagnostic and Statistical Manual of Mental Disorders," the "bible" used as a reference by all mental health professionals, there is a disorder called "pathological gambling." It usually refers to the base aspects of gambling. Gambling can be an addiction, like alcoholism, and no reference is made to "pathological trading." So I guess that means that the society as a whole has yet to recognise a pathological version of trading. If it is so important to you to argue to your friends and loved ones that you are not gambling by trading, there is some ammunition. But whatever you call it, it is just a form of denial, because like it or not, you are gambling. So now that we have temporarily kept the critics at bay, let us get down to business. How is trading like gambling? And how can using this analogy help you understand trading? No one has developed the ultimate signal or technical indicator that allows a trader to anticipate the next market move with 100% certainty. There is some risk involved. And again, that is what makes it gambling. So the gambling analogy is useful. The fact that you can lose money should be at the forefront of your mind; you are not putting your money in a post office savings account. Once you acknowledge risk, you can take precautions to protect yourself. Unless you want to act like a "pathological" addictive trader, it is wise to define your risk clearly before entering a trade, take measures to protect yourself, and set up an exit strategy, should fate move against you. Since trading is a matter of probabilities, it is to your advantage to limit your risk to a small percentage of your total trading capital on any single trade, for example. That will help you survive a severe drawdown and stay in the game. You will be acting like a professional gambler rather than an amateur.

Perhaps the greatest value of the gambling analogy is the mind-set that it offers the trader. If you look at trading as a game of chance, it allows you to think in terms of probabilities: trading is a matter of capitalising on chance across a series of trades. The outcome of a single trade is of little importance, since if you make enough trades, you end up with an overall profit. Mark Douglas wrote one of the best expositions of this thinking strategy in his book "Trading in the Zone." When you play some games of chance, the distribution of all possible outcomes can be represented by a probability distribution in which some outcomes are more likely than others. For example, when you throw a pair of dice, there are 36 ways for the dice to fall, and about a 3% chance of getting a 2 or 12, and about a 20% chance of getting a 7. Traders try to find the high probability trades; it is like betting on getting a 7. You may try for a 7, but there is still a small chance of getting a 2 or a 12. But the more times you throw the dice, the more the law of averages works in your favour. That is, about 20% of the time you will get a 7, if you throw the dice enough times (but theoretically, there is still a chance you will never get a 7). Throwing dice is analogous to using a trading strategy with a proven track record. If you use a trading strategy with a historical track record of 80%, for example, you should expect it to work 80% of the time. It is all a matter of executing the strategy effortlessly and mechanically over and over so that the odds will work in your favour. (But unlike casino gambling, where someone knows the odds, and the "problem space" is essentially identical time after time, a trading strategy is rarely executed in an invariant problem space; history only repeats itself when it does. The gambling analogy in this instance does not hold. The professional gambler has better odds because theoretical laws of probability apply to traditional games of chance, but not to trading strategies.)

When you work under the assumption that you are doing nothing more than playing a game of chance, where the more trades you execute, the more the outcomes will follow a probability distribution where the outcomes are skewed in your favour, the more confident you will feel. As you execute the strategy over and over, you can remind yourself, "I will trust my strategy, repeat it over and over, and the odds will work for me." The gambling analogy in this case gives you an edge. It puts trading in manageable terms. You'll feel more relaxed, confident, and trade effortlessly in a peak performance state. In the end, there are more advantages to viewing trading as gambling than not. By doing so, you will acknowledge the potential risk immediately, and take steps to minimise it. At the same time, you will also be able to use the thinking strategy of looking at trading as a matter of probabilities. The relaxed, confident approach you will achieve from this mind-set will give you a mental edge.

Regret - a powerful emotion you must face

When trading the markets, one often faces actual harm: If you bet a lot of capital on a single trade, and it goes against you, you lose it. The harm is not imagined; the actual loss of money is painful. It hurts, and you may often regret having made the trade. There is a very human instinct to avoid pain at all costs. Not only is the actual loss of money painful, but also the mere feeling of regret from making a bad trade. Regret is so incredibly painful at times that many traders avoid even putting on a trade for fear of having to face the regret of loss later. It is as if the subsequent regret after making a loss is more disturbing to the psyche than the actual loss itself.

We feel regret once we realize we have made the wrong decision, such as making a losing trade. And if we put a lot of ego on the line with that decision, the hurt intensifies. For example, if we do an extremely careful analysis, and start to think that the analysis was so good that it validates our talent as a skilled trader, we have put a lot of self-identity on the line with our money. Whether we are conscious of it or not, we tend to think, "I have put a lot of effort into this trade, and I think I am right. But if I am wrong, it suggests that I am not as great of a trader as I had thought." If we were to make a trade on a whim, in contrast, we may still feel the regret of the loss, but it would not hurt as much. We did not put our ego on the line, so we can easily write off the losing trade psychologically: "It is not my fault that I lost money on that trade. I just made the trade on a whim." Feelings of regret are painful, and some people will do anything to avoid feeling such unpleasant and disturbing emotions. And, at first glance, it often seems as if the easiest way to avoid feelings of regret is to just avoid making decisions. If you do not make decisions, you cannot be wrong or feel regret. Although this seems like an obvious solution to avoiding the unpleasant feelings of regret, you may see that if you avoid making trades (or make poorly planned trades on a whim to protect your ego), you cannot pile on profits, which is the ultimate goal of trading. A more practical solution is to learn to face regret head-on.

There are a few simple ways to cope with regret. The most important way to cope with regret is to accept the fact that regret is an emotion that you'll be likely to experience as a trader. You are going to make losing trades, and if you do not take proper precautions, you will feel regret. It is not useful to delude yourself into thinking that you can avoid regret completely. That said, you can feel relief in knowing that you can take steps to minimize its powerful influence. For example, you can remind yourself that regret is not nearly as bad as you are making it out to be. Many times, all humans tend to overstate the adverse effects of a dreaded outcome. We tend to think that a losing trade would be awful, terrible, or catastrophic. In fact, if we control our risk on the trade, and plan it out carefully, the risk will be minimized and not catastrophic at all. Under such conditions, one's potential demise is greatly exaggerated. A useful thinking strategy is to remind yourself, "I am making more out of the potential loss than it deserves; it is not going to be as unpleasant as I am thinking it will be." Another way to minimize regret is to try to impersonalize the trade. Think in terms of probabilities, "This is just one of many trades. The outcome of this single trade means nothing. The big picture is all that counts." By reminding yourself of the relative insignificance of a single trade, you will minimize the potential regret should you lose. Similarly, it is also important to remember that a single losing trade (or even a few losing trades) does not mean that you have poor trading skills; it may just be a run of bad luck. There is no point in making the outcome of a trade symbolic of your skills as a trader. And, most importantly, never put your self-worth on the line with your money. You are a professional. The outcome of the trade should not influence the positive view you have of yourself as a person.

Do not let the tendency to avoid regret influence your trading decisions. Regret can be a powerful emotion. It can be so painful at times that one avoids making decisions, and it may lead to putting on trades on a whim to protect one's ego. But it is not necessary to let the fear of regret influence you. Keep in mind that if you make a losing trade, you may feel a little regret, but you can handle it. Do not try to avoid regret. Face it head-on. You will feel more free and powerful.

Trading in a higher psychological sphere

It seems so easy: Find a good setup, place a bet, close out the trade and take home the profits. It may seem simple, but trading profitably and consistently eludes most traders. Trading experts note that even those traders who achieve early success do not maintain it. It is easy to make a series of profitable trades early in one's career; the difficulty is trading profitably day after day, week after week, year after year. When it comes to maintaining profitability over the long term, one must look deep into one's psychological makeup and ask and answer tough questions: Why am I trading? What do I get out of it? Why should I continue to trade? Seasoned traders know the answer to these questions: Trading is intrinsically rewarding; it is a fulfilling, enjoyable, and creative endeavour. The experience of trading in and of itself provides its own reward. The most successful traders are so passionate about trading that they would trade regardless of how much money they made or how successful they were. For them, the intellectual and creative activities involved in the trading process constitute an optimal experience. They trade in a higher sphere, and maintaining this peak performance mind-set ensures their lasting profitability. Psychologists who study the motives behind people's life pursuits have discovered that optimal experiences are intrinsically motivating. They are so engaging and interesting that just doing them is enjoyable. The extrinsic rewards, such as money or profits, are not nearly as motivating. When people engage in an intrinsically motivating task, they effortlessly focus all their attention on that task, and achieve a level of experience that is optimal. They do not worry about success or a failure, and they do not expect to receive any reward or gain from the endeavour other than the experience itself. They may desire a reward but they do not need one. Emotions, such as fear, anxiety, and self-reproach, do not even enter their consciousness. The experience is so intense that they tend to be concerned less with the final outcome and more with the process as they experience it.

How does one trade in a higher psychological sphere? It is vital that you satisfy lower order needs, such as a need for self-esteem or recognition, so that you can focus on satisfying higher order psychological needs, such as self-actualization and self-fulfilment. For example, when trying to satisfy a need for self-esteem or recognition, one may think becoming a success will help him or her feel safe, secure, and loved. This belief can cause major problems when trading, for several reasons. First, placing too much emphasis on the outcome is bound to be distracting. Second, believing all your needs will be satisfied through trading will likely increase your fear, anxiety, and tension. Third, these unpleasant and distracting emotions will tend to interfere with your accurate assessment of market conditions and disrupt any clear-headed decision making, hurting your performance and creating a vicious circle of defeat. What motivates your trading? Do you trade to satisfy social and emotional needs? Do you trade primarily to increase your feelings of safety and security? How do you remedy the situation if you are trying to satisfy these lower-order needs? To remedy this, consider satisfying your safety and security needs in other ways. For example, you could set lower standards for your lifestyle. Trying to maintain a rich, luxurious lifestyle will almost certainly interfere with your trading success. Most successful traders report they have settled into a lifestyle that does not depend very much, if at all, on their trading success.

Other social needs that may interfere with your trading performance, and should be addressed outside of trading, include the desire for friendship, affection, and love. Some individuals believe that trading is going to improve their ability to form satisfying relationships. For example, many people believe that if they had enough money, their relationships would be far more satisfying. Although this seems reasonable, it is a fallacy. Wealthy people are no better at gaining love and affection than poor people. If you are hoping that your relationships will improve when you make more money through trading, you are mistaken. It is a far better approach to limit your trading activity and take other steps to develop more satisfying relationships. You may also trade because you desire recognition, appreciation, prestige, and status. It is true that some individuals may give additional respect to those with a lot of money, but not everyone. In addition, needing others' respect can be very difficult and disappointing. In the end, the road to happiness and success involves having respect for yourself. If you are hoping that you will somehow gain respect through making a bunch of winning trades, you will almost certainly be disappointed, and this drive for respect and continuing disappointment will interfere with cultivating a peak performance mind-set. Transforming the trading experience into an optimal experience may not be easy, but it is something that the most profitable traders have achieved and sustain. Make sure that your social and emotional needs are satisfied outside of trading, and that you are able to focus intensely on the trading experience itself. If you can do so, you will find trading interesting, enjoyable and engaging, and be trading in a higher psychological sphere.

Building up your emotional resilience

Many traders experience an emotional rollercoaster. They euphorically celebrate their wins, but soon face despair as their losses mount. Emotion control is one the most complex issues a trader must face, but traders vastly differ in how they control their emotions. Some of the differences are due to temperament while other differences are due to trading style. It is useful to identify your emotional type, and gain control of your emotions. By doing so, you will be able to cultivate the winning mind-set you need to master the markets. Research psychologists have identified the ability to control one's emotions as a fundamental personality trait with strong genetic components. Some people are easily excited, moody, anxious, and prone to despair. Others are so thick-skinned that nothing can influence their outlook. Most people know to which of these two types they belong. Are you overly emotional? Do you tend to get disappointed easily? Are your feelings easily hurt? Do you feel under-pressure or stressed out compared to others? Do you question your self worth or self-esteem? If you answered, "yes" to any of these questions, then you are probably the type of person who has difficulty controlling his or her emotions. And it is likely that you will have trouble controlling your emotions while trading.

One of the best ways to control emotions is to identify the problem of "personalization." Many times, emotional persons take many issues too personally. They continually assume that every unpleasant event they encounter is their fault, and they ridicule themselves for not taking appropriate precautions to prevent its occurrence. Now, at some abstract level, it may be their fault, but it does not help their ability to control their emotions to constantly dwell on this issue. When we take too much responsibility for our actions, we tend to blame and punish ourselves when things go wrong, the same way our parents may have punished us when we were children. When it comes to performing a task, such as entering or exiting a trade, it is vital to de-personalize or objectify matters. Rather than consider the "meaning" or "personal significance" of an action or event, it is more useful to think strategically. One must concentrate on the on-going process of trading, and think, "What should I do next." Many times, people are overly emotional because they give an action more significance than is warranted. For example, a trader may think, "I identify strongly with being a trader, and if I do not make winning trades, I will feel like a failure." Sometimes it is useful to cast aside your occupational identity, have a happy-go-lucky attitude, and think, "I am going to enjoy making these trades; I will think about the consequences later." Some people have so much difficulty controlling their emotions, it may be useful to take extra steps to remind themselves to objectify and focus on the process of trading rather than the emotional significance. One can write "Objectify" and "Focus on the process" down on paper and put it near the monitor while they trade. One can then read the message, and think over and over again, "I am going to focus on the process and ignore the meaning." With practice an overly emotional trader can control his or her tendency to overly personalize each trading action.

In addition to developing personal thinking strategies for controlling emotions, it is also vital to look at situational influences. Emotional reactions can be minimized through proper risk management, for example. Traders should only trade money they can afford to lose, and risk a relatively small amount of trading capital on a given trade. When you know deep down that you do not have much to lose on a given trade, you can more easily control your emotions. Do not continually ride an emotional rollercoaster. Get off the ride and take control. You will find you enjoy trading more, and the objective mind-set you cultivate will help you remain calm in even the most chaotic market conditions.

Drive to win

Why are people attracted to the markets? Is it the excitement, the money, or both? Who does not want to win? A mere desire to win is not enough, unfortunately. True mastery requires more than that. A "gung ho" or "can do" attitude is also essential, but it is not enough either. Traders who master the markets are willing to do anything to win, even if it means putting in all their time, money and effort.

First, they are passionate about trading. They like to trade the markets so much that they would gladly spend all their free time looking at the market action and trying to figure out how the markets behave. Master trader Bill Lipschutz observes, "you find people...who spend inordinate amounts of time on the computer doing something because you are fascinated by it." Winning traders love studying the markets. In their quest to develop an intuitive feel for the market action, they may not be necessarily looking for the next stock in which to invest, but they try in earnest to understand the factors that move the markets. Traders who master the markets love what they are doing. In contrast, traders who want the rewards but do not want to put in the work would rather be somewhere else. They view studying the markets as merely a job that needs to get done in order to trade. Close study of market action does not excite them.

Second, traders with a passion to win are not afraid to ruthlessly scrutinise themselves. They are so driven to win that they do not mind admitting their mistakes. They are not afraid to be wrong. They know that they must evaluate their performance in order to improve. They do not avoid negative feedback. To them, no feedback is negative. All feedback is good in that it allows them to gauge where they are and where they need to go next. They are humble, and know that no trader is bigger than the markets. Admitting that you must put your ego aside and go where the markets take you requires courage and strength, but again, winning traders will do anything to win, even admit that their intelligence and personality are not enough to succeed. As Bill Lipschutz notes, "If you meet a trader who is very, very successful and he truly, honestly believes it is because he is smarter and faster and more insightful and more aggressive than all his peers, I don't believe him," Intelligence is not enough. According to Bill Lipschutz, winning traders are also, "very focused, motivated, and hard working."

It's common to see winning traders become unfazed when they lose money. It is not that they like to lose money, but they enjoy the intellectual challenge of trading so much that they cannot wait to perfect a new trading method. They enjoy the search for new strategies and feel a great sense of accomplishment when they explore new market conditions, and work hard to find the secrets to trading under these new conditions. Traders often face setback after setback. Unless you have a strong desire to win and master the markets, you will feel beaten down after each setback. But if you are willing to do whatever it takes to win, you will not only master the markets, you will win big.

All in perspective

As a novice trader, Jack has just put on his tenth trade. He is still new to trading, but he is optimistic that he will be successful. He wants to succeed. He thinks, "I want to prove that I am a good trader. I hope I do well on this trade. The outcome is critical to the rest of my trading career."

Jack's thoughts and feelings are understandable. Whenever we start a major endeavour such as starting university, a new job, or whatever, we want to succeed. And it is nice to have early success. The first few moments of a major life turning point seem especially significant. When we are not successful immediately, the initial let-down often haunts us for a long time, interrupting our train of thought, and shaking our self-confidence. Despite the reasonable hope of an early triumph, however, it is vital to keep the proper perspective when approaching trading: one must always think of the big picture, the long run.

Any single trade is of little importance. Experienced traders know this fact, and live by it as if it were doctrine. Even though they may focus all their energy on the current trade, they know it is of little real significance in the long run. It is wise to put each trade in proper perspective. It is essential that you consider, at least in the back of your mind, that a single trade is just one among a series of trades, and that the bottom line is the overall outcome across the series, not any single outcome.

There are psychological advantages to taking this perspective. When you downplay the outcome of any single trade, it is less critical to your ego. When viewed as just one in a long line of trades, it is easier to tell yourself, "It does not matter. There will be many more trades and opportunities to come." If there is not much riding on the outcome of a trade, it will free up precious psychological energy. You would not waste your limited psychological resources needlessly worrying about the outcome. You will feel free and creative, ready for whatever happens next. All your attention will be focused on trading your plan, objectively analysing how market moves fit into your plan, and taking decisive action for a clean exit.

Putting a trade in proper perspective is not only psychological, however; it also involves proper risk management. To survive the learning curve, or a severe drawdown, you must limit your risk on any single trade. By limiting your stake to a small percentage of your trading capital, the trade will have minimal financial significance. In reality, it will be of little consequence compared to your overall account balance. Merely believing that a trade is insignificant does not work very well unless in reality it is not significant. For example, it is hard to fool yourself into thinking that a trade is insignificant if you have a month's salary on the line on a single trade, and you cannot afford to lose it. The stress will be unbearable. It is important for your psychological and financial security that you limit the risk on any single trade. Again, think in terms of the big picture. You do not need to make money on a single trade; the overall results across a series of trades are all that really matter.

When starting a new endeavour, It is natural to want to do well on every single attempt. All of one's hopes and dreams may be placed on a few key trades, for example. But trading is much too difficult to think you can quickly make a few trades and be set for life, with all your aspirations met. The successful trader is in the game for the long haul. The trading lore is replete with stories of traders who made huge profits only to lose it all later. You may see some big trades in your career, which will provide numerous war stories that you can use to entertain your friends for hours, but when going into a trade, it is vital to keep the trade in proper perspective. It is still just one trade of the many you will make in your trading career.

I want to be impulsive

The markets keep reaching new highs. Oil prices are at their lowest levels in years. Sasol's profits are up despite a competition tribunal investigation. Many market indicators are positive. There is a sense of optimism in the air and you cannot wait to cash in. It is at times like these, however, that some traders have trouble with discipline. After making a few winning trades, they want to celebrate. It is understandable but potentially dangerous.

Winning traders maintain discipline. Successful trading is a matter of odds. It is vital to get the law of averages to work in your favour. The more trades you make, the more likely you will win. But you cannot make impulsive trades or abandon risk limits. After a few winning trades, though, acting impulsively is what most traders want to do. behavioural economists call this phenomenon the windfall effect. It is much like playing with the house's money at a casino. You win big and you figure you can gamble with wild abandon.

When you trade the markets, however, sometimes you will win but oftentimes you will lose. Losses are commonplace when trading. So when you win, you must retain the profits you make for those times when, by shear chance, your method temporarily stops working. How can you maintain discipline? It is not as easy as it may seem. Self-control takes psychological energy, and just like physical stamina, when your energy runs out, you get worn out to the point that you cannot keep going. Similarly, you can only control your impulses for so long before you feel like acting out and doing something wild and impulsive. Some trading experts suggest recognizing this fact. For example, if you want to act out, stand aside and do something impulsive to get it out of your system. You might want to do something fun and exciting outside the trading arena or even do some recreational gambling to celebrate, and pat yourself on the back. Once it's over, though, it is time to get back to work.

How else can you maintain discipline? First, admit your limitations. Self-control is like a muscle. You need to practice self-control. Do not try to be superhuman. You cannot run a marathon tomorrow if the farthest you had to run in the past year was between your front door and your car. You need to work up to it. Do not expect to be able to maintain self-control without extensive practice. Give yourself time to build up your self-control skills. Second, make a strong commitment to build up your self-control skills. Take the matter seriously. Until you commit to change, you cannot improve your ability to maintain discipline. It is similar to losing weight or quitting smoking. A person must first acknowledge that he or she has difficulty with self-control before change can happen. Admitting that you need to improve your self-control skills goes a long way. Do not trade impulsively. The winning trader is the disciplined trader. The more you can stay calm, rational, and in control, the more profits you will take home.

Background stress: Do not let it impact your trading

Have you ever suddenly just closed out a trade for no good reason? You did not think about it. You just closed it on impulse. Perhaps you felt the stock was not moving fast enough, or maybe you were worried it would fall hard, and you just did not want to see what happened next. As much as we try to monitor our trades in a cold, calm rational mind-set, our emotions often seem to get the best of us. The explanation for an emotional outburst may not be apparent at first glance, but in retrospect, we may realise that a host of factors came together in a split second to make us act on impulse. It is vital to gain as much awareness as possible, however. It is useful to know what we are doing and why, and one of the reasons that impulsive decisions happen is that background stress is left unchecked.

Trading is inherently stressful. When your money is on the line, you feel stress whenever you start thinking about losing. The single losses do not matter much, but when losses mount it can be stressful. The losses lurk in the back of your mind. You may not be sure how you are going to make back the losses that have piled up. Other issues may gnaw at you. There could be a host of problems that lurk beneath the surface, from problems with family or friends to a general uncertainty about the future. Any one of these stresses may seem like nothing more than a common, everyday hassle, but when they add up, even a minor setback can set you off. When you least expect it, you lose your cool. And when you do, these background stressors are likely to influence your performance.It is almost impossible to eliminate all background stress, but you can greatly reduce some of it. You can do a few things to ease some of the strain, like talking to friends and loved ones about your troubles. Whatever you do, it is useful to admit to someone, almost anyone that you may be in a little trouble. It takes more energy to pretend that you do not have a problem than to merely admit that you may be stuck and that you should just admit it and devise a game plan to get out of it. By uncovering hidden stressors and talking about them, you will feel a sense of relief.

Stress can get the better of you if you let it. It builds up if it is not released. Many traders find it useful to let it out physically. By going for a run or working out at the gym, you will let off steam. It may seem like a little thing, but it really helps. You will feel a little less stressed out and be able to cultivate a more detached, rational mind-set.

The proper mind-set can spell the difference between trading yourself into a slump and achieving great financial success. You must focus on the process of trading. Rather than worry about how well you are doing, enjoy every moment. The key is to take it one minute at a time. Do not mull over the past or worry about the future. Just focus on what you can do one step at a time in the current moment you are living. Once you appreciate each moment, and enjoy the intellectual challenge trading offers, you will calm down and trade more freely and creatively. Finally, always remember to run your own race. Do not try to live up to other's expectations, and do not set unrealistically high expectations. Accept what the markets give you. If you live by your own rules, and accept whatever profits you can take out of the markets, you will feel better, trade better, and you will take home more profits.

The heat is on

Have you ever watched the last few moments of a tense sporting event? Sometimes the last few seconds can make all the difference, like when a fly-half drop kicks for the winning points in the last few seconds of a rugby game. Depending on how much talent is involved, a great deal of stress can increase performance or hinder it. If you are extremely talented, a little bit of stress may compel you to push your talents to the limits and pull off a miracle. But for most people, it is hard to perform under extreme pressure. Most people choke under the strain. Ideally, it is easier to perform when you feel you can take it easy, calmly assess what you want to do next, and take decisive action. Whether you are trying to live up to someone else's expectations or are trying to reach self-imposed high standards, trading under pressure is bound to put you on edge.

How can you feel more relaxed and creative? The first step is to identify sources of pressure. The second step is to minimise the sources of stress either through taking action to relieve the stress or using thinking strategies. There are at least three sources of pressure: Financial, social, and self-imposed unrealistic standards.

Most of us could use a little extra money these days, so there is always a little financial pressure to trade profitably. But financial strain can adversely impact your ability to trade with a calm, relaxed, focused mind-set. If possible, it is useful to relieve some of the financial strain. A straightforward way to lessen financial pressure is to reduce the size of your trades. The less money you risk on any single trade, the less stress you will feel. Thinking in terms of probabilities can also relieve financial pressure. That is, if you remind yourself that any single trade is just one trade across a series of trades, and that the profits across a series of trades are all that matter, you will feel more relaxed.

Social pressure can also tax your limited psychological resources. At its worst, we may continually feel that someone is watching us. Our family, friends, or spouse may expect us to make profits. It is natural to care what they think, but caring too much can gnaw at us. The social pressure to perform can upset us so much that we make trading errors, or hold on to losing trades to avoid having to admit that we have been mounting losses. If you feel social pressure, you may want to get into the habit of keeping how you are doing to yourself. But if you must tell close friends or loved ones how you are doing, make sure they understand that the trading business has ups and downs, and that it is best to not feel too excited during the ups or not feel too upset during the downs.

Finally, perhaps the biggest source of stress is the expectations you place on yourself to do well. If you want to master the markets, you have to be ambitious, but on the other hand, too much ambition can put unnecessary pressure on you. It is better to take it easy. Do not try to be perfect. Try to work hard, but at the same time, just do your best.When the heat is on, it is hard to perform at your beat. So why push yourself too hard? Why not take some of the pressure off? The less pressure you feel, the more free you will trade. And the more profits you will make.

Is being wrong really so bad?

When trading the markets, it is more common to be wrong than right. There are many ways to be wrong. You can misread a chart pattern, since interpreting a chart is largely a matter of subjective interpretation. You can falsely anticipate what the market will do next, or you can simply commit too much capital to a trading strategy that just may not pan out in the long run. Novice traders, in particular, are infamous for needing to be right. This natural, human tendency is so powerful that novice traders engage in unproductive trading behaviours to avoid admitting that they are wrong. They might hold on to a losing trade, for example, to keep losses on paper. They may procrastinate or put off making a trade in an effort to avoid facing the consequences of a bad trading idea. In many ways, a need to be right can be stifling. Rather than feel free and creative, a trader who consciously or unconsciously needs to be right may hold back at critical moments of trading. When you are inhibited and afraid, you avoid making trades. And unless you make trades in a variety of market conditions, you will never hone your trading skills and master the markets. To trade like a master, it is vital to stay calm, open, and ready to trade with a winning edge.

Is being wrong really so bad? Many people have trouble admitting they are wrong. It can be difficult to admit we are wrong. It hurts. We tend to place great psychological significance on negative feedback. For example, when we are wrong, it is as if parents or teachers are criticising us for doing something morally wrong. But this is a false assumption. When we are wrong, or make a mistake, we are not doing anything morally wrong. We are just being human. We all make mistakes, and it is vital to take setbacks in stride. If you can learn to downplay the emotional significance of being wrong, you will feel calmer and can trade more freely and creatively.

Another reason we hate being wrong is that we have an irrational need to be perfect. We often assume that unless we are always right, we will not be successful. This is especially true when trading. Every Rand we lose may often require the effort of making two Rands to make up the difference. It is natural to want to be perfect and never lose. But we do not always need to be right. We learn to assume that we always need to be right in school. In school, we were usually allowed only one chance to turn in a term paper or take a test. In most school settings, you cannot retake a test or rewrite a term paper, and thus, you cannot learn to hone your skills. Many people carry over this mind-set into trading. But it does not need to apply. If you make small practice trades, for example, you can make a trade, learn from your mistakes, and make a new trade. Over time, you will hone your trading skills. Since risk is managed, you can make mistakes and learn from them. There is nothing to fear.

There is no reason to kick yourself for making a mistake. You are human. You are allowed to be wrong. Do not be afraid to accept your limitations. If you allow yourself to be wrong, you will allow yourself to trade more freely, and over time, you will hone your trading skills to the point that you will trade the markets skilfully and profitably.

Committed and ready to succeed

Are you ready to make a commitment to making huge profits in the markets? You may think you are committed, but are you? Sure, you are spending time watching the markets, and you may be ready to put your money on the line, but are you deeply committed? Your answer to this question can make all the difference.

When you try to do something as challenging as trading, you have to do more than merely give it lip service. Ultimate success requires that you change your life around. Consider some of the resources you need to ensure success. In reality, you must commit at least R100 000 to put the odds in your favour. Share prices only jump so far, and thus, larger positions make it easier to make a profit. Unless you were born into money, it takes a great deal of commitment to build up enough trading capital to trade with success. In addition, you have to study the markets and learn about trading strategies. This will take time and effort on your part. You cannot merely do it as a hobby. In the final analysis, it takes real commitment, the kind of commitment that starts to impinge on your identity. It means overcoming obstacles, and some of these obstacles may be family and friends, such as your children or spouse who make demands on some of the time you need to prepare to trade the markets. Your children or spouse may also put pressure on you to do well as a trader before you are ready. You may need to divert money to your trading business that your spouse may feel is better spent on daily living expenses. Ideally, you need your spouse and family to commit to your trading aspirations as well, and that can be difficult to pull off. They may agree at first, believing that new found riches are imminent, but when they realise that these advantages are farther off in the future, they may be less supportive. All these little hassles can add up to the point that your resolve is shaken.

Are you showing the tell-tale signs of wanting to quit? Are you putting less and less time into your trading activities? Are you monitoring the markets less and less? Are you reading about the latest developments less often than necessary? Are you daydreaming when you should be studying the markets? Are you feeling overwhelmed at times, believing that your aspirations are merely a pipe dream? If you are having these feelings, you are not alone. Even the most enthusiastic trading coach will tell you that less than five percent of the people who try to trade in the long term succeed, so you would not be seen as a pessimist if you decided that you were not one of the rare few who will make it. Indeed, you would probably be seen by most people as a realist! But this kind of mind-set would not ensure that you make it. You must be a rugged individualist who is ready to make a strong commitment and organise your life to achieve your trading goals. It is not for everyone, but if you are willing to make a commitment, it will be for you.

If you want to make it as a trader, you must have the proper commitment. Most traders fail because they just do not love the study of the markets enough. They are motivated by the goal of making huge profits rather than the process of trading. Trading is not a hobby or an easy way to pay the bills. It is a lifestyle. You need to have passion for the game. Success in the trading business requires such a commitment. Do not avoid making it. If you find yourself procrastinating, rather than learning how to trade, you may just be going through the motions. If you are committed to trading, however, you will find a way to make it. Perhaps, you may just start out paper trading or making small practice trades where you make a winning trade, but break even due to commissions. It is all right if your heart is in it. Spending money to learn to hone your trading skills is all right if you know that you are committed to mastering this field. But if you are just feeding your account to avoid facing the fact that you really do not want to trade, you are just wasting time and money. You are postponing your inevitable decision to give up. Do not give up. Build up the commitment you need to ensure success.

Cannot pull the trigger: There are alternatives

Are you the kind of person who feels butterflies when you are about to execute a trade? Perhaps you are a little nervous because you do not have enough experience with trading, or maybe you are putting a little too much money on the line…you know it, and you feel the pressure. For some people, it may be a nervous temperament. But whatever the reasons, there may be times when you have difficulty executing a trade at the right moment. Accepting your limitations is a crucial step for mastering the inner game of trading, and if you have a problem with anxiety, it is vital that you identify this issue and take steps to work around it. There are many approaches you can take.

Sometimes, feelings of anxiety result from real world, rather than purely psychological, concerns. You may be putting extreme pressure on yourself to perform. You may be expecting a 20% profit on each trade, for example, when you do not have the talent or market opportunities to guarantee such success. Or you may be risking money you cannot afford to lose. In the end, you can only trade with the skills and financial resources that you have available. It is vital to gauge your resources and develop realistic expectations. A realistic approach to trading can do a lot to ease some of the pressure, feel carefree, and execute a trade more freely without self-reproach. As a thinking strategy, it is always useful to tell yourself that you do not have to be perfect. Do not try to perform miracles. Do your best and accept what you can get. You will find that ironically when you give up control, you will feel free, creative, and able to execute trades with ease.

That said, some traders are so temperamentally anxious that they are paralysed. They cannot pull the trigger no matter how good the market opportunity. They do not trust their instincts and they are afraid to make a mistake. For these traders, a mechanical trading system may offer a solution. No system will completely free a person from the nervous uncertainty of not knowing how a trade will turn out, but it offers a sense of solace. Trading systems are not perfect, and sometimes they are criticised since some systems are nothing more than get-rich-quick schemes. And even when a system is legitimate, no system works so well that you can just sit back and relax while profits roll in, month after month, year after year. No mechanical system is fool proof, and if it were, the creators probably would not want to release it to the public. But if you search carefully, you can find systems that actually do work, and if you have a problem controlling your emotions, and have trouble pulling the trigger, using a mechanical system will help you trade.

When your money is on the line, it can be difficult to execute a trade. Sometimes you can merely change the circumstances under which you trade, but other times you may need to change your approach entirely, such as by using a mechanical trading system, but there is no reason to let your initial anxiety about trading stop you from making trades. You can work around the problem, and eventually, make the profits you desire.

Mad and ready for action

There are times when everything goes wrong while trading the markets. If you are not ready for a barrage of mishaps, however, you may feel frustrated when you encounter them, and if you are tired and worn out, you may even get overly angry. You may think, "It just is not fair. Why is this happening to me?" You want to blame someone, but deep down, you know that there is no one to blame. Perhaps there is nothing left to do but accept your fate, and realise that there is not much you can do but calm down and relax.

When things go wrong, it is tempting to say, "I am going to get even with the markets." People seek out revenge when they feel that they have been unfairly wronged, and it is common to feel this way when you have taken every precaution, developed a great trading plan, yet failed in the end. We often become angry at the markets because we believe that the markets and the people involved in the markets should cooperate with our plans. But sometimes, the markets and the world just do not cooperate.

Anger can be a dangerous emotion. When people are angry, they are ready to put up a fight. They focus all their energies on fighting, seeking revenge, and looking for any sign of provocation. It is hard to think clearly when you feel angry. If you are not calm and rational, then you will make impulsive decisions. You will make matters worse by making even more mistakes after a major setback. When you feel angry or frustrated, do not get mad, calm down!

There are many steps you can take to calm down when you are angry or frustrated. First, do not treat the markets as if they are people. Turn off your interpersonal feelings. View it all as objective as possible. Anger is an interpersonal emotion, but when trading the markets, it is useful to think, "It is just business; it is not personal." We usually become angry with someone because we believe that he or she has purposely tried to harm us, to unjustly do us wrong. The markets may consist of people making trades, and trying to win at all costs, but it does not make sense to view the markets as people intentionally trying to harm you personally. They are not out to get you specifically. It is just the nature of the game. If you view everything coldly and abstractly, not interpersonally, you will feel a lot better most of the time.

Second, do not assume anything. Anger is felt when our expectations have been shattered. One expects to profit from a trade, and when the profits are not realised, he or she may become angry, seek revenge, and want to get even. However, it is not useful to hold such high expectations while trading the markets. Do not depend on the markets to fulfil your goals or meet your expectations. Assume that anything can happen. Indeed, in dealing with the markets, it is almost a given that you will lose money, so it is not useful to expect to make money on every trade. Just accept what you can get. Eliminate any preconceptions you have regarding the outcome of a trade. It is vital that you accept whatever happens to you. It may not be pleasant, but it will keep you calm, and if you think calmly, you will usually think rationally and creatively. And when you think calmly, rationally, and creatively, you will increase the chances of profits coming your way.

Handling unexpected success and controlling overconfidence

You cannot trade the markets unless you have self-confidence. Trading is a field where you will see setback after setback, and the only way to pick yourself up quickly and fight back is to have rock solid confidence. But building genuine, unwavering confidence in your trading abilities takes time. It is necessary to experience a variety of market conditions and learn which trading strategies work best under which specific conditions. It is not something that happens in just a few months. Many trading experts say it takes several years of trading before you will gain enough trading experience to build a genuine sense of confidence. In the meantime, novice traders must find a balance between under- and overconfidence.

It is hard to distinguish genuine confidence from arrogant overconfidence, particularly if you are a novice trader. Novice traders must look out for times when their overconfidence makes them take unnecessary risks. For example, Brad Barber and Terrance Odean have shown that when novice online traders face an unexpected windfall, they tend to over-trade. One of the traders said, "If you are overconfident, you fall into traps. When I have a string of ten days where I made money every day, I have to watch myself. I have to get more defensive after a string of good trading days because I am tempted to think that I am invincible. In that mind-set, I get stubborn and take bigger risks." Taking big, unnecessary risks can produce large losses. When you are first starting out as a trader, it is vital to stick to your risk limits, but many traders find it hard to avoid taking greater risks when things are going well.

In their book, "Why Smart People Make Big Money Mistakes," Gary Belsky and Thomas Gilovich are not surprised by why people are overconfident. For them, the more interesting issue is why traders have trouble controlling their overconfidence. According to Belsky and Gilovich, "The problem is the inability to temper optimism as a result of prior experience. Frankly, we do not learn well enough from our mistakes."

Indeed, many novice traders do not learn from their mistakes. They watch their trading account balance rise and fall with the ebb and flow of the markets. They do not pick and choose ideal, high probability trading setups and they trade in market conditions that are not conducive to their methods. They over leverage their trading knowledge and end up making costly mistakes. It is wise to take precautions, especially after an unexpected winning streak, where you are likely to feel euphoric because of an unanticipated windfall. Under such circumstances, you will be prone to take risks because you believe that you are now merely risking the "house's money." But your winnings, no matter how you won them, are yours, and you should protect them.

The most obvious way to gain control over your overconfidence is to manage risk carefully, so a series of losing trades will not deplete your trading capital as rapidly. In addition, make sure that you trade with a well-defined trading plan. If you manage risk and follow a well-devised trading plan, you will be able to minimise overconfidence. When you allow a trading plan to guide you, you will trade more rationally and unemotionally. You will focus on the plan, rather than impulsively allowing your feelings of invincibility to distract you. Overconfidence disrupts many novice traders. Do not let it control you. Manage risk and follow your trading plan. You will stay grounded, unemotional, and profitable.

Fighting Murphy's Law

While trading the markets, there are times when Murphy's Law says it all: "Whatever can go wrong, will go wrong." Does this sound a little too cynical? Perhaps, but only if you submit to pessimism. If you have a winning attitude, however, you are ready to tackle anything. You will think, "Things go wrong all the time. So what, I will take it in stride and move on." If you cultivate a winning attitude, you can fight Murphy's Law with ease.

In their book, "The Innergame of Trading," authors Robert Koppel and Howard Abell argue that trading knowledge is not sufficient to trade successfully. Sure, it is essential to have extensive knowledge and a wealth of experience with the markets, but trading with a winning state of mind is also necessary. Traders with a winning state of mind are anxiety-free, confident, organised, and have high self-esteem. Many traders, though, unnecessarily limit themselves. They are not confident, but uncertain and easily shaken. They are vengeful, rather than enthusiastic about vast market opportunities. They are easily disappointed, and find it hard to get energized. And they face an adverse market event with frustration, instead of persistence and discipline.

Consider the difference between the limited trader with a pessimistic attitude and the resourceful trader with a winning attitude. The limited trader may think, "The markets are rigged, too risky, and do not let you win." The resourceful trader, in contrast, thinks, "The markets provide opportunity, and can be mastered." The resourceful trader realises that he or she may not be perfectly skilled. Mistakes are bound to happen. The limited trader thinks, "If I get stopped out, it illustrates that I am a loser," but the resourceful trader thinks, "If I get stopped out, then I have to re-evaluate the trade." While the limited trader thinks, "If the market does not do what I expect it to, then I do not know anything," the resourceful trader thinks, "If the market does not do what I expect, then my analysis or timing has to be reconsidered." While the limited trader allows his or her emotions and feeling of low self-esteem to take over, the resourceful trader takes an active, problem solving approach and gets things done.

A winning attitude can do wonders. Rather than feel like a victim who has no control over the markets, a winning attitude allows you to gain realistic control of your thoughts and emotions. Rather than react emotional to a setback, a winning state of mind allows you to cope with an adverse event effortlessly, and manage risk in order to protect your capital. When you have a winning attitude, setbacks are not a threat. You do not pessimistically blame the markets or market participants for a setback. Instead, you take responsibility for your actions. You think, "What can I do to make a winning trade? Maybe I can change my method. Perhaps I need to stand aside and study the current market action more closely. I will learn from my mistakes and eventually master the markets." By not putting pressure on yourself to trade with perfection, you feel more relaxed, creative, and ready for action. So when setback after setback starts making you feel like Murphy's Law is true, question its validity, cultivate a winning attitude, take control, and master the markets.

A good mood is more important than you think

Have you felt under extreme pressure while putting on a trade, and found that you just could not think straight? You questioned your trading plan, and suddenly, you hesitated at a critical moment during the trade, a time when decisive action was needed. When you get like this, it may be hard to snap out of it. A bad mood has a lot to do with it. When you are in a bad mood, you will be stuck and paralysed. Your mood impacts your decisiveness. The better your mood, the more earnestly you will trade.

In an innovative experiment, psychologists Benie MacDonald and Graham Davey showed that seeking extreme perfection is a function of two factors: a bad mood and a belief that mistakes have dire consequences. College students were asked to complete a task that consisted of identifying 100 spelling and punctuation errors. Participants were randomly assigned to one of four experimental groups. Some participants were told that if they made a mistake on the task, they would receive a slight form of punishment, while for others, making a mistake had no consequences. Some people did the task while in a good mood, while others did the task in a bad mood, which was induced experimentally by the researchers.

The participants who were in a bad mood, and thought that they would be punished for making a mistake, tended to unnecessarily check and recheck their work. In other words, they tried to achieve an unrealistic level of perfectionism. Why did this group of participants obsessively strive for extreme perfection? According to MacDonald and Davey, these participants allowed their mood to dictate their behaviour. They thought, "I am going to look for mistakes until I feel satisfied." When you are in a bad mood, however, this is not a very useful strategy. A bad mood does not dissipate very quickly, and so if you check and recheck your work until you are satisfied, you will check and recheck longer than necessary. Since you are in a bad mood, you will never feel satisfied, no matter how much checking and rechecking you do.

This experiment explains why people seek out extreme perfectionism while in a bad mood. If you are prone to experience self-doubt, your confidence will be especially shaken when you are in a bad mood. As you try to execute your trading plan, you will question whether it is viable or whether current market conditions are optimal. You will never be satisfied and think, "Something does not feel quite right." At these times, it is vital to do one of two things. Either avoid trading while in a bad mood, or do not let your mood guide your actions. Remind yourself that when you are in a bad mood, you will be especially prone to question your actions, and may act irrationally or impulsively. If you are aware of the psychological mechanisms that influence your decision-making, it is possible to work around them. If you think, "I am in a bad mood, and thus, I am irrationally questioning my trading plan or my abilities," you can try to ignore your mood, and persistently and logically try to follow your trading plan with discipline. But whatever strategy you take, do not underestimate the powerful influence your mood has on your thoughts and decisions.

The intuitive mind

Ever seen a pattern emerge, and instinctively trust your gut instinct even though your logical mind told you otherwise? Sometimes it works, but other times your intuition may fail you. Scientists are fascinated by how people use intuition. There is something intriguing and mystical about it. Intuition helps us make quick and rapid decisions without full conscious awareness, but sometimes it is wrong.

Trading is a matter of probabilities. We find a method that has a statistical edge and use that method over and over so that the law of averages will work in our favour. But there are times when we forget about probabilities and go with our gut instinct. Our intuition is often influenced by emotions. There are times when we want to see something so badly that we see things that are not there. A study by psychologists Drs. Denes-Raj and Epstein illustrates how people can throw logic out the window and make a poor decision when they believe their gut instinct is right.

Participants were asked to pick out a red jellybean from one of two jars of mostly white jellybeans. It was a simple game: If you pick out the red jellybean, you win. The first jar had 10 beans while the second jar had 100. The 10-bean jar had one red jellybean while the 100-bean jar had seven red jellybeans. From which jar would you choose to draw a red jellybean? If you are like most people, your first thought is to try your luck with the 100-bean jar. After all, there are seven red jellybeans in that jar and only one red jellybean in the other. It intuitively feels right, but calculate the actual probabilities. The odds of winning are 10% for the 10-bean jar while the odds of winning are 7% for the 100-bean jar. The interesting part of this study is that participants knew that their odds of winning were better had they tried their luck with the 10-bean jar, but their intuition told them otherwise. In the end, they allowed their intuitive hunch to overpower their logic, and! draw a bean from the 100-bean jar.

There is a lesson to be learnt from this study: Intuition is powerful, and it is vital to learn to overcome your intuition when you suspect that it may be leading you astray. If you were a participant in the study, would you choose to try the 100-bean jar? Your intuition would drive you to go there, but you could train yourself to curb this tendency. You could tell yourself over and over, "Pick from the 10-bean jar," and you would probably do it even if you had a nagging urge to pick from the 100-bean jar.

You might try the same strategy while trading. Seasoned traders rely on their intuition to make winning trades by quickly and efficiently capitalising on the market action, but if you are a novice trader, your intuitive skills are not yet developed. Whether you are trying to identify the emergence of a pattern with technical analysis or trying to read the ticker tape using price and volume, your intuitive skills may lead you astray. Intuitively, you may think that the price will move in a particular direction, and your emotions may want it to, but it does not happen.

As you gather a wealth of experience, your intuitive skills will develop, but until then, it is wise to be a little sceptical. Do not unnecessarily stand aside or lose confidence. Continue to make trades, but do not risk too much on a given trade. If you ignore your risk management rules as a novice trader, you will take big hits to your trading account. Your skills are not yet developed, and until they are, managing risk allows you to survive the learning curve. Mastering the markets takes time and experience. Eventually, you will develop the intuitive skills to trade quickly and decisively, but until then, stay cautious and disciplined.

Pick yourself up and move on

Are you having a bad day? Has media coverage spoiled your trading plan? Perhaps you are just feeling a little off? When you encounter an unexpected setback, you can feel beaten down. You might be tempted to just stay knocked down, stuck, and unable to get back up. "I will never make enough winning trades to recoup my losses." Ever had these thoughts, when you felt beaten? It is natural, but you cannot stay down too long. You have to get back up and try again.

When a wild animal searches for water in the middle of a desert, it does not wallow in self-pity when all the watering holes are dry. It keeps on searching until it finds water. Continuing the search is a matter of survival. There is no time for worry and disappointment. When you encounter a setback, it is wise to similarly search for new market opportunities. Think optimistically. Do not retreat. Engage your primal instincts to survive.

Art Linkletter once said, "Things turn out best for people who make the best of the way things turn out." You may have expected a trade to turn out profitable yet lost. Some may see the loss as a sign of personal inadequacy, but the winning trader takes the loss in stride. He or she asks, was there something to learn here? Sometimes there is and sometimes there is not. A good trading plan can often fail for no good reason. What winning traders do not do, though, is mull over a setback too long. They make the best of it and move on. That can mean executing the same trading plan under more favourable market conditions or it could mean searching for a new trading opportunity. Whatever is done next, stagnation is not an option.

We often feel trapped when the internal dialogue we have with ourselves is pessimistic. When we feel particularly stuck, we can talk ourselves into a rut. It starts out innocently enough. You may think, "I am disappointed. I needed this trade to be a winner." Your next thought, however, gets you into a bit of trouble. You may start thinking, "I will never get this right. I am just fooling myself." Then you start remembering how your best friend warned you that you would never make it as a trader in the long run. You then remember the other failures you have had in your life and the financial obligations you have this month. Soon, you have talked yourself into a psychological rut. All seems hopeless. When you get this way, it is vital to get back your optimistic, fighting spirit.

How can you recapture your optimism? First, focus on the big picture. You might remind yourself, "I will make the profits I want someday. It may not be today. It may not be tomorrow, but if I keep at it, I will eventually reach my financial goals." You might also daydream a little to improve your mood. Imagine a time in the future when market conditions are just right, and you are there enthusiastically ready to take advantage of them. And how can you get ready? Practice and experience. The more trades you make, the more practice and experience you will have, and when the time comes, you can easily make a killing in the markets. You might also want to make a list of past winning trades to help you pick your spirits up when you are down. If you read the list at the slightest sign of disappointment, you will be able to pick your mood up before it starts on a downward spiral. Remember the times you have made big wins. If you did it in the past, you can do it again.

Merely getting yourself in a good mood may not guarantee that you will suddenly return to profitability, but it will increase the odds. There is no way you are going to find profitable market opportunities if you are pessimistic. When you are optimistic, you will think more creatively and freely. And this optimal mind-set will give you the mental edge you need to master the markets.

Dare to be average

When you put your money on the line, there is a strong need to seek out perfection. Many novice traders believe that they can get everything just right. They believe that they can locate infallible information, find the perfect trade setup, and execute every trade flawlessly. In the book "Trading in the Zone," author Mark Douglas notes that many traders are so consumed with making the perfect trade that they never get around to executing enough trades to make a profit. It may be difficult to accept for the overly compulsive trader, but trading is not a profession where you can persistently demand perfection. There is no such thing as a sure profit. Information is often inaccurate. You can plan a trade methodically only to have it fail because an unanticipated adverse event thwarts your trading plan. It is natural to strive for perfectionism. You do not want to be a sloppy, impulsive trader. That said, you do not want to be an extreme perfectionist either.

"The harder you strive for perfectionism, the worse your disappointment will become," according to Dr. David Burns.. Perfectionism has more disadvantages than advantages. When you strive for overly exacting standards, you feel so tight and nervous that you actually are not very productive. You are unable to take risks because you fear failure. You tend to hold back rather than make new discoveries. Trading is a profession where you must take risks and explore new market opportunities. If you continuously strive for perfectionism, you will never feel satisfied. You will always think, "I could have done better."

Is your perfectionism out of hand? Here is an exercise Dr. Burns suggests for learning about the impact of your perfectionism: Dare to be average. Feel what it is like to be average and see what happens. Rather than search for the ideal trade setup, why not just find a profitable trade setup? What happens when you just make an average trade? Sure you would not make as much profit, but you might feel better. You will probably feel relaxed. Compare what it feels like to strive for high standards, moderate standards, and low standards. You may find that merely going for moderate standards makes you feel better. You may also find that you put on more trades, and achieve greater levels of profitability.

Trading can be a matter of probabilities. To get the law of averages to work in your favour, you must make trade after trade. If you manage your risk, and put in a moderate effort, you can make enough trades to come out ahead. As long as the trade setups are reasonable, and you are using sound trading strategies, you can get the losing trades "out of the way" and focus on the winning trades. But if you are an extreme perfectionist, you will always be on edge and unable to make trades. And because you are so concerned with overly high standards, you may never discover and take advantage of new, profitable market opportunities. By easing up, you will feel more relaxed and creative. Ironically, you may end up more profitable by daring to be average, instead of striving for absolute perfection. So dare to be average and see what happens. You may be surprised at what you find.

Building emotional toughness

Psychologist James Loehr argues "emotions run the show." They drive everything. "The stock market is not driven nearly as much by world events as by how people respond emotionally to those world events," according to Dr. Loehr. The most important factor in increasing performance is emotional. "Consumed by anger, fear, doubt or hopelessness, you lock up inside and fall short of the mark again. What is possible for you remains tragically out of reach." Unless you experience a full range of emotions, and become emotionally tough, you will have trouble achieving a higher level of performance.

How do you become tougher emotionally? According to Dr. Loehr, there are four indicators of emotional toughness: flexibility, responsiveness, strength, and resilience. By working on each of these areas, you can develop the emotional skills you need to improve your performance.

Emotional flexibility is the ability to be open, expansive, and non-defensive in the face of a crisis. There is a strong tendency to blow a minor setback out of proportion and respond inflexibly. For example, when our trading strategy goes awry, or we face a temporary drawdown, our first inclination is to avoid the problem, rather than experience a range of emotions, such as a fighting spirit, humour, or enthusiasm. It is important to experience a little bit of fear, but once you go there, it is even more vital to think creatively, problem-solve and get past it. If you are open to different emotions, you will have an easier time moving forward, rather than remaining stuck and paralysed.

It's also important to be emotionally responsive. When facing a crisis, many people want to shut out their emotional experience. They are withdrawn and distant, estranged from their on-going experience. But it is essential to remain open to experience and ready to respond actively and creatively. If your trading method is failing, for example, it is important to energetically try to revise it. You must actively study the markets, be open to current market conditions and accept them. Once you connect emotionally with the markets, you can find new solutions that were not obvious at first glance.

When facing a crisis, even a minor one, emotional strength and resiliency allow you to constantly exert a positive force to change matters. Rather than back down in defeat, it is vital to show unfailing persistence. You must be able to quickly bounce back from a setback. Rather than be deterred, you must keep your overall goal in mind and keep striving for it.

Winning traders are emotional tough. They are open to a wide range of emotions, stay connected to their on-going experience, stay positive, and bounce back from a setback quickly and easily. The more you can build emotional toughness, the more rapidly you can enhance your trading performance.

Increasing mental capacity

Trading can be a complex activity. A broad range of information must be studied and integrated. Not only do you need to keep up on possible news and factors that may impact the market action, you have to look at technical indicators, such as price and volume, in order to anticipate where the market will move next. And it is not easy to identify chart patterns. It can be a lot like putting structure onto an amorphous pattern of lines. If only we had more computing power…we could process all the information we needed to trade more efficiently. Unfortunately, the mind has limits. And you have to work around them.

The mind is like a computer. We store memories in the hard drive, while our on-going experience is processed by the CPU and stored in RAM. The amount of attention you can devote to a particular task is restricted. You can only attend to and process a limited amount information and when you move beyond the limit, the information is not processed. Have you ever noticed that it is possible to read a telephone number and remember it for only a short time? When you are distracted, the information is lost. Unless you memorise the information, it is lost.

How can mere humans increase the mental capacity of our minds? It is not easy. You cannot just add extra RAM or a faster CPU. What we can do instead is "over learn" some of the tasks we do while trading. It is similar to how people learn to drive a car. At first, one must focus attention on each driving task separately in a deliberate focused manner. But, over time, one can monitor speed, look for road hazards, and engage in several tasks automatically, and still be able to do other things, such as talk with a friend or insert a CD into the car stereo.

You may have noticed that trading tasks can be "over-learned" in much the same way. For example, you probably have noticed that over time, you can identify signals that precede a breakout almost automatically. With practice, a lot of steps that you once had to perform in a deliberate and tedious manner can now be completed will little effort. Many times, "intuitive" decisions merely seem as if they are a "gut instinct," but may in fact be based on a several valid and reliable inputs and signals that were processed automatically. The more you spend time practicing new skills, the easier it will be to do multiple tasks.

Active trading requires increased mental capacity. But your IQ does not need to break the bank. You can increase your mental capacity through practice. The more you study market conditions and develop an intuitive feel for the markets, the more you can do multiple tasks simultaneously. You will find you will increase your mental capacity and trade more profitably.

In a trading state of mind

If you are like most people, your moods change throughout the day. There are times when you are extremely energetic and optimistic. You feel like you can do anything. You are in an optimal state of mind for trading. A state of mind consists of a constellation of moods, feelings, thoughts, and memories. In an optimistic state of mind, you feel powerful and ready for action; you feel enthusiastic and energised. You have a can-do attitude. You remember past triumphs and you are inspired as you think of your past accomplishments. You are open to new ideas, and you can creatively think of new trading strategies. You cannot wait to trade.

At other times, though, you may feel down in the dumps and beaten, as if you are paralysed by your emotions. You remember every failure, no matter how small, and you wrongly believe that these minor setbacks illustrate your inadequacy. As you might imagine, some states of mind are more conducive to trading than others.

Sometimes our moods, and corresponding states of mind, change for no apparent reason; it may just be the time of day or a biological mechanism. Other times, our moods reflect daily events, such as a string of unexpected losing trades. But regardless of how it happens, our current state of mind impacts how we approach trading. When you are ready to execute a trade based on your meticulously defined trading plan, and you are also in an optimistic state of mind, you execute your plan flawlessly. Other times, in contrast, our states of mind are less than optimal. For instance, we may feel pessimistic when we are ready to execute a viable trading plan, and if we allow these feelings to dictate our actions, we may decide to abandon the plan for no good reason.

It would be nice if we were always in an optimal state of mind, but it is not always the case. Some traders are naturally tired during the trading day, but in the evenings, after a little rest, they think clearly and creatively. These traders may find it useful to devise specific trading plans off hours when they are in a creative, optimistic mind-set. When they go to execute the plan the next day, though, they may feel dreary and unenthusiastic. If they have a well-defined plan that is clear and easy to follow, however, they find they can ignore their current feelings, and focus all their energy on executing the plan. They may think, "I am not going to let my low energy mood interfere. I cannot think clearly when I am like this, so I am going to just focus on execution and live with what happens. As long as I follow my plan, I will have met my objective."

Other traders may be overly optimistic during the trading day. Extreme optimism can be dangerous. Overly optimistic traders may feel invincible and get a swelled head. They may impulsively put on low probability trades, seeing positive signs when there are not any. Later in the day, they may think, "How could I have been so impulsive?" During more calm and rational moments, they may see things more clearly. At these times, they would be wise to use these states of mind to clearly map out trading plans. Once the trades are mapped out and clearly specified, the trading plans can be more easily executed when market conditions are just right.

Because our moods may not be optimal at the moment of execution, a detailed trading plan can ensure that a trade is executed with discipline. Whether you are overly optimistic, dreary and pessimistic, fearful and anxious, or frustrated and scattered, if you have a well-defined trading plan, you can temporarily ignore your current state of mind, and focus all your available energy on executing the plan. A less than optimal state of mind does not have to hamper your trading. You can still trade profitably if you make a detailed plan and trade it.

The art of knowing

If you are an eternal optimist, you hate bad news. But bad news is relative. What is bad news to some is mere information, and possibly good news, to others. (For example, if you were going long, a sell off would be bad news, but if you were short, you probably felt it was a bonanza.) Some novice traders hate bad news and do anything to avoid hearing it. It takes many forms. Some traders keep losses on paper to avoid acknowledging them. Other traders avoid looking at performance statistics, such as a win-loss ratio, in order to keep up the illusion that they are making huge profits. Others fudge a little, making a bunch of low profit trades to artificially boost their win-loss ratio, and still others feed their trading accounts every month and hope that someday, they will make the huge profits they have been hoping for. In the end, these are all just ways of using psychological "denial," futile attempts to passively solve problems instead of taking active, decisive steps to solve them. But knowledge is power, and the more you know about your trading performance, the more you will be able to improve your trading potential and take home more profits.

Denial can be useful at times. For example, if you have developed a thorough trading plan and there is very little that can go against it, it does not make sense to focus on the few unlikely events that may ruin your plan. If you focus on what can go wrong, you will hesitate. You may unnecessarily question your plan. At the moment you are ready to execute your trade, a little denial helps matters. You feel carefree and ready to see what will happen next. Over the long term, however, denial does more harm than good. If you are trying to avoid monitoring your trading performance, you will always feel uneasy. You will secretly dread taking an honest look because you are afraid of what you will find.

It is hard to look at our performance when we think things are not going well. But if we do not, we cannot find ways to improve. It is all a matter of attitude. Winning traders carefully look at their performance. They view it as a process that may need fixing. Just as an auto mechanic tries to fix a broken car, the winning trader identifies what works and what does not. Rather than passively ignoring the problem, winning traders actively identify what is going wrong and make changes. They stay detached and look at their performance objectively, as if they are merely watching a television documentary.

If you have not looked closely at your performance lately, think about doing it soon. Keep a positive attitude. Do not look at it as a dreaded event, but as an opportunity for improvement. Do not be afraid of what you may find. If you do not meet your expectations, do not look at it as a failure. Just look at it as a type of objective feedback that you can use to improve your trading approach. Stay calm and upbeat. If you look hard enough and think about it enough, you will find creative ways to trade more profitably. And if you do not immediately find new solutions, it is much better to stand aside until you do, rather than keep losing money on strategies that just do not work. If you take an active problem solving approach to finding ways to improve your performance, you will eventually achieve profitability, and if you keep looking, studying, and changing, you will stay profitable across a variety of market conditions.

What is your bias?

In case you think you are capable of making a rational decision …

If you find it hard to sell a losing share, if you have a way of “just knowing" which ones are going to go up or down, or you would rather stick with those that “feel safe", chances are you are managing your money with your heart instead of your head. In which case you are prone to a number of psychological biases with the potential to really botch your decision-making. And because these are aggravated when your brain gets “overly excited", do not be surprised if you find yourself making unexpected investment decisions when you start to fret over market performance.

What are these emotion-based behaviours with the potential to destroy your investments?

You are probably aware of the more common ones, namely:

  • The so-called “anchoring" or “married" effect, where you become welded or married to an investment;
  • The confirmation bias, whereby you interpret information in a way that confirms your preconceptions;
  • Loss aversion, the fact that you would far rather avoid a loss than make a gain. (You know someone is suffering an extreme form of it when they tell you that they do not know how much they have lost because they cannot bear to look.)
  • The “endowment effect" whereby you assign a greater value to what you own than what you do not, irrespective of whether or not it is justified. As in: “I am all right, because I am in resource shares or blue chips."
  • Finally, there is the “overconfidence" bias, from which everyone who assumes they can beat the market undoubtedly suffers.

Unfortunately, these are just the tip of the iceberg.

Other biases include the bandwagon effect, hyperbolic discounting, the illusion of control, planning fallacy, selective perception, post-purchase rationalisation, status quo bias, zero-risk bias, choice- supportive bias, congruence bias, disconfirmation bias, impact bias, omission bias, outcome bias, contrast effect, and pseudo certainty, to name but a few.

We also suffer cognitive distortions. Chief among these: all-or-nothing thinking, over generalisation, mental filters, magnification and minimisation, emotional reasoning, personalisation (attribution) and a tendency to jump to conclusions.

Then there is the way we remember things. Memory biases either enhance or inhibit our recall or alter the content of what we remember. These include the bizarreness effect, classroom effect, context effect, hindsight bias and rosy retrospection, once again to name but a few. Besides all of which we're also prone to a “recency bias" whereby our latest memories of loss or prosperity become a guiding force in our investment decisions.

None of which is good news. Try as you may, you can never gauge the specific biases or distortions you are operating under since it is not possible to observe accurately a system we are part of. In any case, none of these biases are easily remedied, even by a psychotherapist.

Fear of success: You could well be sabotaging your own efforts

“Because success is heavy, and carries with it a responsibility, it is often much easier to procrastinate and live on the “someday I'll" philosophy." - Denis Waitley.Ask yourself the following questions:

  • Do you usually have trouble pulling the trigger and frequently miss big trades or investments that turn out to be winners?
  • Do you feel that there is a ceiling in your investing or trading?
  • Do you regularly make a specific amount of money only to find that you eventually give it all back?
  • Do you often find yourself making high-risk trades that seemingly go against the grain?

If the answer is yes to any of these questions, you may be subconsciously afraid of succeeding and, as a result, self- sabotage.

You cannot imagine being afraid of succeeding? Well, here is the thing, fear of success can be just as paralysing as fear of failure. It is not surprising. Success is not just about power and money. It involves change, making you vulnerable to new situations; it brings with it new challenges and responsibilities that might expose undiscovered weaknesses and flaws; you may not think you deserve it, or can sustain it; the recognition most of us crave is abhorrence to some.

The solution? Self-sabotage.

There are certain fields in which each of us believes we can excel and others in which we accept mediocrity. If the expectation of mediocrity is challenged, we are just as likely to sabotage our abilities to succeed as we are to rise to the occasion. People are driven to feel they can predict and control outcomes. So when their performance turns out to violate their predictions, it can be unnerving, even if the outcome is, objectively speaking good news.

In one piece of research with the University of Washington, it was found that those participants who thought of their capabilities as fixed were more likely to become anxious and disoriented when faced with dramatic success, causing their subsequent performance to plummet. Among those who believed they had improved, those with the fixed view became more anxious and performed worse on the subsequent test than those with the malleable view. Whereas, among participants who thought their performance had failed to improve, it was the malleable-view participants who grew anxious and underperformed compared to their fixed-view counterparts.

Consequently, it is believed that if people gain an understanding of how they perceive their abilities, as fixed or changeable, they can be made aware of the advantages and pitfalls of both perspectives. Which, in turn, may better equip them to adopt alternative theories to explain life's ups and downs. “Both approaches are highly intuitive and that makes them relatively easy to teach. If we can get people to change their underlying assumptions about their abilities, it may improve their performance.

Controlling fear

The markets are driven by fear and greed. When money is risked and can possibly be lost, it is natural to fear losing it. When the masses see any sign that the current price is going against their trading plan, they have a strong tendency to bail out quickly. But seasoned traders rarely act on their fear. Through experience, they have learned to control it. And through practice and concerted effort, you can too, if controlling fear is an issue for you. What is fear? Fear is an emotion that signals impending doom. When the human psyche perceives a threat to the self, psychological and physical assets are mobilised. The tendency to experience fear has biological and genetic bases. Fear can be very adaptive for survival, and is related to the fight-or-flight response. It is a very basic response that animals use to survive in the wild and it is controlled by very primitive parts of the brain. When harm is perceived, a wild animal must mobilise resources and make a quick decision to either fight the opponent or flee to safety. All energy is focused on the threat. Fear is almost instinctual, and if left unchecked, it can sabotage even the most fool proof trading plan. While fearful, it is hard to concentrate. All attention is mobilised and focused on the threat. When fearful, it is almost impossible to focus on scanning all possible options while in the midst of a trade. That is why it is crucial to control fear and prevent it from undermining a well-designed plan. Fortunately, there are a few key strategies that can be used effectively to control fear.

  • Manage Your Risk: It is very difficult to control fear when you have a great deal of money on the line. That is why most traders tend to risk relatively small amounts of capital on any single trade; they also use protective stop losses and have clearly defined exit strategies. Putting less money on the line with each trade is an effective way to decrease fear of losing money. Similarly, it is important to trade with money that you can afford to lose. If you trade with money that you badly need to pay basic living expenses, you will have a valid reason for fearing a loss. It will be difficult to fool yourself, so do not bother trying. If you cannot afford to lose your stake, build up your trading account balance and stand aside until you can calmly put a bet down without concerning yourself with the adverse consequences of a possible loss.
  • Admit Your Fears: Some people were taught as children to hide their fear, to pretend that they were courageous in the face of adversity. But trying to hide your fear often makes it even more difficult to control. It is better to just admit that you are afraid, and admit that there is, indeed, a good chance that you will lose money on your trades. You will find that once you admit the possibility of loss, you will feel much better, and control fear more easily. In his book, "Trading to Win," Dr. Ari Kiev offers a quick and sometimes effective way of controlling fear: Acknowledge that you are afraid and the feeling will pass. Refuse to acknowledge fear and it will perpetuate. So admit that you are afraid and the fear will disperse.
  • Know Your Personality: Humans differ in their ability to control the fight-or-flight response. Some people are easily frightened. Their nervous systems are rapidly aroused and once energised, it is hard to calm down. Other people are fearless. They tend to stay calm across a wide range of situations, even those that would frighten most people. It takes a lot to get their nervous system aroused and energised. It is important to know where you stand on the fear-tolerance continuum. If your tolerance for fear is low, it is going to be harder to control your fear than others, and you will do yourself a disservice by acting as if you do not have a problem with fear. It is essential to have a specific fear control plan. Those with a low tolerance for fearful situations may need to paper trade (i.e. practice on the Trading Simulator) until they master their fears. Others may need to seek professional help to learn structured techniques, such as systematic desensitisation. For others, it may be necessary to adjust one's trading strategy. One may be so prone to experience fear that it may be necessary to make only long-term investments, where quick decisions are less urgent. Or when trading in the shorter term, it may be useful to use the automatic settings on trading software (i.e. Alerts) to exit, or place specific orders with PSG Securities Ltd trader over the phone. Regardless of the strategy one uses, it is vital to gauge one's fear tolerance and take appropriate steps to compensate.

The big ego

We have all met people with big egos, and perhaps almost everyone suffers from a big ego occasionally. Life is often dull and dreary and it is fun to spice it up by dwelling on what we have accomplished and giving ourselves a big pat on the back for a job well done. But there is a vast difference between occasionally feeling good about what you have accomplished and having a big ego. People with big egos live to brag about how well they are doing. They cannot wait to tell everyone, or anyone, how successful they are and how much they have accomplished. They tend to "show off" and try to direct everyone's attention toward them. Is this a psychological problem? Yes. It may be a very common one, but it is a psychological problem, nevertheless.

What are the underlying dynamics of a big ego? People with big egos engage in what psychoanalysts call "reaction formation." They try to hide their true feelings by engaging in behaviour that exemplifies the opposite of what they actually feel. It is like being especially cool toward someone you are attracted to because it is too hard to admit that you like him or her. Sometimes, we just cannot face our feelings, so we do the opposite to "deny" what we actually feel. People with big egos have very low self-esteem and have a hard time facing it. So instead of merely admitting that they do not think well of themselves, they try to hide the fact from themselves and others by bragging about how great they are doing. In doing so, they never fully accept their shortcomings and never develop an honest and sincere high regard for themselves.

Few people have such rock solid self-esteem that they can avoid this dynamic psychological process of enhancing their social status by focusing on their accomplishments. If you are one of the lucky ones, who never bolsters his or her self-esteem by bragging about his or her accomplishments, that is great. But for the rest of us, it is hard not to want to feel like a big shot occasionally. It is not a good idea to leave a big ego unchecked, however. Having a big ego can adversely influence your trading. For example, you may be so concerned with needing to maintain bragging rights for your winning trades.

Who cares what they think?

A young trader mused about the seemingly low regard that common people hold of traders. In contrast to those who pursue traditional professions, such as lawyers, doctors, or accountants; traders are often seen as merely a bunch of hobbyists trying to make a few extra bucks in the markets. Most people think anyone can do it, as long as they have the time, money, and stomach for it. It is common to hear an acquaintance say, "Trading. I have always wanted to try it," but you rarely hear an acquaintance say, "Brain surgery. I am going to try that someday."

The traditional investment community does not give traders any more respect. Many brokers are happy to take their money from brokerage commissions, but behind their backs, many see traders as nonchalant gamblers or as misguided amateurs. And unit trust fund managers are frustrated that the masses cannot tell the difference between the traders, who they think are taking unwarranted risks by trying to profit from short-term volatility, and them. In the general public most see traders as reckless unrestrained pursuers of greed. Several trading coaches are quick to counter with, "Traders serve an important function: they provide liquidity." All these statements are true to some extent. Traders are not pursuing a traditional profession; you cannot major in short-term "trading" in business school, for example. Traders are gamblers who take risks that most would consider intolerable. Many enter the trading profession because they are a little more motivated by money than say a minister, social worker, or others who have taken a vow of relative poverty to help the greater good. And in their defence, traders do help regulate consumer prices by providing liquidity. But in the end, none of this really matters. You will find that seasoned traders do not concern themselves with such philosophical issues. They do not care what anyone thinks or how the greater society values their role or function. They love trading. It is a passion and a strong calling, as strong as any calling that draws anyone to pursue any profession. They really do not care what anyone thinks. All that matters is what they think. They know what they want to do with their time and energy, and that is all that matters.

Why are we so overly concerned with what other people think? In the corporate world, or while working in any large institutional setting, getting along with others is paramount. You have got to maintain your reputation. If people call you a "hot head," a "schemer," or "two-faced," it will impact your ability to get along with others, and successfully climb the corporate ladder. So keeping your reputation in check is part of survival. But traders work for themselves, and are only accountable to themselves. Observing what others think and maintaining a reputation is irrelevant. As a trader you must learn to abandon such social comparisons and attempts to protect your reputation. Top-notch traders are true individualists. They look inward for their own values to decide what they want to do. They do not care what other people think of them. They would be traders no matter what, even if the whole world unanimously agreed that trading was the noblest of all professions or everyone viewed trading as the prime example of vice.

The fact is that in the big scheme of things, most people are going to view working as a trader as hardly as noble as other professions. Let them think what they like. You are not going to change public opinion. So instead of worrying about what other people think, look inward. You are going to waste precious psychological energy by worrying about the legitimacy of trading or what they think of you for pursuing such a career. Save your energy for trading. Save your energy for pursuing what you really want to do. Enjoy trading and celebrate the fact that you have found your true calling.

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