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Do Or Die

The Heck About Trading Psychology

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Well, Psychology is the scientific study of the human mind and its functions, esp. those affecting behavior in a given context. I always felt that psychology stuff is for dizzy eyed nerds who read through their thick glasses. Or maybe for unfortunate souls (psychologists) who get paid to listen and appreciate rants of the extremely disgruntled.

 

As a contrast traders are an awfully smart breed who can buy 10k shares faster than you blink. Traders tend to be aggressive and outgoing.

 

  Quote
The notion that trading is mostly mental/psychological is complete rubbish. A negative frame of mind can interfere with the best of skills and experience, but a positive frame of mind won't provide you with the pattern recognition skills and the conceptual integration to make the above trade. The way you learn short-term trading is by seeing one example of a pattern, after another, after another, after another.

 

Streenbarger said it on his very popular blog. He is (was) among the exceptional public guru whom I respect.

 

I would also like to quote him on trading personality traits:

  Quote
I commonly hear questions about which personality traits distinguish successful traders. My leaning is to question the premise; success in trading is probably far more related to talents, skills, and effort than personality features... different styles of trading--from market making in the pit and scalping to longer-term investing and pairs/spread trading--might be associated with different personality trait correlates of success. The search for a single set of traits to predict success is unlikely to bear fruit.

 

Okay, I do not intent to bash psychology stuff in the Trading Psychology forum. So I'm sharing here few resources related to approach and attitude which I found worthy of reading.

 

The Phantom of the Pits was the first book which really helped me regarding trading mindset.I skimmed through it and found the following chapters helpful:

4. Preparation for Trading

5. Rule One

6. Part Two

7. Trading with Rules One and Two

13. Behavior Modification

The Third Rule

 

The book is freely available on many websites on the internet because there are no copyright issues. You can also download from here: http://www.mypivots.com/articles/booktext.aspx?bookname=Phantom%20of%20the%20Pits

 

There was a research paper (which I'm unable to find now) which chimes with my observation about people turning into professional traders. What it suggests is that a relaxed attitude toward performance may be more helpful than a driven one: the highly achievement-driven trader may create his or her own internal noise, interfering with sound decision-making.

 

Having said that, for those looking for the 'psychological' aspects mostly discussed on forums like "sit tight on your trades", "follow your stop losses"; I would strongly recommend the book Behavioral Finance and Wealth Management by Pompian. Part-2 of the book contains a detailed review of the most commonly found biases (around 20). It is complete with general and technical descriptions, practical applications, research reviews, implications for investors, diagnostic tests, and advice on managing the effects of each bias. You can practically jot down a bias each time in trading diary whenever it effects you.

 

The last thing I would like to say is about a certain trait called "Locus of Control." It relates to everything worth achieving in life and not just trading.

 

People with internal locus of control tend to:

  • Show remarkably higher organization skills in their work/research. For example, keeping notes and PnL logs, learning from a experienced trader whenever they get a chance to, constantly looking to update their skills and so on.
  • Exhibit a hard work ethic to achieve skills necessary to succeed.
  • Are inquisitive as they figure out the whys of the markets.

 

People with external locus of control tend to:

  • Finding blame on things which they have no control (called Regret Aversion, infact they are prone to a lot more biases than the person with internal focus).
  • Inability to focus on task at hand exists.
  • Small set backs are seen as massive roadblocks.

 

 

Posting a comment will only take you 2 minutes, but it will be the strongest motivation for me to share something better.

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Dr. Steenbarger is a very nice guy...but human as are the rest of us, and his opinion doesn't jive with my experience.

 

What I see in my classes is that students seem to "get" the basic concepts quickly, but lack the confidence to pull the trigger....because they don't believe what they see on the screen...when this happens, what they experience is disappointment as the market pulls away without them...

 

As we do this on a daily basis, the student gets to see that once they have a decent understanding of what really moves markets, the only thing that stands in their way is their own mental attitude...as they see me take those entries, they eventually come to understand that

it is mostly about confidence, focus and discipline...

 

Clearly mental attitude is an important, and perhaps critical part of trading success.

 

Good luck everyone

 

Steve

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  Do Or Die said:
I always felt that psychology stuff is for dizzy eyed nerds who read through their thick glasses.

 

By your quote you seem to indicate that Dr. Brett also feels similarly. His quote, however, only says that it's rubbish to think that trading is "mostly" about psychology. Look at this video from him and you'll see he is quite attuned to the impact psychological traits can have on trading:

 

[ame=http://www.youtube.com/watch?v=f1wcDBJpxE8]Trading Coach Shares Views on Three Common Problems for Tra - YouTube[/ame]

 

I think that once a trader "knows how to trade," that the psychology then becomes important. A trader can get the basic concepts, which means little, because ANYone can get basic concepts after a while. The key then, IMO, is as Dr. Brett says, pattern recognition. Learning repeatable patterns and thinking in probabilities to realize that a certain percentage of those patterns will play out as they did previously leads to the possibility of exploiting that activity for profit.

 

However, putting too much focus on psychology before a trader has the experience in front of the screen to recognize those patterns can be a case of not making the best use of his or her time. In other words, when you have no freaking clue, then the psychology can actually distract from the real problem (that you have no clue and need to learn how the markets move). Perhaps this is what Dr. Brett means; it seems this way from my understanding of the quote.

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  joshdance said:
In other words, when you have no freaking clue, then the psychology can actually distract from the real problem (that you have no clue and need to learn how the markets move). Perhaps this is what Dr. Brett means; it seems this way from my understanding of the quote.

 

Precisely my point.

 

But what I see is people start talking psychology stuff to newbies who use RSI before trying to understand what internal relative strength means. The noob has no clue about MFE/MAE and he gets the goddamn advice not to become 'too greedy'; he is not told what exactly greedy means.

 

Say a person has learned enough to become profitable, or maybe has started recognizing his strategy edge. At that point it may be relevant to talk about psychology. In initial stages, I will advise reading material which DIRECTLY relates to practical trading from sources in article above.

 

Most stuff related to learning trading will be relevant (in general) to anything worth achieving in life. Winning attitude, discipline, focus (internal locus of control... and of course keeping away from biases I referred.

 

And regarding Mr. Brett, always keep in mind he is a public guru. He gets paid for talking about psychology. Howsoever honest a man he may be, he is likely to develop a natural bias to talk more than required.

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  Do Or Die said:
Well, Psychology is the scientific study of the human mind and its functions, esp. those affecting behavior in a given context. I always felt that psychology stuff is for dizzy eyed nerds who read through their thick glasses. Or maybe for unfortunate souls (psychologists) who get paid to listen and appreciate rants of the extremely disgruntled.

 

As a contrast traders are an awfully smart breed who can buy 10k shares faster than you blink. Traders tend to be aggressive and outgoing.

 

If traders are so smart, why do they lose so much money by making stupid mistakes? Certainly one of the reasons is that they let euphoria (when winning) take over and get aggressive and impulsive. Or let fear take over (when losing) and revenge trade.

 

Who in this forum feels "awfully smart" in their attitude that they bring to their trading day? And if they do, how long do you maintain the "awfully smart" mindset while trading?

 

I do wear glasses (fairly thick also) and I have blessed to help people built a psychology of success as a profession. Some of those people were in pretty rotten places when I met them and some of them simply didn't know how to move from their current "stuckness" to a higher functioning level. And some were either incapable of change or not willing to work for their change. Most are just "normal" people. "Normal" people have a near 50% divorce rate, 60% of the medications in their medicine cabinets are for managing despair and anxiety, and a vast number of "normal" people use Al, drugs, or behaviors to regulate anxiety. Translation: "normal" people are pretty messed up. That's "normal" for you. Not really a desirable place to be. We don't need to talk about "crazy" people - normal is enough of a problem.

 

These "normal" people would rarely consider outside help with their belief system because they have refuse to look inside themselves because they do not see how the brain/mind has confused the "feeling of certainty" with only their perception of reality. The biological foundations of the "feeling of certainty" trumpts the management of ambiguity every time unless the brain is trained to observe the assumptions that have become cast in concrete as beliefs. In trading this glitch is brought into hard relief in the profits and losses of the beliefs of "normal" thinking people confusing the feeling of certainty with risk management. Until this glitch is corrected, your trading account continues to drain.

 

Robert Burton, MD has written about this extensively in his book On Being Certain. I believe any trader who wants to develop his mind for trading needs to understand the concepts which this neuro-scientist possets in this book.

 

I have met very few people that comed equipped with a standard issue probability based mind. The brain is already biased toward the "feeling of certainty" when, if fact, life itself is pretty uncertain. We are possessed to produce explanations that justify our beliefs, no matter how ineffective they are. This is why there are so many psychological mistakes at particular moments in trading where risk and uncertainty derail what we thought was a logical mind.

 

What I do agree with is that looking at your psychology of performance (for most people) is not a great investment until they know how to trade. And they can trade their methodology well when real risk is not a component of trading. Moving to risk management exposes us to our bias toward the "feeling of certainty" rather than the psychological management of performance. If you have done this, good for you. And recognize that you are "abnormal". That is, you do not fit on the standard bell shaped distribution curve that would define the brain/mind that most bring to trading. You are several standard deviations away from normal (50 percentile) in a positive direction for trading.

 

The mindset you bring to the challenge of trading is what is going to bring forth the probalilty of what is going to happen. If the psychology isn't working, then I hope sane people decide to retrain the brain/mind for the new world of trading that they are now engaged in. The old mindset rarely works without work.

 

Rande Howell

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  Do Or Die said:
Precisely my point.

 

But what I see is people start talking psychology stuff to newbies who use RSI before trying to understand what internal relative strength means. The noob has no clue about MFE/MAE and he gets the goddamn advice not to become 'too greedy'; he is not told what exactly greedy means.

 

Say a person has learned enough to become profitable, or maybe has started recognizing his strategy edge. At that point it may be relevant to talk about psychology. In initial stages, I will advise reading material which DIRECTLY relates to practical trading from sources in article above.

 

Most stuff related to learning trading will be relevant (in general) to anything worth achieving in life. Winning attitude, discipline, focus (internal locus of control... and of course keeping away from biases I referred.

 

And regarding Mr. Brett, always keep in mind he is a public guru. He gets paid for talking about psychology. Howsoever honest a man he may be, he is likely to develop a natural bias to talk more than required.

 

Don't give greed a bad name.

 

Greed has created a lot of wealth for a lot of people. Only losers are affected by greed in a negative way.

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  MightyMouse said:
Don't give greed a bad name.

 

Greed has created a lot of wealth for a lot of people. Only losers are affected by greed in a negative way.

 

:rofl:

Thats the whole problem, no one bothers to say what greed is. People say stick to your trailing stop loss, don't be greedy tp book profits; if the MAE suggests otherwise it may be good to keep profit targets (be greedy as per that definition).

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  Rande Howell said:
If traders are so smart, why do they lose so much money by making stupid mistakes? Certainly one of the reasons is that they let euphoria (when winning) take over and get aggressive and impulsive. Or let fear take over (when losing) and revenge trade.

 

Who in this forum feels "awfully smart" in their attitude that they bring to their trading day? And if they do, how long do you maintain the "awfully smart" mindset while trading?

 

Let me make a correction. By 'Trader' I mean a professional or someone who intends to 'trade for a living'. Not the average joe who reads on the internet about chart patterns and tries his luck at daytrading.

 

  Quote

...Translation: "normal" people are pretty messed up. That's "normal" for you. Not really a desirable place to be. We don't need to talk about "crazy" people - normal is enough of a problem.

Lets get precise. There is heck of misinformation on the internet, media and everywhere which makes people with average IQ make stupid mistakes.

  Quote

These "normal" people would rarely consider outside help with their belief system because they have refuse to look inside themselves because they do not see how the brain/mind has confused the "feeling of certainty" with only their perception of reality. ...continues to drain.

Again, the problem is not about the mindset but misinformation.

 

  Quote

I have met very few people that comed equipped with a standard issue probability based mind. The brain is already biased toward the "feeling of certainty" when, if fact, life itself is pretty uncertain.

 

Again, its lack of information which feeds the 20 bias in the mentioned book by Michael Pompain.

 

I'm thankful for your detailed post... but my perception is different. It could be because I've spent so far time with people who consider trading as a career; while you've been with individuals.

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Rande:

 

The cartoon below depicts how the average joe gets involved in stock market. They are fed with misinformation and prone to biases. Someone who wants to take trading as a career or intends to 'trade for a living' will approach the markets differently (the 'trader' whom I was referring to).

stock-market.jpg

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  Do Or Die said:
:rofl:

Thats the whole problem, no one bothers to say what greed is. People say stick to your trailing stop loss, don't be greedy tp book profits; if the MAE suggests otherwise it may be good to keep profit targets (be greedy as per that definition).

 

Greed is deeply primitve survival emotion that motivated biological systems to take all they could get while the going was good because of their uncertainty about where or when the next meal was coming. It mostly alaigns with a fear in trading known as fear of missing out.

 

When psychology emerged, it then began to influence cognition. Greed, in itself, is neither good nor bad. It is simply an emotion that has surivival value. As psychological beings, we can have choice about where it takes us.

 

Rande

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  Rande Howell said:
Greed is deeply primitve survival emotion that motivated biological systems to take all they could get while the going was good because of their uncertainty about where or when the next meal was coming. It mostly alaigns with a fear in trading known as fear of missing out.

 

When psychology emerged, it then began to influence cognition. Greed, in itself, is neither good nor bad. It is simply an emotion that has surivival value. As psychological beings, we can have choice about where it takes us.

 

Rande

 

“Earth provides enough to satisfy every man's need, but not every man's greed”- Oscar Wilde

 

“Hell has three gates: lust, anger, and greed” - Bhagavad Gita

 

“Greed: A word commonly used by liberals, low achievers, anti-capitalists and society's losers to denigrate, shame and discredit those who have acquired superior job skills and decision-making capabilities and who, through the application of those job” rough the application of those job” -Neal Boortz

 

“We are all born brave, trusting and greedy, and most of us remain greedy.” - Mignon McLaughlin

 

"Three great forces rule the world: stupidity, fear and greed." -Albert Einstein

 

"Nothing makes us more vulnerable than loneliness, except greed." -Thomas Harris

 

"Calm self-confidence is as far from conceit as the desire to earn a decent living is remote from greed." --Channing Pollock

 

'From the first day to this, sheer greed was the driving spirit of civilization." -Friedrich Engels

------------------------------------------------------------------------------------------------------------------

 

The point I'm trying to make is most of psychological stuff is subjective and open to debate. The average people may not "come equipped with a standard issue probability based mind"; but it is the foremost requirement of trading. The form and magnitude or each upcoming move in market can only be based on probabilities; and never with certainty. But the media (including internet) gives a different impression to people. Analysts keep giving targets as if it is a prophecy. The general media does not encourages probabilities or factual conclusions but rather promotes theoretical debate.

 

Irrational Exuberance by Robert Shiller is an excellent read on how media promotes certain biases.

 

It makes sense but only after a person has achieved a certain skill level in trading.

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  Do Or Die said:
“Earth provides enough to satisfy every man's need, but not every man's greed”- Oscar Wilde

 

“Hell has three gates: lust, anger, and greed” - Bhagavad Gita

 

“Greed: A word commonly used by liberals, low achievers, anti-capitalists and society's losers to denigrate, shame and discredit those who have acquired superior job skills and decision-making capabilities and who, through the application of those job” rough the application of those job” -Neal Boortz

 

“We are all born brave, trusting and greedy, and most of us remain greedy.” - Mignon McLaughlin

 

"Three great forces rule the world: stupidity, fear and greed." -Albert Einstein

 

"Nothing makes us more vulnerable than loneliness, except greed." -Thomas Harris

 

"Calm self-confidence is as far from conceit as the desire to earn a decent living is remote from greed." --Channing Pollock

 

'From the first day to this, sheer greed was the driving spirit of civilization." -Friedrich Engels

------------------------------------------------------------------------------------------------------------------

 

The point I'm trying to make is most of psychological stuff is subjective and open to debate. The average people may not "come equipped with a standard issue probability based mind"; but it is the foremost requirement of trading. The form and magnitude or each upcoming move in market can only be based on probabilities; and never with certainty. But the media (including internet) gives a different impression to people. Analysts keep giving targets as if it is a prophecy. The general media does not encourages probabilities or factual conclusions but rather promotes theoretical debate.

 

Irrational Exuberance by Robert Shiller is an excellent read on how media promotes certain biases.

 

It makes sense but only after a person has achieved a certain skill level in trading.

 

There is a moment where greed can become tamed. It takes awakening from a stupor though. Most never learn and the one who do, learn after the price of greed comes calling for the price of its deal. I believe John Templeton, as did Wareen Buffett, found the balance between greed as an evolutionary based emotion and its value in a world beyond mindlessness.

 

There will always be a struggle within the self. This is where trading can become a rarified place to observe the destructive and constructive elements of our being.

 

Rande Howell

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Gold’s Outlook – Uptrend may continue, but US jobs data could trigger profit-taking. Always trade with strict risk management. Your capital is the single most important aspect of your trading business.   Please note that times displayed based on local time zone and are from time of writing this report.   Click HERE to access the full HFM Economic calendar.   Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding of how markets work. Click HERE to register for FREE!   Click HERE to READ more Market news.   Michalis Efthymiou HFMarkets   Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. 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    • Date: 31st March 2025.   Trump Confirms Tariffs on All Countries, Sending Stocks Lower.   The NASDAQ continues to trade lower due to the US confirming the latest tariffs will be on all countries. In addition to this, bearish volatility also is largely due to the higher inflation data from Friday. The NASDAQ declines to its lowest price since September 11th 2024. Core PCE Price Index - Inflation Increases Again! The PCE Price Index read 2.5% aligning with expert forecasts not triggering any alarm bells. However, the Core PCE Price Index rose from 0.3% to 0.4% MoM and from 2.7% to 2.8% YoY, signalling growing inflationary pressure. This increases the likelihood that the Federal Reserve will maintain elevated interest rates for an extended period. The NASDAQ fell 2.60% due to the higher inflation reading which is known to pressure the stock market due to pressure on consumer demand and a more hawkish Federal Reserve. Boston Fed President Susan Collins recently commented that tariffs could drive up inflation, though the long-term impact remains uncertain. She told journalists that a short-term spike is the most probable outcome but believes the current pause in monetary policy adjustments is appropriate given the prevailing uncertainties. Although, certain investment banks such as JP Morgan actually believe the Federal Reserve will be forced into cutting rates. This is due to expectations that the economy will struggle under the new trade policy. For example, JP Morgan expects the Federal Reserve to delay rate cuts but will quickly cut towards the end of 2025. Market Risk Appetite Takes a Hit! A big factor for the day is the drop in the risk appetite of investors. This can be seen from the VIX which is up almost 6%, Gold which is trading 1.30% higher and the Japanese Yen which is the day’s best performing currency. Most safe haven assets, bar the US Dollar, increase in value. It is also worth noting that all indices are decreasing in value during this morning's Asian session with the Nikkei225 and NASDAQ witnessing the strongest decline. Previously the stock market rose in value as investors heard rumours that tariffs would only be on certain countries. This bullish swing occurred between March 14th and 25th. Over the weekend, President Donald Trump indicated that the upcoming tariffs would apply to all countries, not just those with the largest trade imbalances with the US. NASDAQ - Technical Analysis In terms of technical analysis, the NASDAQ continues to obtain indications that sellers control the price action. The price opens on a bearish price gap measuring 0.30% and trades below all Moving Averages on all timeframes. The NASDAQ also trades below the VWAP and almost 100% of the most influential components (stocks) are declining in value.     The next significant support level is at $18,313, and the resistance level stands at $20,367.95. Key Takeaway Points: NASDAQ falls to its lowest since September 2024 as the US confirms tariffs on all countries, adding to inflation concerns. Core PCE inflation rises to 0.4% MoM and 2.8% YoY, increasing the likelihood of prolonged high interest rates. Investor risk appetite drops as VIX jumps 6%, gold gains 1.3%, and safe-haven assets outperform. NASDAQ shows strong bearish momentum, trading below key technical levels with support at $18,313 and resistance at $20,367.95. Always trade with strict risk management. Your capital is the single most important aspect of your trading business.   Please note that times displayed based on local time zone and are from time of writing this report.   Click HERE to access the full HFM Economic calendar.   Want to learn to trade and analyse the markets? Join our webinars and get analysis and trading ideas combined with better understanding of how markets work. Click HERE to register for FREE!   Click HERE to READ more Market news.   Michalis Efthymiou HFMarkets   Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.
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