The Hardest Part of Trading

Don't Underestimate Psychology in your Trading

I know I sure did. I felt I was a "level headed" individual that did a great job at keeping my emotions in check in everything I have done in my life. Well let me tell you for some reason trading is different. I'd also have to admit that I was great at keeping my "outward" emotions in check. So I would appear calm and collected in difficult or emotional situations, but the emotions were still inside trying to cause me issues.

What Got Me to Focus on This

Last night I was looking through some Blogs that I don't normally visit. I was not really looking for anything specific and at the time I did not track these blogs as they did not seem to complement my trading style or needs. But I discovered a couple of comments that stuck in my brain about the "Pain of loosing Money"

1. For most people the pain of loosing is greater than the joy winning the same amount.
2. Making losses is painful enough. Especially if you knew better and could have avoided them.

I think point number one really speaks to why the "Fear of Loss" is such a big problem for new traders. People would rather "not loose" than "win" given a choice. While similar they are far from the same. Another way of saying it would be to give an example based on a running race. A similar statement would be one of the athletes in the race saying I don't have to finish the race in first place as long as I don't finish in last place. By not coming in last place, the athlete is not loosing.

How does This tie to My Trading

I can say that I had a big problem "over protecting" good trades where I would crowd the stop too quickly and placed it at break even just before the trade goes my way. Because of the fear of a winning trade becoming a loosing trade. When I have not even given the trade time or room to work for me. On the flip side, I had had no problem holding onto loosing trades, "Hoping" that price turns and the trade becomes a winner. Only just delaying the loss until the stop would get hit when I should be evaluating if I should be in the trade and exiting as soon as I determine the trade is not what I wanted. Or at a minimum, checking where the "tightest" spot I can place my stop that still allows the trade a small chance to turn into a winner.

For some reason this all came together as I reviewed Dr. Brett Steenbarger's recent Post. I followed the link to Dr. Bruce Hong's new Blog. While reviewing his posts on trading Psychology I came across his post on The Beginning: How memories are formed and it really struck home for me. Dr. Brett had spoke about the need for repetition to really learn or ingrain a habit into your brain to get to the point where you react the same way each time to the same event. While it made perfect sense to me, it never combined with my bad habits I needed to break.

My recent frustrations with my trading the last two days needed to combine with this information. The following quote from Dr. Bruce's post is what struck home for me:

"Good habits and skills take a lot of time, effort and repetition to acquire. But so do bad habits! They don't happen overnight - you have to really do a lot of work or repetitions in order to acquire bad habits! And once formed, they're in there forever!"

Still wondering what the big deal is?

I have "Learned" some very bad habits that are still appearing in my trading. They have surfaced with a vengeance these last few days. I'll have to correct these or I'll not be able to finish my transition to a profitable trader

1. I started by questioning my new signals as I was attempting to define a new trading edge.
2. while in simulation mode, If I missed an entry I would Sim a late entry as a lazy was to "log" the trade.

While these so called "late entries" were never profitable in my simulation trading, I keep taking them to log the trades. Then when I reviewed the trade log, I knew I could tell where I should have entered the trade. I think this has had the side effect of repeating a bad habit so much that it is too easy to fall back into this mode even when I know it has never worked.

What Does This Mean to My Trading

Simply put - Don't chase missed entries. Wait for the next entry. More often than not, the next entry will even provide a better entry price then "jumping on" late to a missed signal. This is my number one priority right now.

Technically I should never chase. If I'm following and "Trusting" my signals I should be catching several nice moves when they are offered. The only time I can allow myself a "late entry" is when price is coming out of congestion and is giving every sign that it wants to run away. Just don't force these entries.

Trade Wise, Trade Well
John