20131105

The Psychology of Trading (1)

"Making ONE winning trade is easy, being a consistent winner is hard"
Emotion plays a big part in every traders' heart. With a wrong mindset, this game of trading can make one loses a  lot of money. Psychology of trading is one of the most important aspect in stock trading. Some experts refer this to one of the M in the famous 3M (Mind, Money, Method). Yes, I am talking about MIND. We need to have a good mindset before we are going to buy stocks in stock market.

In this article I am going to share the powerful quotes from Mark Douglas, the writer of a really good book, Trading in the Zone. When I read the book last year, my attention was caught by the "Five Fundamental Truths" of Trading Psychology. Read this carefully and decide if this makes sense to you. I fully absorb the ideas of these principles and this helps me to be a better trader.
  1. Anything can happen - Simple translation: we have no control over the market. Accept this. So when the market is against you and you losses money, understand that you cannot blame the market. I repeat: we have no control over the market.
  2. You don't need to know what's going to happen next in order to make money - I used to see people predicting whether tomorrow the market will be green or red. This is rubbish! The fact is, we cannot predict anything. Sure we can analyse and guess, but we have to realize that we cannot predict the market, so do not waste your time giving prediction or believe in people prediction. Focus on your edge, ignore any attempt to predict.
  3. Wins and losses are random - This is about math lesson: probability and normal distribution. Understand that one day you win, the next day you can lose. What is important is you win in the LONG run. The sequence of winning and losing doesn't matter, what matters is you are winning over time.
  4. Your EDGE is nothing more that a higher probability of one thing happening over another - The edge is defined as the system and strategies you used in buying stocks and selling stocks. The definition is very broad and you have to find out your own edge. And by testing it for a long period of time, your edge must have a positive return in the long run (that is you are winning in long haul). Remember this: Your edge is no guarantee of a winning trade, just of winning over time.
  5. Every moment in the market is unique - Just because a similar trade/pattern won last time doesn't really mean that it will win this time. Treat every trade as unique occurrence you will see the truth of the trade without relating it to the what happened last time.
Trading Psychology

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