As a trader when we look at the market data. What happens next?
What goes on inside our heads?
There is no trading without an assumption, so we do our human things.
We start the idea generation process.
Very quickly, consciously or sub-consciously, we start constructing our biases and our biases help us to ascertain the market.
We start predicting the market. Then comes strategising, followed by action (trade).
Our trading position then resides in the realm of our inner balance of ‘fear and greed’. Will we close a position too quickly. Will we will hold on to it until the right moment, or will we hold on to it longer than needed and run in to losses. It’s all down to copinng with our inner fear and greed.
There’s a golden rule to remember here;
“There is nothing you know, that the market does’t already know”
It’s important to constantly remind ourselves of the risks that exist outside and within ourselves.
I would like to pre-warn my readers that this article is not intended for any particular trading strategies you can benefit from using ‘fear and greed’ but rather a monologue on the importance of ‘gate keeping’ and the sheer significance of these human emotions in trading. When controlled and used at will – these emotions can help us achieve the goals we are pursuing.
We can look in to some areas that are of high concern, but often neglected and not discussed by traders or in other words there isn’t much time allocated in a short day trading course to dive in to the psychological aspects of day trading.
I would let this discussion run slightly loose to uncover some psychological aspects, however in trading terms we are trying to learn about ‘risk management’.
To my great surprise – I see lot of the coaching today is done by handing out as short trading execution plans that are labelled as ‘success systems’ without any guidance on psychological aspects that come in to play. Human emotions play ‘the’ most important part in trading.
Be fearful when people are greedy, and greedy when they are fearful,
Fear and greed are the two most powerful human emotions, and according to Einstein the third one is ‘stupidity’. These are the two main forces of human nature responsible for all the prosperity and destruction in the world. Fear and Greed drive action. The greatest marvels and disasters in the human history are a result of these emotions – yet we are still unsure how much importance should be given to educate ourselves on these. In the instance of day trading when a trader learns to use these emotions correctly, they become better at ‘risk management’.
These are the emotions that drive us. These are the emotions used by smart corporations and marketers to influence the masses, and make them perform the desired actions. In marketing terms they are called ‘call to action’. In politics often referred to as ‘manipulation’. Just look at the political divide on the Brexit vote prior and post voting – its extraordinary.
Why Using A ‘Stop Loss’ Is A Good Idea
I am assuming you know what a ‘stop loss’ is and why traders use it. You can google it or read trading terminologies on wikipedia for all I care 🙂 You know what this blog is for by now.
I have come across many experienced traders who are teaching their students not to use stop losses. Which I strongly disagree to and here’s why; The reasoning presented in favour of not using stop losses is usually along these lines; ‘one can never tell how much a market will fluctuate’ or ‘one can’t get the full benefit of a trade with a stop loss’ or ‘stop losses lose more than what they make’ etc.
Here’s my view:
Often new day traders have a limited budget so they can’t afford not to have any stop losses, even if they did – they still don’t have the experience and full understanding of the market to know if a stock will eventually head in the intended direction. Stop losses may take out novice traders quickly and make them lose money but its part of the learning process and practice and experience as they grow, they can make better judgement.
Apply hard stop losses and lose limits to take maximum advantage
Using Fear: By using hard stop losses you can minimise your risk
Controlling Greed: Allow for a bigger margin to maximise your profit, whilst remembering to not go overboard with your upper limit.
Maximise Gains: You can maximise your gains by doubling or tripling your position when you see a strong move in the direction you anticipated – rather than trying to maximise your profit with your original position by waiting for too long.
Example: If you sell EURO/USD at 1.30 and decide a sensible stop loss at 1.33 and limit order at 1.21
Knowing Yourself And Finding Your Own Style
You can relate this part of the discussion better if you have traded in the past and have found a strategy that seem to work for some people and has not worked for you.
Did you wonder if there was anything wrong with your setup? – although you have correctly used all the rules laid out in a strategy, or you wondered – was it for your luck that didn’t play out the way your expected?
You should then be asking yourself if the strategy is suitable for you. There is no scarcity of trading strategies. There are thousands of them and a lot of them actually work.
Perhaps you have not taken the time to learn about yourself. Your own unique attributes. As a trader you must pay attention to what’s happening outside and around you, but equally important is to learn what goes inside you.
Winning and losing is part of the trading game, however knowing yourself better can help you overcome some of your trading difficulties. Whether you’re a quick or slow thinker, whether you jump to conclusions fast or take your time do things correctly – all of these attributes play a significant role. We must learn to step outside of ourselves to realise our strengths and weaknesses and seek to do the opposite.
Learning and educating yourself with the core principles of trading can help you become a better trader.