Trading and Psychology, What Traits Equate to Success?
Guest Post by Tom Cleveland of Forex Traders
Investors and traders alike are instructed early on in their training that success depends on three fey factors – knowledge, experience, and emotional control. While the first two items can be approached in a straightforward manner, the latter factor, the psychology of dealing with risk and reward when real money is on the line, is one of those “muddy snowballs” that no one quite knows how to handle or master in a step-wise fashion.
As a result, we listen to what is necessary to cope with the issue, but do we really “hear”? When we trade from our emotions and then ride a “loser” for all it is worth, we know that we have violated the cardinal rule of trading. Yes, we abandoned out trusted system, we cancelled our stop-loss order, and we were sure the fundamentals favored our position. The market, however, did not agree, yet we continued to hold onto our position, refusing to accept a loss until it was so large that we had to gulp and exit.
Sound familiar? Psychologists would tell us that investing has nothing to do with feeling like a loser, but everything to do with how we manage decisions related to risk and how we decouple that experience from the concept of loss. If we must view risk in a different way, then what characteristics support that type of thinking? Here is a brief list of psychological traits that successful traders possess:
1) How do you handle mistakes? If you were shamed early in life, then mistakes may threaten your personal sense of self. Successful traders understand that mistakes are part of the game. Mistakes do not reflect on your inner core. The errors are due to actions in the market. Your role is to accept them and adjust quickly, not take them personally. Learn from them, and move on;
2) How do you approach decisions? If you enjoy the intellectual challenge of interpreting the nuances of your trading system and how it applies to current market conditions, then you are a step ahead in the game. Focus on the components of the decision at hand, and try not to be overly concerned with the potential for loss;
3) How do you deal with denial? Some denial is actually good, if it allows you to concentrate on the decision in front of you, rather than become overly consumed by the fluctuations in the market. Your faith in your trading system and routine must trump any undue feelings of anxiety about what you may lose. Confidence will accrue if you follow your process;
4) Do you trade in isolation? Trading can be a highly individualized activity, leaving little room for diffusing emotional tensions. Studies have revealed that many investors handle the concept of loss better if they share strong emotional ties with another person. Having a reliable relationship bond with someone else can actually improve your creative activities by providing emotional support for you sense of self;
5) Lastly, do you feel like an outside observer? Many successful traders actually regard themselves as somewhat different than the general population, following the beat of a different drummer, so to speak. They have developed confidence in their own abilities, and, although they are not loners, they are not followers either. They have learned to trust their own judgment and display a modicum of skepticism.
