Lesson 7: Trading Psychology 1. Psychological Training for Traders: ● The Secret to Success ➢ Entry, technical points -10%; A day trading system must include entry points or specific conditions that must be met prior to entering a trade. ➢ Financial Management -30%; Involves the planning, controlling, organizing and observing the financial assets properly to gain organizational goals and objectives. This can only be obtained with an effective plan and system. ➢ Strong psychological abilities –60%; ✓ Emotions can have a negative impact on your career as a trader. One must learn how to control one’s emotions. ✓ Awareness is power – become aware of all the biases attached to day trading. For example: Sensory Derived Bias, Avoiding the Vague, and Tangibility of Anticipation. Being aware of these biases can lead you to success or failure in the trading business. ✓ Learn Control Over: Stress, Mindset, Mastering Your “Edge” (advantage) ✓ Visit the Internet: the internet has a huge resource for helping you develop and understand all the psychological tools and abilities needed for conquering the trading world. ➢ Most traders focus on the first 10% Mastery of trade timing includes having powerful stratagems within one’s system to facilitate in calculations for the greatest trigger values for a trade validated by watchful and patient analysis. ● Stages of Development from Amateur to Professional; The first five skills that every trader from beginning to end need are: analytical skill, research, focus, control, record keeping. Mastery of these skills as part of your system will help you become a professional trader. ➢ Stage 1 Unconscious Incompetence ➢ Stage 2. Conscious Incompetence ➢ Stage 3. The Eureka Moment ➢ Stage 4. Conscious Competence ➢ Stage 5. Unconscious Competence
https://www.tradeciety.com/5-stages-of-profitable-trading/ 2. Market Psychology: ➢ Market psychology is the overall sentiment or feeling that markets and their participants experience at any particular time ➢ Price is a psychological event –a momentary balance of opinion between bulls and bears
➢ Patterns of price action reflect the mass psychology of markets and market participants ➢ BULLS - Looking for LONG trading opportunities; Associated with increased consumer confidence; Increased anticipation of future capital gains ➢ BEARS - Looking for SHORT trading opportunities; Associated with a general decline in the stock market; Transition from wide investor optimism, to investor fear and pessimism 3. Fear vs. Greed: ➢ The Self is made up of two primary emotions that affect our mental and behavioural state; ➢ What is Fear? – the emotion caused by the belief that something dangerous is likely to cause pain or a threat. ➢ Overcoming Fear: Four Trading Fears ▪ Fear of Losing ▪ Fear of Missing Out ▪ Fear of Letting a Profit Turn into a Loss ▪ Fear of Not Being Right By controlling our emotions and having a good system in place we can learn to overcome all of these fears. ➢ What is Greed? – the intense or selfish desire for something especially wealth or power. ➢ Overcoming Greed – Recognize, Stay with System, Always Stay with 1:2 or less ration. By controlling our emotion and having a good system in place we can learn to overcome our greed. ➢ Symptoms of Fear & Greed Fear and Greed Indexes like the one available on CNN rate how fear and greed are moving the market. -arousal of consequences to reduce negativity and increase positivity - hope - the idea of “free” - irrational emotions - override the rational decision making side of your brain 4. Common ways to lose: ➢ Missing trades –three types - Not focused –stay in the ‘zone’. Do not take trades whilst; being distracted, if you’re tired and/or over
emotional; Hesitating, especially after a loss; Creating trades that have no logic and ignoring trades that make sense (stick with your rules) ➢ Overtrading –never try to make up for losses, missed trades, or trade from boredom. Profits come from consistent and persistent action, not reaction; Trading against the momentum or trend –never try to pick tops and bottoms; ➢ Micromanaging trades –Don’t get out unless the trade hits your targets or stop. Let the trade run; Overconfidence –you don’t know where the market is going, the market is not always rational 5. Dealing with losses: ● Remember: ➢ Trading is about probabilities ➢ The market does not owe you anything...it doesn’t even know you exist ➢ Check -are you on a learning curve? ➢ Know your daily/weekly/monthly/yearly loss limits ➢ Every trade is a new trade & every day is a new day ➢ Learning never ends 6. Learning from Experience: ● After trading; - The best gift you can give yourself is being organized. Having a system for trading is great, but it will all be for nothing if you don’t have an equally successful organizational system. Keep a log and write down all key points and information. Also, I personally recommend keeping a working journal with you for you to write down things you need to remember in your day, things you learn from mentor, etc. Always carry this journal around, and you will never be lost. ➢ Review the trades you took and the reasons why you took them ➢ Keep a Log ➢ Entry and exit points ➢ Profit and Loss ➢ Mistakes made ➢ Reasons why you took the trade 7. General Trading Guidelines: ➢ Trade with the trend ➢ Enter at clearly defined technical levels ➢ Exit losing stocks at your stop ➢ Do not exit winning stocks too quickly ➢ Trade with amounts that you are comfortable with ➢ Avoid trading according to rumors ➢ Avoid trading in news ➢ Avoid trading during the first and last minutes of market hours