Trading Psychology

Your biggest enemy, when trading, is within yourself. Success will only come when you learn to control your emotions. Edwin Lefevre’s Reminiscences of a Stock Operator (1923) offers advice that still applies today.

  1. Caution.
    Excitement (and fear of missing an opportunity) often persuade us to enter the market before it is safe to do so. After a down-trend a number of rallies may fail before one eventually carries through. Likewise, the emotional high of a profitable trade may blind us to signs that the trend is reversing.

  2. Patience.
    Wait for the right market conditions before trading. There are times when it is wise to stay out of the market and observe from the sidelines.

  3. Conviction.
    Have the courage of your convictions: Take steps to protect your profits when you see that a trend is weakening, but sit tight and don’t let fear of losing part of your profit cloud your judgment. There is a good chance that the trend will resume its upward climb.

  4. Detachment.
    Concentrate on the technical aspects rather than on the money. If your trades are technically correct, the profits will follow.
    Stay emotionally detached from the market. Avoid getting caught up in the short-term excitement. Screen-watching is a tell-tale sign: if you continually check prices or stare at charts for hours it is a sign that you are unsure of your strategy and are likely to suffer losses.

  5. Focus
    Focus on the longer time frames and do not try to catch every short-term fluctuation. The most profitable trades are in catching the large trends.

  6. Expect the unexpected.
    Investing involves dealing with probabilities � not certainties. No one can predict the market correctly every time. Avoid gamblers� logic.

  7. Average up - not down.
    If you increase your position when price goes against you, you are liable to compound your losses. When price starts to move it is likely to continue in that direction. Rather increase your exposure when the market proves you right and moves in your favor.

  8. Limit your losses.
    Use stop-losses to protect your funds. When the stop loss is triggered, act immediately - don’t hesitate.

    The biggest mistake you can make is to hold on to falling stocks, hoping for a recovery. Falling stocks have a habit of declining way below what you expected them to. Eventually you are forced to sell, decimating your capital.

Human nature being what it is, most traders and investors ignore these rules when they first start out. It can be an expensive lesson.

Control your emotions and avoid being swept along with the crowd. Make consistent decisions based on sound technical analysis.

Good message, if only I could keep to it :slight_smile:

These are the perfect rules to live by as a trader!!! The message could really bring some success to someone who is methodic and responsible. I feel like a coward still, and I know I let my emotions some times run too wild! But I appreciate the message! I�ll copy and paste and print it out… let�s see if I pay more attention to it as than way I do start my diets every monday, failling miserably by 10 am! Thanks again!

Coffee and lots and lots and lots and lots of nicotine. Get your blood pressure checked regularly by your doctor…get in a fresh salad at least once a week…learn to do leg excercises sitting in your chair.

And oh yeah, don’t forget that there is a life outside of Forex.

I really appreciate the fact that well seasoned pros take time to share what they have learned to work. I am a fan of those who share their knowledge so that others may grow. Thanks for all the tips .I am going to read them over several times.

How about trimming your fingernails on a regular basis before you trade so you don’t chew them to the bone:( .


If you look like your avatar, what do you use to trim your claws? :smiley:

I have read so many brilliant pieces on trading psycology for the past eighteen months I have been trying to trade the forex and, basically, they all seem to say the same thing. But still I don’t seem to be able to overcome my emotions. I panic too much! I enter a trade and on any retacement I hop out with a loss and shortly after, the trend that I had identified will continue! Even today, it happened two times and it is becoming disturbing. Has it taken anyone else this long to overcome their emotions or am I alone? Can anyone help? Many thanks.

I think it all depends on the person for the time, however I won’t lie, I’m shy by nature, so right from the get go, my emotions were quite heavy in the market. In saying this, I was never confident whenever I got in a trade, in fact Hesitancy has been my main downfall. One time, I started shaking out of nervousness, I had to close the trade, it was too much emotionally and physically. In saying this, I can now trade with confidence and without a care if I lose. But, I had to go through alot, for me it was about facing losses head on, to the point of being comfortable with them. Of course experience, I feel is the only true way to get rid of emotions, reading something may tell you the problem, yet actually going through it I think is the only way to overcome it. You said you got early right, then the trend went in the direction your trade was in. For me, I just set the trade (put a stop) and pretty much occupy my time in other ways. Especially now, when I get in a big trade, if it is in my direction, I leave it, If it makes a slight dip, I know that I’ll try and take it way too early, so I’ll just take a breather, and check it laiter. Staring at the trade all day will only make me nervous. Of course I am a position trader. But the road was not green pasture believe me, In making mistakes, and taking losses, I’ve been able to overcome my fear. Of course I read material, and constantly study the market, but when it comes down to it experience is crucial. Hope this helps! Stay cool, Take it easy eh!

If you want to get some advice on the mental side of trading, next week on Thursday I’m hosting a conference call with Brett Steenbarger. If you don’t know who Brett Steenbarger is, check out [I]The Psychology of Trading[/I] and [I]Enhancing Trader Performance[/I] (the links go to my personal review of those books). He’s also a very active blogger and has written loads of articles that appear on websites and in magazines all the time.

One of the things I really like about Brett’s approach to trading psychology is that he doesn’t follow the standard line of emotions are bad and discipline at all costs. He’s a former therapist, so he takes what I think is a more practical approach to handling and using your emotions in your trading.

Brett doesn’t do these sorts of things all the time, and I know I’m really excited to hear what he as to say and ask him some questions. If you want details, click here.

WOW! Thanks for letting us in on this. I have read his first book (due for a re-read actually) and i am actually in the process of reading his new book. I personally spend loads of time reading through all his articles. The man truly is a master of his craft. In fact, he makes reference to you, John, in his new book and he seems to have a great deal of respect for you, which speaks wonders of your credibilty here on the forum.

Dr. Steenbarger’s work is truly eye opening and is completely removed from everyday trading wisdom that you can get anywhere. What the good Doc offers is unique and would be difficult, if not impossible, to find elsewhere. If i could get him to personally counsel me i would pay thousands for that experience. But since he does not provide services to individual traders i would gladly take the opportunity to be a part of this live conference call.

John, again, thanks a million for bringing these kinds of events to our attention.

Brett is a great guy. I’d come in contact with him through some work I was doing for another website. Knowing his experience training traders, I asked him to take a look at my book. He provided some great feedback and was instrumental in my hooking up with Wiley to get the thing in print. He also wrote the foreword as well, so I definitely have good reason to like him. :smiley:

You’re absolutely right. Brett’s approach to trading psychology is so refreshingly different. I was really amazed when I read his first book. When I read Enhancing Trader Performance a couple months ago, I was even more impressed. Literally, I was taking notes from just about the very first page!