Psychology Of The Winning Trader
by: Robert Paul Williams
It is said that nine out of every ten traders loose money. It is also said that day trading is seventy five percent psychology and the other twenty five percent divided up between your trading system and proper money management. Now I do not know if those facts are true or false. I have never seen a survey published on the topic, maybe someone can help me with that information, but let us assume that if it’s not absolutely true then it is nearly true. This would mean that most traders are lacking the proper psychology for trading.
Therefore we need to look very carefully at this business of our thought patterns, what we are thinking while we are trading. All our actions are governed by either pleasure or pain. Whatever we do, we do it to either to experience pleasure or escape pain. We have a need to avoid pain and a desire to gain pleasure. We need to do some introspection and decide what is it that drives us while we are trading, pleasure or pain. Do you jump into every trade even when the setups are not quite right because you just cannot stand missing the next big move, not having the pleasure of the winning trade. Fear will probably cause you to not enter trades when everything looks perfect because the chance of loosing money is just too much for you. So you sit there paralyzed, or you enter the trade but your stops are so tight you hardly ever make any money. Most traders I believe associate trading with pain. They are ruled by fear. The fact is that every trader looses money. It is part of the game. It’s how you deal with it that matters.
If we associate pleasure with every winning trade and pain with every loosing trade then our trading career will be an emotion roller coaster ride of up and down feelings. This is the very heart of the problem. Most of us are emotional traders. Our psychology has associated winning with pleasure and loosing with pain. The problem with this is that in day trading we will experience a number of winners and losers everyday. If you start the day with a couple of losers you will begin to hurt, which causes fear and when the next setup comes along your fear level is too high and prevents you from entering the trade, That trade just happened to be a winner and you missed it. Now you are really going to pieces. What can we do to overcome our emotions?
We have to change or psychology, change the associations we have formed of pleasure equals winners and pain equals losers. The first thing is to set goals for our trading and our goal should be consistent profitability. What are our monthly and our yearly goals? Use points or pips instead of money. Secondly, we need to know what is preventing us from achieving our goals. Is it fear of loses, incorrect position sizing etc. Look at what you are doing and why it is not working. We now need to break that pattern of behavior and install a new pattern. How do we do that?
Every trader needs to choose a few setups that they are comfortable with. Investigate the numerous different types of trades and choose a couple that you really like. Then you have to gather your historical data and you will need to advance the data bar by bar and test each setup. Take your number one setup, the one that you are most comfortable with and back test it with your data. You will need fifty to one hundred setups. With each one write down exactly what happens. Develop a set of written rules for entry and exit for the trade. Do this for all your setups. When you are finished testing each setup you will have data on the profitability of the trade. Now you must own the trade in your mind. You have tested it, now believe in it.
The next step is to paper trade the setups for a period of time. One month should be sufficient. Log every trade. Practice until you are automatically entering the trades as you see the setups almost without thinking. Your associations have now changed. Your thoughts are now focused on identifying a set of conditions that when they present themselves you act. You can now trade without emotion. Yours trades are proven winners historically and though you will have losses you know you are profitable. The psychology of trading has now changed from pleasure and pain to one of identifying setups and acting upon them without emotion. This process will guarantee a long and successful trading career.
About The Author
Robert Williams is studing for a career in day trading. He desires to share knowledgewww.allstarforex.com that he has acquired in the field with other traders.
