Psychology of Trading

“There is one peculiarity about mass psychology in that when you are in a bubble, you can’t see it. Bubbles are invisible when you are inside the bubble,” said the charming Jim Dines, of The Dines Letter

"Sell them and you’llbe sorry
Buy them and you’ll regret
Hold them and you’ll worry
Do nothing and you’ll fret"



While I believe risk control is the single most important factor in trading, it is related to the trade psychology.

It is the proper psychological state that gives you the discipline and mental state to control your trades. Risk control is simple but difficult to implement. To do it properly, one needs to be prepared psychologically.

No wonder top trading trainers like Van Tharp and Alexander Elder rate psychology as the number factor for success.

Van Tharp uses NLP (Neuro linguistic Programming ) to help you to trade. He believes that people are generally programmed to do everything the wrong way. They have internal bias that seems to lead them to do the exact opposite required for success. Many of the right trades are contrary to human instinct. His recommendation is to observe and emulate those who are successful. It is similar to what Anthony Robbins used for his self improvement techniques.

Elder uses Alcohol Anonymous 12 step approach to help his students especially those that has fallen into "addiction". A losing trader can get caught in a bad spiral, repeat the same mistakes mindlessly, loses control of all forms of money management and tries to recover his loses. He needs to be "sober" again and cured of his "addiction".

The most difficult part is to control the emotions of fear and greed. When you winning, you take profit prematurely. Even more difficult is when on a losing streak, you find difficulties to adjust, protect or even cut loss. Most big losses are the result of failure to stop the bleeding. This happened to me for 2 trades last year. I refused to get out of TBT and BSX. As a result, these were my biggest losses. It is not the result of my trading system but my poor discipline and emotional control. Fortunately, it was just 2 positions.

Therefore, I include "setting clear rules" as a cardinal law of my trading. I want to be alienated from any emotions of fear and greed.

If there is anyone in trouble, I highly recommend you read Alexander Elder book on Trading for a Living.

For serious traders, it is good that you read both the books to understand the psychology of trading.

If there is anything that can put you in the right mental or psychological state, it will be greatly helpful.