While traders might give the impression that they have spent time and effort in becoming familiar with a particular market before gambling big bucks on a trade, often they are very much overestimated. Traders are, I am loathe to say, humans. And being human means they are being subject to the same emotional and psychological influences as you and I.
The psychological makeup of each trader has an enormous bearing on whether or not they achieve success in the marketplace, no matter what kind of trading they are engaging in, and so understanding the complexities of the human psyche at play is integral to ensuring a greater chance of success when trading.
Even the types of trader out there are broken down according to their emotional and psychological behaviours. Noise traders, for example, act impulsively and make irrational decisions influenced by fear and greed. They do not take into account advanced fundamental analysis of a financial asset, like fundamental traders would, for example, or sentiment traders, who undertake in-depth research and analysis to accurately predict a markets ‘mood’, but then trade according to their opinion of what that means. You then have traders who prefer taking the market timing strategy, which involves buying or selling based on predictive methods using economic data that forecasts the future price movement of an asset. These types of traders tend to be more organised, anxious and controlling than others.
Fear and greed are by far the two most influential emotions that can impact the trading psychology and influence performance – that goes without saying. Scientifically, these emotions have been proven to short-circuit and undermine the more complicated decision-making required when actively trading, driving the decision-maker to settle upon a decision without taking into account rational trading methodology, such as fundamental or technical analysis.
That’s not to say these emotions are necessarily negative or a bad thing for a trader – sometimes it can propel the trader to reach a decision quicker, and thus, reap the rewards sooner. There is also a line of argument of course that says no trader acts without greed; in fact, without it, one would get crushed when trying to day trade against the best online brokers. That being said, it is important to regulate this type of emotion, as being too greedy is the downfall of many inexperienced traders. What is required, is for a trader to regulate their trading psychology and manage one’s emotions when confronted with market-induced adversity. A certain ‘zen-like’ state of mind is needed when a trader is confronted with intense, fear-inducing market-related change or activity. They call it optimal trading psychology.
Understanding what motivates fear and greed can also give traders the discipline and objectivity needed to take advantage of others’ emotions.The ability to think quick, control one’s emotions, and act rationally is incredibly important if one wishes to succeed when trading. Some have taken to calling it ‘resilience’ in trading – a relatively new buzzword across the sustainability and education sectors. It describes the ability to observe and learn from an emotional experience in order to adapt to any situation, and it is particularly relevant to the world of traders.
According to the American Psychological Association, resilience is the capacity to “bounce back” from adversity, even if it “is likely to involve considerable emotional distress.” Traders will, at some point, lose money. It is inevitable. No one can be so lucky as to be on a winning streak forever. Therever, it is absolutely critical to one’s performance to be able to pick up and start again, despite incurring a potentially very heavy loss. For those traders who are sensitive to loss, there is no long-term hope for them. Improving one’s resilience, is therefore integral to trading success.
Traders are also influenced by a whole other host of emotions: Happiness, impatience, anger, desperation, pride, hope, boredom, frustration and more. Sometimes these emotions work to the benefit of the trader, sometimes they don’t. The good news is, there are definitive ways to monitor and control one’s emotions. Identifying your personality traits, developing (and sticking to) a trading plan, learning to become resilient, becoming adaptive, taking a break after a loss, and keeping a trading log are some proven approaches to doing so.
Be it that someone is trading to for income to support themselves, become wealthy, keep money safe or for entertainment purposes, it is very unlikely they are doing so to lose money. Trading psychology can most certainly determine the extent to which traders succeed, or fail, because innate human characteristics play an integral role in the success of a trade. Given that the odds are stacked against traders in the marketplace, with up to 80 percent proven to consistently lose money, it is advisable to try to develop an optimal trading psychology so as to have a greater chance of achieving predictable, long-term profitability.