Trading Psychology 101

Why Trading Psychology?

When it comes to any type of trading the way we think, when making an investment decision, is important to understand. Simply knowing yourself well enough to understand your motivators, emotions, and decision making processes is important to being successful. The simplest way to learn your habits is with a brief look at the psychology behind the trade.

Now we aren’t really talking about Freudian concepts that are mind-numbing and complex. We won’t be covering psychological jargon here.

Instead we are talking about simple concepts that will help you to: know yourself, understand your motivators, to find a winning attitude, to become a more effective learner, and in turn to become a better trader.

Getting to know ourselves is actually one area that many of us avoid. The idea is based in the, usually unfounded, fear that if we learn more about ourselves, we may just not like what we find.  If you want success as a trader though it is one area of great importance. Trading psychology will give you a start in knowing yourself better.

You will learn about the psychology of making decisions. With this information you are suddenly empowered to make decisions that will be successful, and also to avoid decisions that will bring certain failure. As it applies to Forex, trading psychology gives you one piece of the puzzle that will make you a more informed trader. In fact, without a basic understanding in this area, it is very likely that your emotions will rule you and your career as a trader will be a constant roller coaster of ups and downs.

Another part of the psychology equation is learning to like yourself, and to become committed to your own success. If you think about it for a moment, you cannot get along well with anyone who you are afraid to learn more about. You’re also not likely to work towards that person’s success (you’re actually more likely to sabotage the efforts of someone you don’t like). The same idea is true about you. If you don’t like yourself, then you may just be ensuring your own failure.

In short here are three basic areas of trading psychology we will cover (briefly) in this chapter, and reasons why you need a foundation in each area:

1. The Psychology of Decision Making – Understanding why we make decisions and what motivates us to do so will help us to make more informed trade decisions. It’s also important to understand how our emotions affect our decision making processes.
2. The Psychology of Winning – Learning to have a winning attitude, and to like ourselves, is a very important part of becoming successful (in any area).
3. The Psychology of Learning – Learning is important to success in any new endeavor. As adults we often back away when intimidated. We will cover the psychology of learning, and talk about ways to become better learners.

For now we won’t be covering anything in great detail. Instead we simply want to lay the foundations for a few concepts that may just revolutionize the way you think, and ultimately the way you trade.

The Psychology of Decision Making

Let’s start with decision making. Just how important is the decision making process to the way we trade?

To answer that question let’s talk about the word decision.

The simple truth is that there isn’t anything you do without making a decision first.  Absolutely everything you do requires the effort of deciding to do it. When you get out of bed in the morning, you are deciding to rise, when you make your morning cup of coffee you must decide to put forth the effort first. Even things as simple speaking or walking require you to make the decision to do so. There isn’t a moment in our lives when we aren’t making a decision.

You can’t even get off with “deciding not to decide”, since in doing so you are putting forth the conscious effort to make that decision. Even when within your own mind as you think – you are making decisions on how to direct your thoughts, how to mold an idea, and we decide how and when to direct and focus our attention.

Since we cannot “not decide”, and in reality are making millions of conscious, un-conscious, and semi-conscious decisions each day then it is then fair to say that:

Everything about us, including (but not limited to)

• Our Actions
• Our Attitudes
• Our Emotions
• Our Thoughts
• Our Imagination

are the result of our decisions and the ways in

 which we decide to focus our attentions towards

 or away from something.

This brings us to the psychology of decision making. The term psychology comes from the term pscyche (that is, our own combined mental and emotional makeup). The way we make any given decision, out of the thousands we make each day, is directly affected by our own psyche.

Every single person on the planet internalizes things differently. We have all had different experiences, we have different thought processes, and we all see things in slightly different ways. One image may represent something completely different to you than it does to your neighbor. If something influences our psyche (the way we view the world) then it also influences the way we internalize. The way we internalize information affects every decision we make.

To apply it to trading:

We cannot make a trading decision without our own psychology coming into play. Since we all make decisions differently, a trading plan (or system), that worked well for one person won’t always work well for another person.

The good trader is the one who can find a psychologically balanced approach to trading. They understand their own psychology well enough to develop a trading plan that fits with their psyche and decision making processes. They also develop ways to overcome their own temptation to second guess a trading plan and stick to it.  A well balanced approach to trading shouldn’t require a lot of work on your part. It should be quite natural to follow your own trading plan.

The Psychology of Success

The next area we need to cover briefly is the psychology of winning. In this case, the idea is quite simple; it’s all about your attitude, your perseverance, and overcoming obstacles.

Many of us have the innate ability to sabotage our own success. It isn’t always a conscious effort to say “I’m going to fail today”. More often it is a subconscious process of giving up when we don’t succeed right away.

Imagine for a second that the trading plan you’ve been working on for months isn’t working. You’ve worked hard, you thought you had it right, but you’re losing on a daily basis. Since it is based on a system of a very successful trader: obviously you’re not cut out for this and you should just quit, right? The answer to that question is, of course, no!

That is a losing attitude, and you’ll never succeed as a trader if you quit every time it gets difficult.

Let’s look at the aspects of a winning attitude instead.

It’s very likely that your parents (or someone else in your life) once told you that you can do anything you set your mind to. In many ways that is what a winning attitude is. It’s about making the conscious decision not to quit but to succeed. Once you’ve done so you become determined to win.

From there you’ll find:

1. Determination brings resourcefulness.
2. When you’re resourceful you become more innovative.
3. Innovative thinking brings us insight
4. Insight allows us to see obstacles and overcome them.

When you begin to apply this concept to trading:

1. You become determined to succeed and then you suddenly find yourself no longer following someone else’s instructions.
2. Your determination drives you to learn more, and create a trading plan that works for you.
3. Your innovation begins to bring insights into what works and what doesn’t and suddenly you find yourself going back and adjusting your plan.
4. With your adjustments in place you remove that obstacles and ultimately find success.

Of course the reality of it is rarely that simple. You may in fact have to rethink things many times before you ever succeed. But, with your determination to succeed, you just keep repeating the processes until you finally do win. It’s all starts with the psychology of success, which is really just determination to succeed.

The Psychology of Learning

The last area I want to cover is the psychology of learning. Without learning it is hard to find success in anything.

When you look at the world of Forex, it’s really like learning a whole new language. There are trading terms, financial/technical ideas and information, programming languages for trading systems, and the list could go on.

Worse than all the areas that need to be learned the terminology itself is really layered. That is, without an understanding of the basics, further learning becomes even more obscure. Any type of success would be difficult to find without a basic understanding, and without an in-depth knowledge, creating a trading plan that works becomes much more difficult.

Learning will help you to become a better trader. Not just learning the basics, until you have enough information to be mildly successful, but real learning and continued learning that will keep you moving you forward as a trader.

As adults we often get intimidated when presented with something so large. You ask one question, and then upon receiving the answer you suddenly find you have three more.

Then, of course, there is the embarrassing prospect of asking questions in the first place. Many of us don’t even bother to ask questions anymore. Possibly we don’t want to reveal our own ignorance, or maybe we just don’t know where to start. Asking questions is important, and whether you learn better by reading, talking, or trying something, it’s asking a question that facilitates the learning that will help you to get further.

If you look at the way a small child learns you’ll notice one big difference between them and you. A child doesn’t worry if a question will seem silly or stupid – they ask them anyway (and most of the time hundreds of questions a day). Because of this there is a big difference in the rate of learning between a child and an adult learner (the child learns at a much faster rate).

Here are some suggestions that to help get you started with learning.

1. Let Your Own Interests Guide You – You will learn at a faster rate if you find the material interesting. As you begin to learn, let that idea lead you to learn more in a single area. Getting a good knowledge of one area of trading will help to make learning other areas much simpler.
2. Ask Questions, Find Answers – Don’t be afraid to ask questions. There really is no such thing as a silly question, and with mediums like forums, help systems for your FOREX account, and others, there is no reason not to ask! Finding the answers to our questions helps us to further develop knowledge in any given area.
3. Expose Yourself to New Material Daily – Even if that paper on tomorrow’s trade predictions seems unintelligible because you don’t understand the terminology. Read it anyway! Exposing yourself to new material regularly will help you to begin to develop a better understanding. Keep a dictionary (or Google) on hand to look up terms you don’t know.

Real learning begins when we work at it. Don’t allow yourself to become intimidated or overwhelmed by the amount of material that needs to be learned. Simply work at it, and soon you’ll find yourself understanding more, and in turn absorbing new concepts at a much faster rate

Conclusion

Thus far we’ve actually covered a lot. We talked about why you should learn trading psychology, and then covered decision making, success, and learning.  At this point in the book it may still seem a little obscure, but you know have a basic idea of three concepts that will take you further in your career as a trader. By the time you finish this book it will become clearer how it all fits together.

For now, let’s move on to take a look at the psychology behind becoming a trader. Understanding your own motivations is important. In chapter two we will look at the reasons people trade. Put simply: why you trade is almost as important as how you trade.