Psychology is an overused term. Really what it comes down to is that to be successful as a trader you need to have self-mastery (self-control) to trade a system with an edge and to achieve that edge. With that being said, there's usually personal development required to control natural impulses broadly related to fear and greed that can threaten impartial decision-making when our money is on the line.
When you find yourself a successful trader and you look back at the growth you've had you can see that you're a much different person than you were when you were starting out. Much more self-controlled. It's great to take time to reflect and appreciate that growth.
I've found that there's a succession of steps that takes place with our clients that we've seen emerge as a fairly common experience among all of them.
People generally go through 3 emotional phases:
a. unconscious competence (they don't know what they don't know)
b. conscious incompetence (they know that they don't know)
c. conscious competence (they have to think about what they're doing)
d. unconscious competence (they don't think about what they're doing).
There's an interesting phase that occurs between b and c. People go from a mentality psychologically of trying to collect all of the available information about trading into their library, and then realize that it's more about aligning something simpler from what they already learned (and usually used successfully in the beginning of their trading) with their personality type.
There's also a psychological shift that occurs with the math of trading, ie the probabilities and statistics of it all. They go from this "I used to be paid for working every 8 hours" to, "I sometimes lose money when I work 8 hours, and that's okay" mentality. Abandoning themselves to their model's money management is usually the biggest "psychological" hurdle.
One of the ways we encourage people to get through that phase earlier is to:
a. don't begin trading the model until you are 75% of the way into a known draw down cycle
b. don't trade live until you have a live/sim trading plan. When will you drop from live, to sim? How will you know when your model's edge has disappeared?
Like I said - a fairly commonplace experience...generally occurs in that 3-5 year "learning to trade" window.
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No matter how good a person is at some task, something will be their limiting factor. Most traders will think that it is their method, but it may be their psychology. If the trader keeps a log of their deadly sins, like did I miss trades, did I enter too early or exit too soon and so on, they can see if they are trading their method properly. If there are problems in these areas the trader needs to work on the human factors.
It is also worth knowing the ways in which humans tend to do well or badly. We have inbuilt limits as a species as well as limits as individuals. As an example, imagine that your charts are loaded with lots of indicators and ask if you sometimes fail to notice things in live trading that are obvious in review. Now watch this video and count the number of times the ball is passed between the players wearing white tops.
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One of the issues is that many do not have a good metric to determine what is "too early" or "too soon," for example. Many traders are flying by the seat of their pants, and have no real approach to understanding how markets work, or how to take advantage of that. So, they go into the day looking to figure it out as they go along; they are constantly flipping in their minds: long, short, long, it's going up, it's about to go down, nevermind, it's going up, .... then, as the market moves without them, an immediate hindsight bias kicks in -- "I should have taken that entry." In other words, every 30 seconds they see a potential entry into the market, but it's not a solid entry based on any real reason. So, they get the ability to be "right" in their minds no matter what happens. They feel that they saw it coming, even though they also saw every other possibility. This then turns into "I had a good read on the market, my head just wasn't in the right place." So, without ever considering (or maybe considering and then rejecting) the idea that they really don't know what they are doing in a systematic-enough way to profit from it, they immediately go to blaming their psychology. Which is sometimes the problem, for sure, but I just do not buy that 80-90% of traders really know what they are doing and can compete in the professional market, yet they are being held back by their minds. More than likely, they have both a lack of understanding about markets, AND mental/behavioral problems.
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Yes, but what is the reason for that action? If I tried to play golf, my actions would only be described as "crappy" because I have no idea how to even grip the club. And, my mental state is probably crap too, so I would get frustrated, and hit the ball even worse. But what is the source of the frustration, anger, impatience? For me in this scenario, it is rooted in the fact that I really don't know what the hell I'm doing. I have no approach to the game. Golf, to me at this stage, is "hit the ball." I'm not thinking strategy at all. But, after I have developed a fundamental basis to approach the game, and when I acquire some skill, then my negative thoughts or undisciplined approach to playing the game become the issue of focus. But until that time, it just doesn't matter that much, because I don't know how the game is played.
People with trading issues can probably fit into these 3 categories: little skill, great psychology; learned skill, but poor execution due to poor personal psychology; little skill and poor psychology. I hypothesize (with no intentions of experimenting) that most traders fall into the last category, not the second.
We each are unique, and must figure out (or let others help us figure out) what our primary focus needs to be.
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