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Applications of Trading Psychology

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Applications of Trading Psychology

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Novosibirsk + Siberia/Russia
Posts: 21 since Oct 2012
Thanks: 1 given, 22 received

Would like to define a few points about when psychology is applicable for traders and when it is not, because realized I never mentioned it before (and it's not mentioned too often in general as well), so wrote a short list of theses on the topic:

Psychology will NOT help if a trader doesn’t have solid, well developed and tested “edge” (a trading system, methodology). No way attitude and mindset can substitute the statistical advantage. It can even be dangerous if one relies on psychology without having a profitable system in place first.

So any trader who thinks s(he) needs psychological advice must first ask oneself: “do I really have a profitable method at my hands?” The answer must be absolute “yes”, which includes every detail of the tactics described in the form of rules applicable for any situation happening in the market, thorough back- and forward tests on simulated and live account with sample size, which is statistically significant and covers wide range of market conditions.

If you can objectively answer “yes” to the question above, but still are unable to consistently extract profits out of markets, then indeed you need professional advice, because the reasons for your problem might be the following:

a) past trauma of losing experience. Before finding a profitable method people often experience many defeats. I personally experienced dozens of defeats when newly developed or adopted system showed it’s flaws in real trading and had to be dismissed. This creates strong negative associations in our subconsciousness, which may paralyze our ability to make decisions and execute them properly. Psychologist may change that negative attitude in subconscious mind and correct the process of applying a trading method.

b) Discipline problems. People may have emotional traits, which are not very compatible with successful trading. Here we have the following possibilities:

1) train oneself so that emotional discipline and attitude changes towards which suits the successful trading routine well, or…

2) accept the fact one’s emotional constitution is incompatible with trading or investment activity and altogether drop this business. Which is perfectly fine, too. If one person is a great football player and another is talented artist it doesn’t make one of them better than the other despite the fast artist unlikely could compete for a ball or athlete could write divine poem.

c) Self-sabotage. Some people lose money in the markets, because subconsciously they think they don’t deserve winning. It is more common than many think (especially considering typical public image of Wall St. and it’s “sharks”) and is almost always very subliminal, far from “the surface” of our mind. We find those cases of self-sabotage due to one or another reason, correct them, which usually leads to dramatic changes in one’s professional growth (be it trading or any other activity).

Those are not the only, but the most popular areas where psychology is highly applicable and very useful to traders and investors.

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