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10 Main Points on Trading Psychology (Part 2)

As most of you know, I strongly believe that psychology is a major part of this game. If you haven’t read the first six points, you can view them HERE. Trading is mostly mental, and we are all in it to make money. I have learned these main points from Brett Steenbarger and his book The Psychology of Trading. I love the book and highly recommend it to anyone who wants to make money in this game. It is a must read. 

Here are the last four points:

7.) People in general, and traders specifically, enact solutions as well as problem patterns. If a person was truly 100% dysfunctional, they would not survive. Most people have dysfunctional patterns, that are anchored to specific states, and exceptions to those patterns, that are anchored to different states. The challenge is, to identify these solution patterns that already exist, and learn to access them at the drop of a hat. This is the quickest way to accelerate psychological change. While executing great trades, realize what you are doing, and become highly aware of these situations. Once you capture the essence of what you are doing when you are at your most intentional, you will be much more equipped as a trader.

8.) Although emotional mind states are associated with distortions in the processing of market information and in trading, eliminating emotion is not necessarily the secret to improve trading. Just because you remove a negative, it does not create a positive. Traders should utilize emotional experiences to identify solutions and construct new positive patterns. The most successful traders have built their strategies off of well done research, but execute these strategies under specific physical and emotional modes. They are considered ‘attuned’ to the market, and become very sensitive to markers that change their patterns. Traders must experience significant emotion, but do not become lost in their feelings. You must use this emotion as another market tool, just as you use any other market data from your research.

9.) Success in the markets often comes from doing what doesn’t come naturally. It is human nature to over exhaust trends and expect them to climb into the future. It is natural to want to climb aboard high-momentum markets and seeming breakouts. It is easy to become committed to these positions, even in the face of evidence that they are not working out. Traders’ emotional reactions to the market, are how they think other traders are reacting  —which ironically, may be the worst way to play the life cycles of the market. When you are emotionally drawn to enter a roaring market, or to abandon a plunging one, it is often the point in which you need to put on a contrary trade.

10.) Trading success is a function of possessing a statistical edge in the markets and being able to exploit this edge with regularity. Trading failure is most likely to occur when you trade untested methods that possess no valid edge or when you are incapable of consistently applying edges that are available. Improving your psychology as a trader by itself will give you no edge in the market. Developing or purchasing a valid trading system will not make you a great trader by itself. The development of trading systems and the development of yourself as a trader must proceed hand in hand. You are only as good as the methods you implement and as your ability to implement those methods regularly. 

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