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Online Trading : Psychology of Trading

Psychology of Trading: Online trading is a very lonely occupation, and there online stock tradingare many books written about the psychology of trading, mostly written by leading traders. Other than offering the usual clichés and sayings  and emphasising the need for hard work and discipline, not many if any, start with the premise that we should try to understand our own personality and temperament and how our own view of the world will help or hinder our trading.

This is one such site, and along with several other pages on this site, I am currently writing a complete web site dedicated to the subject which will cover the subject in much more detail. The following comments really serve as a basic introduction to this often ignored yet important area of trading - YOU!!

Psychology of Trading: Introduction

Let's start with a quote from Sun Tzu - The Art of War which really sums up the whole issue :

Thus it is said that one who knows the enemy and knows himself will not be endangered in a hundred engagements. One who does not know the enemy but knows himself will sometimes be victorious, sometimes meet defeat. One who knows neither the enemy nor himself will invariably be defeated in every engagement.

This is why so many people fail at trading. Not only do they not understand the markets and the enemy, but they also have no idea of their own personality. When coupled with the twin emotions of fear and greed in the market this becomes a powerful cocktail and will ultimately mean you will fail.

Psychology of Trading: Your Trading Personality

We are all born with certain personality traits. There are of course many ways to approach this subject, but for the purposes of trading I am going to focus on optimism and pessimism. Our personality traits are either suppressed or reinforced during childhood, when patterns of behaviour and belief systems are laid down. Typically this occurs over the first few years, and are set for the rest of lives by the age of seven. Understanding ourselves in terms optimism and pessimism should help us approach trading  with a detachment and objectivity necessary to succeed. Online trading is a complex activity where a broad range of information must be studied and integrated keeping up with news indicators charts etc. Logical analysis of the data is key to your success, but your judgement and conclusions will naturally be coloured and clouded by where you fit on this scale.

For example, if you tend towards a more pessimistic temperament, i.e. the glass is half empty, how will you be able to overcome this feeling which will reinforce the fact that you are not going to succeed in your trading. This therefore becomes a self fulfilling prophesy. Alternatively a very optimistic personality will have a strong attitude which is often accompanied with over exuberance, ill discipline and a possible lack of attention to detail.

The problem of course is twofold. Firstly we need to understand our own personality and to be as honest as we can in making an objective assessment. Secondly, we then need to put in place systems and methodology for our trading which have inbuilt mechanisms to regulate our behaviour so that it provides a more balanced approach. This is one of the key factors in developing a trading plan, which will put in place the framework for your trading, and hopefully iron out your traits to give you a better chance of success. Ironically your personality can also influence your view on which way the market is going. Pessimists will tend to always think that the market is going down, and optimists that prices will rise. In general you often find that those who like trading the short side of the market have a personality skewed to pessimism, and visa versa. Naturally what we need to achieve is a balance where we do not allow our personality to skew our judgement one way or the other. 

Coupled with our personality we then have a further layer of problems dealing with our values and our beliefs. If you refer back to an earlier page on the site, we touched briefly on risk, and our view of money. This again is a key issue which has to be tackled, as our core beliefs and values will inevitably structure our view of money, risk, and loss of money. All these areas are complex and I am developing a separate site which will give you much more information, and I hope help you to understand how important it is to understand your trading personality - understanding the psychology of trading, and yourself is vital if you are to succeed as an online trader.

Could I suggest you have a look at an article I wrote recently which is shown in full on the trading articles page, on just this subject - the psychology of trading.

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