Alerts & Commentary
Trading Psychology
Thanks to Leo for sending this excellent synopsis, by Price Headley, of the important themes in the book titled Mind Traps by Roland Barachand.
I have not read the book but the points summarized by Mr. Headley are largely excellent considerations and observations that could be very useful to all traders and investors.
I have entered comments where appropriate. Please comment or question if you have an alternative opinion.
Coach BD
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Hello Coach BD,
Although I’ve read this excellent book on trading psychology (Mind Traps by Roland Barachand and recommended by trading psychologist Van Tharp), I believe it is Price Headley who penned this excellent synopsis. Perhaps our Members will also find this book interesting reading:
Mind Traps focuses on how the average person tends to think, compared to how we need to think to make money over time in the markets. Here’s a summary of points that can benefit you as a trader:
1) Before entering any trade, you should consider the other side of the trade and state the reasons you would take the other side of the trade. This helps you objectively enter a trade with a full understanding of the major risks involved.
2) Analyze your behavior from the beginning to the end of the trading process (from idea generation to entry and finally to exit). What are the areas you can improve to help your trading profitability the most?
3) Keep a trading journal of your thoughts on open positions and new ideas. Writing things down helps you to look back objectively and see where you were right and where you were wrong.
4) Fear blinds us to opportunity. Greed blinds us to danger. Emotions cause perceptual distortion, where we see only the part of the picture that our beliefs allow us to see.
5) We are likely to continue doing things for which we are rewarded, which can cause us to act too bullishly, after the bulk of the uptrend has occurred, or become too bearish near the lows, when the bulk of the damage is already done.
6) Fear of regret slants stock market behavior toward inaction and conventional thinking. The person who is afraid of losing is usually defeated by the opponent who concentrates on winning. An analogy for sports fans is the Prevent Defense in football. Playing “not to lose” only prevents you from winning.
This is one point on which Mr. Headly, or Mr. Headley and/or Mr. Barachand, and The Trade Coach disagree strongly.
Trading and investing is not a competition.
There is not one winner for every loser in every trade. Contrary to popular belief, especially among inexperienced traders, there is not a person on the other end of every trade you make, especially in the options market.
In good markets, the majority of traders and investors can be winners, with only a few losers. In bear markets, the majority of traders and investors are losers, with only a few winners. This is not speculation… This is fact.
Trading or investing like it IS a competition is one of the surest paths to ruin. However, this is not the same thing as having a positive outlook and perspective with regard to your trades and evaluations. Doubt IS your enemy, so the rule to live by is…
“When in doubt, stay out!”
7) You cannot have a personal agenda to prove yourself in the markets. Your focus must be on following your plan strictly to maximize the potential to make money.
8) Do not get overly attached to any one view on a stock, or a market. Don’t talk to others about open positions, it only makes it that much harder to exit when your plan says you should.
The Trade Coach agrees with the first part of that thought. But strongly disagrees with the second part of it. Successful traders and investors almost always seek opinions from our colleagues, or other independent research opinions, about our trades and investments. This is a prudent method for testing your thesis and evaluation of specific trades. But we still must heed our trading rules for entry and/or exit.
9) Our predictions are only as good as the information available to us. Evaluate the data and indicators that you use objectively for the best results.
10) People prefer gains be taken in pieces to maximize good feelings about their abilities, while they prefer taking losses in big lumps to minimize the pain they feel about being wrong.
11) People prefer a certain smaller gain compared to the higher probability of a bigger gain, so they can say they made a profit. In contrast, people will speculate on the high probability of a bigger loss over a sure smaller loss because they don’t want to feel like a loser.
In trading, we must reverse that conventional emotion, allowing us to let profitable trades run, while cutting losses short.
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