Psychology in Forex Trading
We’ve covered the subject of the 3Ms many times – money management, mind and method. The money management aspect of trading, or position sizing was discussed in a recent article on this FXCC blog. Method, otherwise known as the strategy or technique you employ; mechanical, discretionary or a combination of both, will increasingly feature on our soon to be released strategies section. But what about the psychology of trading? We’re not talking how the big players create unfulfilled orders, or use submarine tactics ‘on the tape’ in order to fool the rest of the market participants primarily at their counter party level. The ‘healthy’ psychology of retail traders is a huge issue and yet is often over looked and demoted in importance past the other critical success factors of money management and method. Despite the many volumes of work created specifically for traders on the subject psychology remains relatively unexplored by retail traders.
As an experiment I cast an eye over a couple of the most popular trading forums this morning and quickly gauged that the distribution of the subject discussion is mainly centred on strategies. As an example on one forum there were circa 150 live members, 26 were viewing forex strategies and systems, 17 were viewing scalp and ‘mechanical’ systems, 33 were viewing technical trading software, 17 technical analysis, 21 trading resources and a techies help corner had 10. A total of 114 were perusing sections mainly concentrated on technique or method. In percentage terms the number is circa 76%. Looking at the psychology section there were 2 viewers and the money management section had 8. Combined this equates to less than 13%. If you read any respected trading author such as Mark Douglas or Dr. Van Tharp they’ll always be at pains to stress the huge importance of the mind in trading and yet a cursory glance at one of the most popular trading websites available reveals that the subject is for the most part totally over looked and under estimated. Why?
Perhaps the perception is that such a soft science has no part in the hard world of trading. When you contemplate the origins of trading it’s difficult to imagine a period of perhaps a hundred years back and the great traders of the day discussing re-setting your mind, or finding your equilibrium, “facing their inner fears”, or getting their work life balance correct. Similarly during the ‘loadsamoney’ big bang of the 1980’s visions of dedicated darkened chill rooms with rows of massage chairs playing whale music through the attached headphones in order to get traders mentally in the right place just doesn’t work and probably wouldn’t have worked for them when bottles of Bollinger and Perrier Jouet equally did the trick after a long day at work. The “work hard play hard” mantra of the 80’s-90’s left precious little time for reflection and still doesn’t to this day. Despite the fact that the human resources of the major banks’ trading subsidiaries have taken on board the importance of mental health and indeed regularly hold seminars on the subject this is worlds away from what the retail day trader requires.
The subject of psychology for traders has grown in importance in direct correlation with the exponential growth in home trading which is still in its infancy. Best estimates would suggest that the critical mass of home trading is still less then a decade old, extremes would suggest home trading is only as old as the Internet going mainstream in the public’s consciousness and use, perhaps 13-14 years. Therefore in an industry so young it’s hardly surprising that certain skills and success factors are lagging in recognition of their value. However, as with the growth in black box trading systems, the mushrooming of trading ‘psyche’ books has not helped the overall cause of assisting psychology to be recognised as playing a pivotal part in your trading success…
The word “fear” is a big seller in our industry, “how to conquer your trading fears” is a subject which has quite frankly been done to death and it’s questionable if printed volumes are needed to cover a word and symptom that can be easily addressed using, for example, the breakdown of the word used in a previous article of ours titled F.E.A.R. Unfortunately the habit and human trait of repetition and plagiarism is rife in the trader psychology business, the snake ‘mind’ oil for traders is just as readily available from on line ‘quacks’ as black box systems and holy grail strategies.
Now this article could not possibly cover all the important aspects of how to cope mentally with a trader’s personal development, it’d be an insult to our readers’ intelligence to do. Instead, from time to time, we may aggregate (with their permission) articles and or books you could purchase that in our opinion could help your development. Firstly, here’s a link to Brett Steenbarger’s articles and site. I discovered Brett’s work some time ago and looking back at his site recently, with a view to penning this article, it reminded me of the huge impact he made to my perceptions and overall the bottom line of my forex trading. Below is a brief quote from one such article which really resonated with me at the time, it still does. Why not take time out to read all of Brett’s work whilst you wait for those all important set ups? He has really paid it back and forward in sharing these invaluable thoughts and there’s precious little free education in our industry, certainly not of the life changing variety Brett offers..
“Back in 2004, I joined Kingstree Trading, LLC, a proprietary trading firm in Chicago. There, I had the good fortune to get to know and observe many successful traders at work. One lesson particularly stands out in my mind. A trader saw buying come into the market, and he quickly jumped on board. He saw that the odds of taking out a recent high were good, given the size of the buying. To his surprise, however, the trade stalled out before the target and reversed. He quickly exited with a tick loss. He turned to me and said, “I just paid for information.” When the market bounced higher a few ticks several minutes later, the volume was weak. No big players were taking the long side. He aggressively sold and quickly made a couple of points. He placed a good trade, and it didn’t work out. He didn’t view that as a threat, as a loss, or as a failure. He viewed it as information. The market was telling him that we weren’t going to take out the recent high.
How he entered the first trade and exited it and how he used the loss to prepare himself for the winning trade: *There* was a clinic in trading psychology. If your setups are valid, there are only two kinds of trades: Those that make you money and those that give you information.”
A Lesson in Trading Psychology
Brett N. Steenbarger, Ph.D.
www.brettsteenbarger.com
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