Forex Trading psychology for investor

From A. Elder`s Book "Trading for a Living"

Do you really want success? Already for seventeen years I have had a friend with a stout wife. She dresses well and has been permanently on diet for the whole time I have been acquainted with her.  She says that she wants to lose her weight and does not eat cakes and potato, when she can be seen by other people, but I have seen more than once how she attacks this food with a fork in her hand in the kitchen. She asserts that she would like to be slender, but stays as stout as on the day when I met her for the first time. Why?

Immediate pleasure of food is more important for her than the future joy of improved health and lost weight.  My friend` s wife reminds me many stock traders speaking that they aspire to success, but instead continue making their operations by moment impulses, eager to get short-term pleasure of exciting participation in stock trading.

People deceive themselves and play games with themselves. It is rather bad to lie to other people, but if you lie to yourself, it is hopeless. Shops are full with nice diet books, but there are a lot of stout people around.

Psychology is a key moment

You can base your actions by fundamental or technical analysis. You can make bargains according to your guesses about economic or politic trends, use “inner information” or just hope for the best.

Remember, what you felt the latest time you filed an application. Were you excited and eager to play actively or did you feel fear of possible losses? Did you hesitate before taking the telephone receiver? When you concluded the bargain, did you feel inspired or humiliated? Feelings of thousands of stock players form enormous psychological flow, and the very flow makes the market move.

Emotional surfing

Most of the traders spend bulk of their time in search of a good game. As soon as they enter the market, they lose control: either groan with pain or smile with bliss. They skate the emotional surfboard and miss an element important for profit—control of their emotions. Their inability to control themselves leads to bad control of money on their accounts.

If your way of thinking does not correspond to the market, or you ignore changes in the crowd mass psychology, you have no chances to win the stock game. All professionals, who win, realize great importance of psychology for stock playing. All amateurs, who lose, ignore it.

My friends and clients who know that I am a psychiatrist, often ask whether my profession helps me in trading. A good psychiatrist and a good trader have one common feature. Both of them focus on reality, on seeing the world as it is. In order to have healthy life, you should live with your eyes opened. In order to be a good player, you should play with your eyes opened, see real trends and turns and not waste your time and energy for useless regrets and dreams.

You can succeed in stock trading only when you regard it as serious intellectual work. Emotional game is fatal. Insurance of finance management strategy will contribute your success significantly. A good trader controls his capital as keenly as a diver controls his air supply.

For What to Play?

The stock trading looks discouragely easy. When a beginning trader wins, he feels as a genius and a lucky guy. Then he undertakes a crazy risk and loses everything.

People trade for many reasons, partly rational and partly irrational. Trading lets them make a lot of money. Money means freedom for many people, although they often do not know what to do with their freedom.

If you can trade, you will set working hours for you, will live and work where you wish and never report to your superiors about your work. Stock trading is a striking intellectual sport - chess, poker and crossword simultaneously. Trading attracts people who are fond of puzzles.

Trading attracts risk-liking people and tears away those who avoid risk. An ordinary person gets up early in the morning, goes to work, enjoys lunch time, returns home to his beer and TV set and goes to sleep. If he earns some spare dollars, he will place them onto his bank account. A trader goes through awful hours and risks his capital. Many traders are one-loners denying reality of the present and striving for obscure future.

Self-realization

Many people have inner need to achieve their personal perfection, to reveal their talents completely. This need, together with enjoyment of trading and attraction of money, makes a trader resist the market.

Good traders are usually hard-working and smart people. They are open to new ideas. Paradoxical it may sound, a good trader` s goal is different from money making. His goal is to play well. If he trades properly, money comes almost automatically. Successful traders continue improving their skills constantly. To reach the limit of their abilities is more important for them than to make money.

A successful worker from New York told me that if he became half a percent smarter every year, he would have become a genius by the moment of death. His aspiration to improve is a trustworthy criterion of a successful trader.

A professional trader from Texas invited me to his study and said that if I sat across a table from him for a whole day when he gambled the stock, I would be unable to say whether he had won 2000 dollars or lost 2000 dollars. He reached such a level when a profit does not gladden him, and a loss does not upset. He is concentrated on playing properly and perfecting his skill so much, than money cannot affect his feelings.

The problem of self-realization consists in the fact that many people are inclined to self-destruction. Drivers prone to make accidents continue destroying their automobiles, while self-destroying traders continue destroying their accounts. The market offers unlimited opportunities for self-destruction, like for self-realization as well. The idea to bring out your inner conflicts into the market will cost you much.

Those traders who are not in peace with themselves often try to satisfy their contradictory desires through the market. If you do not know what you want, you will find yourself where you would never like to be.

Myth about Intellect

Losers prone to believe the myth about brains will tell you, “I have lost, because I did not know the secrets of stock trading”. Many losers fancy that successful traders have some secret. This fancy helps maintain the busy market of consultant services and ready trading systems.

A discouraged trader takes his cheque-book and goes to buy “game secrets”. He may transfer 3000 dollars to a con artist who offers a “reliable”, proved by the учзукшутсу, computerized trading system. When it is ended with self-destruction, he sends out another cheque for a “handbook” explaining how to stop being a fool and become a true initiate and winner by means of comparing Moon, Saturn and even Uranus positions.

Losers do not know that from the intellectual point of view stock trading is quite simple. It requires fewer abilities than cutting out appendix, building a bridge or fighting a suit. Good traders are often smart, but there are few intellectuals among them. Many have never gone to college, and some even have not completed high school.

Intelligent and hard-working people who have succeeded in their carriers, often go in for stock trading. An average client of a broker firm is 50 years old, he is married and a college graduate. Many have academic degrees or their own businesses. The two largest professional groups among them are engineers and farmers.

Why do these clever and hard working people lose the trading game? It is not intellect and not secrets, and in no way education that distinguishes winners from losers.

Myth about Insufficient Capital

Many losers think that they would succeed if they possessed more funds. All losers were withdrawn from the trading by a series of loss-making bargains, or by one, but extremely ruining bargain. When an amateur closes all currently loss-making positions, the market often reverses and starts moving in the direction the trader relied on before.  The loser is ready to beat himself and his broker: if he had kept afloat for a week longer, he could have made a small fortune!

Losers regard change of the market directions as proving of their methods. They earn, borrow or save enough money to open a new modest account. The history repeats itself: the loser is swept away, then the market moves in the other direction proving that he was right, but too late, the account is empty again. At this moment, the fancy emerges, “If I had had larger account, I would have kept afloat a little longer and won”.

The amateur does not assume that he will bear losses, and does not prepare for them either. The conviction that he has not enough funds is a trick allowing disregarding two unpleasant things: lack of discipline at trading and lack of realistic plan of finance management.

Myth about Autopilot

Imagine that a person unfamiliar to you comes to your garage and tries to sell you an automatic system for your car control. “Just pay several hundred dollars for a computer chip, install it into your car and stop wasting your efforts for control”, he says. You may have a nap in the driver chair while “the smart automatic driver” is delivering you to work. You will surely laugh at such a seller` s face. But will you laugh if he offers you an automatic system for stock trading?

Those traders who trust in the myth about autopilot, suppose that pursue of wealth can be automated. Some attempt to develop an automatic trading system themselves, others purchase it from specialists. People who perfected their skills of a lawyer, a doctor or a businessman give out thousands of dollars for preserved competence. They are governed by meanness, laziness and mathematic ignorance.

Earlier the systems used to be written down on paper pieces, now they tend to take form of copy protected disks. Some of them are primitive, some are very complicated and have integrated optimizers and rules of finance management. A lot of traders are in search of magic capable to turn several pages of computer code into endless stream of money. Those who pay for automated trading systems resemble knights of the Middle Age, who used to pay alchemists for a secret of turning base metals into gold.

Complex human activity does not let automate itself. Computerized training programs have not ousted human teachers, and accounting systems have not led to unemployment among accounters. Most human activities require experience in decision making, so machines and programs can help human beings, but not change them completely. So many buyers of these goods failed that they have organized Club 3000, named by the common price of such a system.

If you managed to acquire a really working automated system, you could leave for the Tahiti and spend the rest of your life in comfort and luxury with receiving endless stream of cheques from your broker. But so far it is only the software suppliers who manage make money by automatic systems. They have formed a small, but colourful domestic industry. If their systems worked, why should they buy them? They could go to the Tahiti and collect cheques from brokers themselves! However, every seller has a ready answer to it. Some of them assert that they are fond of programming more than stock trading. Others say that they sell a system just to gain some capital for stock trading.

The market changes each time and plays an automated system. The most restrictive rules of yesterday are working poorly today, and will surely stop working at all tomorrow. A trader in line can correct his methods properly, if he discovers alarm signals. An automatic system does not adjust to new conditions so easily, it is just destroyed in new conditions.

Air flight companies with autopilots pay high salary to human pilots. They do so, because people are able to cope with unexpected situations. When the body of a liner is damaged over the Pacific Ocean, or when fuel runs out over Canadian reservation areas, it is only the human being who can find an escape out of a crisis situation. Newspapers wrote about such situations, in both of the cases experienced pilots managed to land their planes safely, because they played by ear. No autopilot would have repeated it. To entrust your money to an automated system is the same as to entrust your life to autopilot. The first unexpected event will destroy your account.

There are effective trading systems, but people should keep an eye on them and correct every their decision. You must monitor the process yourself, and not shift your responsibility on a system.

Traders prone to the fancy about autopilot, try to go through experience of childhood, when their mothers would satisfy their needs in heat, food and comfort. Now they wish to lie on their backs again, watching profits flowing to them like endless streams of warm milk.

It is impossible to count on the market friendliness. It consists of tough men and women thinking about taking your money away, and not about pouring milk directly into your mouth.

Personality Cult

Many people allege that they aspire to freedom and independence. Nevertheless, when they find themselves in a pretty pickle, their opinion changes and they start looking for “strong government”. Traders in distress often seek for advice from various “guru”.

When I was growing in the former Soviet Union, children would be taught that Stalin had been our great leader. Then we found out what kind of beast he had been, but when he was alive, many followed the leader with a pleasure.  He made them free from the need to think themselves.

Small “Stalins” exist in every social group: in economics, biology, architecture, etc. When I arrived to the USA and took stock trading, I was amazed at the enormous number of people seeking for a teacher, their ‘small Stalin” in the market. The fancy that somebody else can make you rich deserves detailed consideration in this chapter.

Trading with Your Eyes Opened

Every trader must master three main components: realistic personal psychology, logical system of playing and a good plan of finance capital. These fundamentals are like three stool legs: if you remove one of them, the stool will fall together with a person sitting on it. Losers try to build a stool with one leg, maximum with two ones. Usually they concentrate on a trading system only.

Your game should be based on clearly determined rules. You should analyze the feelings which overwhelm you when you are playing, in order to be convinced that your decisions are logical. You need a capital management structure enabling you to keep trading in spite of any series of bad lucks.

Discipline

The market offers a great amount of temptations, like a walk in a treasury or in a harem. The market forms strong desire for new acquisitions and great fear to lose what you have. These feelings distort our assessment of opening opportunities and dangers.

After having won some profit most amateurs feel as geniuses. It is pleasant to feel so intelligent that it is possible to relinquish your own rules and win. Thus many traders give up their rules and come to self-destruction.

Traders acquire some skills, win, their emotions overwhelm them, and the traders destroy themselves. Many of them immediately try to take revenge upon the market. Plenty of examples of jumps from wealth to poverty and on the contrary are known. A distinguishing feature of a successful trader is his ability to accumulate wealth.

You should make your game as objective as possible.