The Psychology of Trading

If you've ever thought, "If I could only find someone who could teach me how to trade, I'd be set," then you're not alone. Unfortunately, there is really no such thing as an "trading school". While there are many courses you can do and books you can read, there is nothing that prepares you for the fact that, when you go into the market, it is really yourself that you are up against. Not the market, not the economy and certainly not other traders.

To grasp this fact is a necessary first step towards becoming a successful trader. It is to understand that, for the most part, the battle is within. And it is a battle that is played out between the two pillars of the human psyche, fear and desire.

The latter is what draws people to trading in the first place - the desire for wealth, success, financial freedom or whatever is the lure. These we readily acknowledge, for they form our more "acceptable" side. What we don't often admit to ourselves is the side driven by fear - the fear of doubt, of being wrong, of misjudging and, ultimately, the fear of loss and failure.

Yet it is between these two internal "energies" that we are continually pulled. And it is never just one or the other that is present, but always a combination  - sometimes desire prevails (and we feel free of the fear) while at others times the fear takes hold and clouds our judgement in a way that affects our capacity to achieve our desires. And, of course, trading amplifies this conflict like few other everyday experiences can.

This conflict usually gives rise to one particular outcome within yourself - that is, that you care. You care about your success, you care about your failures, you care about your future. Naturally - you're human. But even more than these generalized areas are the specifics we care about - our position on something (the market, for example), our perception of it and our mental and emotional response to it. We hang on to these, often times longer than we should, because one of the things we care most about is being right.

But you caring in this way puts you at odds with the market, because if there is one thing you MUST understand about the market, it is this - IT DOESN'T CARE. It doesn't care if you win, and it certainly doesn't care if you lose. More importantly, it doesn't care about your position on where it should go, when and why. That is the nature of the market - it doesn't care, it's impersonal.

So we have a situation where you're interacting with the market as a trader but operating on a completely different premise to that of the market. Basically, you care and it doesn't. Such incongruities rarely foreshadow success, and this situation is no different. To understand why, let's look at what we do when faced with such a significant gap between ourselves and our operating environment.

How we respond to this situation will depend on what we want from it. Clearly, in the case of the markets, we want a lot. Therefore, we're going to do our best to close the gap between ourselves and our environment in a way that, we hope, will give us what we want. To do this, either one of two things must happen - either we become more like the market, or we try make the market more like us.

Dispassionate logic would dictate that the former response would be more productive than the latter. Caring, however, does not easily give rise to such dispassion, and the more we care the more this is so. Whether we realise it or not we inexorably follow the latter path, and do so by "imbuing" the markets with our motives. Because we want it to move in a particular direction, it should. Because we need it to go up, it must do that as well. And sometimes it does, which only reinforces our flawed perception and delays our day of reckoning.

But it will come because between the two (that is, between you caring and a market that doesn't) there is an inverse correlation - the more you care, the worse you will do. And this works both ways - the more you care about EITHER winning or losing, the worse you will do.

Success, then, comes neither from caring too much nor from caring too little. Rather, it comes (assuming you have a sufficient grasp of trading's mechanical/technical aspects) from the place that lies somewhere between the extremes of desire and fear which, if given a name, could be called indifference.

What characterises indifference is not the absence of desire and fear. That is its simplistic interpretation which envisages some emotionless world populated by individuals bereft of character. In fact, desire and fear are an essential part of being human and are necessary for our survival - in many cases fear protects us from harm, while desire is what drives us forward to achieve our goals. No. Indifference is rather more complicated than that and could be seen as having two characteristics.

First, it is the absence of being pulled too far in either direction. That is, too far into the fear (which can be debilitating to our judgement) or too far into our desires (which can be equally blinding). Second, it is the ability to come back to our "centre" no matter how far away from it we might have travelled (and in trading, that can sometimes be a long way). It is when we get "stuck" at some point that the problems arise, as we're now unable to move on from a particular incident or our response to it.

In other words, indifference doesn't imply the lack of emotion. Rather, it is the ability to move on from it as necessary.

Developing this capacity for fluidity does not come easily - we all have places (be they emotional, mental or even "factual") that we like to inhabit, usually for longer than we should because we all want to be right. Moreover, it is something that cannot be made up, invented or contrived. Nor can it be acquired through books or courses. You either have it or, if not, you will have to let experience teach you how to find it (and that rarely comes cheap).

Either way, it's one of the central ingredients for success. Give some thought to your capacity for indifference before you decide to enter the market yourself, and consider whether trading with the assistance of an advisory service may be a safer alternative.

You can do this in one of two ways - either as a "passive" investor who simply trades the recommendations as they arrive, or as an "active" investor who studies the trades and understands the reasons why they were entered and exited. In this way, you will find the service's very generous with their knowledge as they explain their analyses, often in great detail.

And as you come to understand the technical side of trading from this relatively safe perspective, you will inevitably gain an insight into that other factor whose significance in trading should never be underestimated - yourself.