Trading Psychology -vs- Trading Methodological
Windowofworld.com – It is said that trading is 90% trading psychology and 10% trading methodological. Does this then imply that regardless of the trading method, a trader who has control over their emotional problems will thus become a profitable trader, or will it be impossible to ever control his emotions without applying a capable method?
The perspective of the trading method would suggest that not only these statistics are not the case – trade psychology does not exist. The trading method will determine profitability, and this will be done through: (1) the ability to understand the strengths and weaknesses inherent in this method (2) the ability to maximize these strengths and minimize weaknesses.
Viewpoint of the Trading Method
The psychology of trade has become so much discussed and promoted through books and consultants that it has become a very convenient rationalization and reason for losing. Why take responsibility for the lack of work ethics and trading without the concept of a plan, an honest assessment that will be a hit on a trader’s self-esteem when you can blame it on the psychology of trade alone?
The psychology of trade is something that is made by a trader from existing personality traits that were not originally related to trade, but the surface of trade without understanding methods. The result of the course is fear, but won’t this be a problem when doing something that is considered dangerous, and that is done without the necessary understanding and skills? Trading, with its inherent characteristics in accepting financial risk while participating in unknown results, is certainly dangerous, and thus more preparation and understanding is needed.
Consider a trading plan that has the following three types of arrangements: (1) the initial trade entry you are referring to (2) the first continuation used to enter a trade if you miss your initial entry, or you decide to want more confirmation because it is a counter trade (3) the second continuation which is intended as a trading addon arrangement, but it is also one last chance to enter trade.
You get an initial sales arrangement that triggers, but you don’t take trade = trade1. The trade breaks with the net and goes to what will produce a partial profit, and then before the price drops further, it traces back to the area where the sale was made. This price holds so the swing stays short, and from the handle of what is now resistance, you get the trigger for your first continuation setup BUT you don’t take this trade = trade2. Why not trade? You decide that after losing the initial entry that you have missed a trade; Your emotions and biases tell you that the step is too far. Once again, this trade broke cleanly, not only adding to the profit from trade1, but also giving a partial profit to trade2.
The price now consolidates between the lows and the price resistance that you normally use to keep it short if you have taken either the initial trade, or the first advanced trade. Instead of swinging flipped after consolidation, it keeps going down again, and with this continuation, your second continuation setting triggers = trade3. AND AGAIN – You don’t take trades. After all, if you don’t do one of the first two trades, how can you do this trade; maybe you are wrong when you think that step is too far to take trades, but of course that applies to traders3.
Like trade1 and trade2, trade3 is profitable trade. This swing has truly turned into a great step in the direction, with every break holding a weak retest of textbook examples of the strengths of your trading methods, but YOU have never entered a trade. You are going crazy! You get into this damn swing – you just can’t stand it anymore. Another retrace applies as a lower high. You don’t have an entry setting, but that doesn’t matter, the other three trades are profitable after being lower. Isn’t that interesting, the same emotion that won’t let you enter your trading plan, now forces you to take a non-planned trade.
Instead of trading you go to a lower low and to a profit, it instead goes to a higher low and then turns into an initial purchase. Bad has just gotten worse, you also don’t come out when the swing goes into buy. After what you went through to finally get into trading, you have to try and make it work, and after all the downward trends right? TraderA uses this initial purchase to exit a sale and profitable sales addon; they decide that they want more confirmation from the swing back before trading in the opposite direction. The first continuation setting triggers and lasts a long time, the swing has reversed, and this trade reaches its first profit target.
TraderB finally gave up and THOSE came out short, even though by losing two points, not one point intended, and without consideration of taking the next trading plan, the purchase continued first. These traders were carried out for the day, but at least they were right all along; the swing was too far to enter, and their fear was guaranteed that this was a lost trade that they were not supposed to enter.
Is this a trading method or a trade psychology problem? What message will TraderB take from what just happened. Will they take the attitude that they are not to blame, they just can’t trade because of the psychology of trade? Or will they admit that the method did indeed win, that the resulting loss was not a trading method, and even if it was, the loss would be offset by the previous winner. Will they admit that THEY made their worst fears come true and not only turned this into a losing trade, they also increased the size of the loss, and then avoided other winning trading methods.
Indeed, psychology is involved with what happens in the trade scenario described, but it is a function of the individual’s core personality, and will most likely be a problem regardless of what is being done; if there is a risk involved, there will be an emotional response. Thus, it is first necessary to separate personal psychology from trade psychology, and use this concept as an excuse for trading actions. Then, if the psychology of trade will be controlled, this will be done through the development and implementation of a proven plan that traders are willing to follow. Don’t trade with an innate reason to fail, you will lose before you start, and will continue to do so with continuing emotions to the extent that trading is no longer possible.