Trading Psychology and the Secrets to Success

Spread betting can severely damage your wealth. I know, I know…listening to someone reminding you of the pitfalls of betting is hard to take but anyone considering getting involved in spread betting should be forewarned of the potential hazards. First and foremost it is worth considering why spread betting exists in the first place. The answer is it provides speculators with greater leverage ie, the more right you are the more you win which is great but conversely the more wrong you are the more you lose.

In my opinion it’s how you handle loss that will define your long term success as a spread bettor. Bad trades can leave you feeling sick inside and hard done by. It is at times like this that you may be tempted to chase losses. Inevitably you go looking for an opportunity that you would have otherwise not considered and the likelyhood is any subsequent bet will be struck without due care and attention resulting in poor decision making. Okay, occasionally you may get lucky but I strongly recommend that at the end of a hefty reverse or sequence of losing bets you take time out starting by switching your laptop off. During this downtime review your losing bets and evaluate if they were placed using your trading knowledge and judgement and in hindsight would you have placed those bets again.

Listen, every bet isnt going to be a winning one, nor is every day, week or month. Judge yourself on your long term performance and do not beat yourself up having backed a few losers. If you cant find an event you have really strong views about, then don’t get involved, there is always another day. Naturally I’m dishing out advice I don’t always heed myself but in this case do as I say and not as I do!

The following are some valuable “nuggets” regarding trading psychology.  It’s my hope that one or more of these “nuggets” will help you better understand your own trading psychology and the importance of psychology in trading markets.

“I’d definitely consider spreadbetting but be aware the psychology is different so you really need the discipline to stick to your plan. Having stops and limits set out in stone before you place a trade is a good idea. Stops and limits can be raised IMO but never lowered. The main psychological issue is that you see it all 100% live – and early morning it can look very bad (big spreads which close later in the day), while if you are just starting out expect to see a red monitor with many red blips for the first few weeks as you are immediately down on your spread when opening new positions. It can be tempting to immediately grab profits if you see profitable trades retracing a little but this is a mistake and ultimately a costly one.”

Remember that becoming a profitable trader is a journey, not just a destination. The perfect trader does not yet exist. Try to become a better trader each day and enjoy the progress you make. Concentrate on learning the craft of technical analysis and on improving your trading skills, rather than focusing solely on the amount of profit or losses in your trading. Discipline when day trading is even more difficult to control -:

  • Congratulate yourself and feel good about a trade when you have done what you were supposed to do, according to your trading plan–regardless of the profit or loss on the trade.
  • Don’t get overly excited about the winning trades or too depressed about the losing trades. Try to maintain an even keel and a professional outlook regarding your trading.
  • Do not expect certainty in a trade. Keep the underlying cash to hand, and don’t panic into selling as soon as it goes red. The secret is to have loads more available cash in account than needed to cover the margin and stop position.
  • The pain of standing aside and missing a good trade that your method told you to take is much worse than the pain of losing on a trade that you entered and exited properly and according to your trading plan.
  • Your own life experiences shape how you think about trading. If your first experience with trading was a negative one, the odds are high that you will not trade in that particular market again for a long time–and maybe never. The psychological impact of loss and defeat can be much greater and last much longer than the effects of physical pain. If you were not defeated psychologically by a negative trading experience, then the loss does not have such a negative and lasting impact.
  • Your ego and winning can make you broke. Winning can create powerful emotions that distort reality. The more you win, the better you feel, and your ego takes over. Confidence rises but you then end up going back to square one. That’s exactly what’s happened last month. I became over confident after a run of wins, relaxed my defence and got hit. I lost a month’s profit to a single bad trade. The joy of winning is what gamblers seek. A gambler will lose as many times as necessary just for the thrill of winning once.
  • Always remember this: You are the sole person responsible for winning or losing in trading. Don’t blame the market or your broker. Losses are an opportunity to focus on whatever problem occurred during the trade. Don’t get caught up in personal denial.
  • A successful trader quantifies, analyzes and truly understands and accepts risk. Emotional and psychological acceptance of risk is what determines your mental state in each trade.
  • The market is not physical. It’s an amalgamation of the mindset of all trading participants. The daily tug-of-war between the bulls and the bears reveals what they are thinking on a daily basis.
  • Never buy just because the price is low, or sell just because the price is high. Never average a losing trade. Don’t become impatient with the market. Always have a good reason for initiating every trade. Remember, the markets are always right.
  • Traders need to listen to the market. To listen effectively to the market, traders need to know and pay attention to their trading methods, but also pay just as much attention to themselves as they pay to their charts and the market. The trader’s challenge is this: Learn who you actually are, and then consistently and consciously develop the qualities that allow you to trade well.
  • As traders, the more we can detach ourselves from the emotions of hope, greed and fear, the better our chances for trading success. Bigger bets are more emotional, ‘loss aversion’ causes us to concentrate on the possible loss instead of the gain… Why are there hundreds of good technical analysts but few good traders? Because they need to spend more time on their personal psychology than their analytical methodology.
  • As traders, the more we can detach ourselves from the emotions of hope, greed and fear, the better our chances for trading success. Bigger bets are more emotional, ‘loss aversion’ causes us to concentrate on the possible loss instead of the gain… Why are there hundreds of good technical analysts but few good traders? Because they need to spend more time on their personal psychology than their analytical methodology.
  • Market psychology is everything. The key with trading is to figure out which shares you believed other investors might consider best choices as opposed to the ones you favour. If everyone is already bullish on a share, its stock price could already be inflated and great care is needed. It is pointless buying at this stage as you have already missed the boat.

“If I had eight hours to chop down a tree, I’d spend six hours sharpening my axe.” – Abraham Lincoln 

I like this maxim, because it is similar to trading: Research and learning are very important. Preparation for trading takes much longer than executing and watching the trade.

As a ‘glass half empty person’ (in fact sometimes I cannot even see the glass) I naturally look for the downside in any potential trading setup before ever
considering any upside. Unfortunately, the market in this respect has far more patience than the majority of traders. There is an old saying that the market will do whatever it takes to drive the largest amount of traders crazy. Trends can persist as long as there are traders fighting them. Don’t fight the tape.

Individual “psychology” or mindset re investing is a fascinating subject -:

My father who has made a large amount in the Care Sector from a business started from scratch (recently sold to a Venture Capital group) has a very poor record of personal equity investing (without disrespect as he has achieved a lot in other areas). The same belief and great self confidence required to succeed in starting up and growing a business is not always conductive or translates to equity investment success.

So, by now you should have an understanding of spread betting, you’ve opened an account suitable for your needs and you’ve familiarised yourself with the rules but the key ingredient to being a successful spread bettor lies within. Adopting the correct pschology is absolutely essential and you must exercise extreme patience, discipline and caution as a spread bettor as each trade is like a bomb waiting to go off.

If you’ve had a bad day or a poor run of form please re-read this feature again, I truly believe that making money from betting is about minimising loss and you are more likely to lose when on tilt.