The Mental Aspect

This is a good place to talk about the psychology of trading. Typically, in the books it is talked about as “fear” and “greed”, and it’s true that these are probably the most powerful of the factors that you will fight, although other primal forces will try to change your approach and lead you to failure. The fact is that many otherwise sensible people find that are unable to trade following their own proven plans, because of the power of these primitive emotions.

It’s a battle that you must have with yourself. Even if you have practised with a free account, and tried to pretend that you were risking money, there is nothing that quite prepares you for the forces that you will feel when you risk actual funds.

Without wishing to sound too corny, fear is probably the most frightening emotion that a trader feels. It can hit you in several ways, and the most typical one is being scared of closing a position quickly and taking the loss. Unfortunately, doing this hits right at the confidence and self-worth level of an individual. You picked the bet, you entered it freely, and it’s gone the wrong way – what is wrong with you and/or your system? You know by now the answer is that nothing is (necessarily) wrong, and these things can happen. That doesn’t mean you don’t examine what you did to see if you made an error, but you certainly shouldn’t beat yourself up about it.

“Successful traders normally have sorted our their psychological issues and developed trading systems that work for them. They have a trading plan with defined trading goals and have worked on eliminating mistakes from their spread betting.”

Successful traders normally have sorted our their psychological issues and developed trading systems that work for them. They have a trading plan with defined trading goals and have worked on eliminating mistakes from their spread betting.

Fear can also undermine your winnings when you do have a good bet. You anxiously watch, and see that it moves into profit, and then get scared that it might go the other way. “A bird in the hand is worth two in the bush” you rationalize as you close your position, taking a small profit. Sure, that may be the right thing sometimes, but you should rely on your exit strategy, whether it’s a trailing stop or a target price, to close your bet, otherwise you risk missing out on all those bets that keep on going and make you a far better profit.

The most frightening way to feel fear while you are betting is, however, when your situation builds into a general panic from things not working out for a while. This can throw you into an emotional turmoil, making all your trades with your gut and not following your plan, which most frequently is a recipe for disaster. Hopefully you can then find enough courage to sign off and walk away before too much damage is done.

Having said that fear is a major problem, greed can also take a nasty turn. When compared with regular trading, it may be that greed is more to be concerned about with spread betting because of the leverage involved. The way it often manifests itself is that you have a run of lucky bets, and start thinking that you’ve really “cracked it”. A little at first, and then more later, you throw caution to the wind and start staking more than your plan should allow, eager to see the funds rolling in. If Lady Luck is particularly cruel to you, you will keep winning until the amounts are large enough to wipe out your account and possibly your house. The way out of this is to control the amount you’re betting, and honour your stop losses – always.

To prepare yourself for the mental aspects of spread betting you need to examine your own feelings realistically, and figure out how your emotions are going to affect your spread betting decisions, so that you can plan to overcome them. After all, spread betting is not difficult to understand, it’s simply numbers going up and down and you must jump onto the right side of the equation. Yet many would be traders have difficulty, and it’s usually because they have a run of losses. That’s not surprising, as you can do lots of things imperfectly, and if you are winning you won’t worry about that – it’s only when you are losing that the emotions can get out of control.

One of the problems is that you are reacting naturally, and nature lets you down. Your body releases all sorts of hormones which were very useful in the caveman days, but don’t have much of a place in the modern world. Specifically, when you’re losing money you release a hormone called cortisol, and that has effects on the way you think, particularly if it lasts for a long time. It has been blamed for ruining your analytical side and leaving you open to emotions, and also for making you recall negative events and looking on the dark side.

How you deal with that is one of the determining factors on whether you can become a good spread better. You need to understand that it happens, and can’t be helped, and learn to cut it off from your trading decisions. This is one of the reasons that no matter how many times you try spread betting on paper, as I’ll talk about in the next chapter, it’s never “real” until your money is involved.

If you are emotionally involved with your trade in any way, it will colour your actions. For instance, you may second-guess your stop loss and put it back, hoping that the share will start moving in the direction that you believe it should have. Before you know it, things have escalated and you can get overwhelmed. And you should never carry your emotions from one bet into the next, for example by thinking that you’re going to get even on this one just because you lost on the last one. Each bet stands on its own merits and can win or lose.

One aspect that is not often discussed is the fact that many traders and spread betters nowadays choose to do it from home, and it is a very isolated way of life. This in itself is not healthy, so I would encourage you to form friendships, whether online or at trading seminars, so that you can discuss common problems. And if you have a partner and are not alone in life, then you should involve them in some way, even to the extent of letting them know when you have losses as well as gains. It’s not healthy for your relationship to hide what you’re doing, especially as you may be fighting a bad mood if the day has not gone well, and your partner deserves to know that.

There are some ways to make it easier. Firstly, you should always have your trading account separate from your living expenses, and as detached as you can think of it. You need to aim for a clinical detachment, where you can say to yourself “Oh, interesting, that bet didn’t work out” and close it immediately, rather than thinking about the money. Remember (and this is one of the main psychological barriers) that some win and some lose. If you have a plan that is worked out so that you come out ahead on average, then you must rely on that and follow it through. We will look at forming a trading plan in the next chapter. It’s so easy to become involved in a particular loss, feeling that you did something wrong because it failed, even when you didn’t. That’s not to say that you should not look at your losses for mistakes, but even perfectly executed plans will fail to turn a profit on each individual bet, that’s just the nature of the markets.

This is probably also the place to warn you not to try and second guess your planned strategy. If you have sensibly prepared and tested it, and it is an overall winner, then it is almost fatal to your account to change it “on the fly”, thinking that you have discovered a better way. Any changes to your trading plan should be considered carefully, and not while you have your bets open. There will be more about trading plans in the next chapter.

By the way, if you think I’m winding you up and making far too much of this, I would encourage you to do some live spread betting before making a judgement. Everyone thinks they have control of themselves and their actions until they hit by a situation where the emotions kick in. The emotions you should especially watch out for are those that cause arguments with your loved ones, ones that involve you “rooting for” particular stocks or bets showing that you are getting emotionally attached, and feelings of helplessness. If you’re being overcome, close out your positions and take a break.