The psychology of trading

The psychology of trading. Apart from the fear

Investment in financial markets is one psychologically frustrating activity. We can have all the logic of ours and which, however, the market perform the movement you want (and worse, when you want). We must get used to generate a high tolerance to failure against losses and a not build us castles in the air when we are in a winning position. In general, the more frequent are our operational; more we will face against our own psychology. For those who do intraday trading (many fast operations to the end of the day not) keep any open operation) or swing trading (operations in a short period, usually of a) day a couple of weeks), is made absolutely indispensable to follow the famous three "em" of Alexander Elder: "Money, Mind, and Method".

Fear is a powerful motivator and a "healthy" emotion, to a certain extent. One thing people often do not realize when you think of the fear, however, is that fear is activated not only by the danger, but also for the opportunity to. The other side of the danger. And in fact, trading both aspects are inseparable.

As a result of this division, there are two types of traders, which are mainly motivated by the fear of losing an opportunity... and those who are mainly motivated by the fear of losing money.

Those who are afraid of losing money end up losing good opportunities, and those who fear losing good chances at the end lose because they come to the market when they should not.

In clinical terms, this situation of double aspect is called approach/avoidance and is one of the problems most stressful psychologically speaking that human beings face and that also manifests itself in the trading. Suffer from approach/avoidance is like driving with one foot on the accelerator and the other on the brake. The driver accelerates up to the red line, but not going anywhere.

It's like a double bind. Naturally, people try to avoid double links and however in trading we face it all the time. It is not surprising that the traders stress, even professionals.

The beginner traders worsen this approach/avoidance situation, focusing on one side of the coin, usually the reward. But when we do that, when we ignore the reality of the risk and we focus exclusively on the positive side of the market, we feel emotionally ambush if the market does not behave as we expected. This puts the trader in a cycle of endless hope and despair, or in the case of some traders, bloody fights without end on the market.

How do we avoid this problem?

There is no reward without risk. To balance the risk/reward equation we have to give the same level of attention to the risks that I incur to estimate the potential of reward. If we are able to maintain both possibilities in our minds simultaneously, the potential gains and potential loss, we will eliminate the possibility of being surprised by a nasty surprise, which is what feared in the first place. If we prepare for the loss in advance and manage the size of the position properly, most of the negative effect of a loss is reduced.

Therefore, it is essential to pay attention to both effects of the equation.