Weird Psychological Quirks That May Be Affecting Your Trading

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Options Broker 2020!
    Ideal for beginners!
    Free Demo Account + Free Trading Education!
    Get a Sign-up Bonus:

  • BINOMO
    BINOMO

    2nd place in the ranking!

3 Psychological Quirks That Affect Your Trading

The most troublesome problems we face as traders are the ones that we don’t even know exist. Certain human tendencies affect our trading, yet we are often completely unaware they are affecting us and our bottom line. While there are many human tendencies, we will look at three that, if not managed, can block the road toward achieving our financial goals. (See also: Behavioral Finance.)

The Enemy We Don’t Know

When dealing with trading in a technical way, we can see where we erred and attempt to fix it for next time. If we exit a trade too early in a move, we can adjust our exit criteria by looking at a longer time frame or by using a different indicator. However, when we have a solid trading plan and are still losing money, we need to look at ourselves and our own psychology for a solution. (For more, see: Stimulate Your Skills With Simulated Trading.)

When we deal with our own minds, often our objectivity is skewed and, thus, cannot properly fix the problem; the true problem is clouded by biases and superficial trivialities. An example of this is the trader who does not stick to a trading plan but fails to realize that “not sticking to it” is the problem, so he continually adjusts strategies, believing that is where the fault rests.

[Sticking to your trading plan can test your resolve, but you have a better chance of success if your approach is based on a solid technical framework. To learn more about the essential tools and indicators for building a profitable trading strategy, check out the Technical Analysis course on the Investopedia Academy, which includes over five hours of on-demand video content.]

Awareness Is Power

While there is no magic bullet for overcoming all of our problems or trading struggles, becoming aware of some possible base issues allows us to begin to monitor our thoughts and actions so that over time we can change our habits. Awareness of potential psychological pitfalls can allow us to change our habits, hopefully creating more profits. Let’s look at three common psychological quirks that can often cause such problems.

Sensory-Derived Bias: We pull information from around us to form an opinion or bias, and this allows us to function and learn, in many cases. However, we must realize that, while we may believe we are forming an opinion based on factual evidence, often we are not. If a trader watches the business news each day and forms an opinion that the market is going higher, based on all the available information, he may feel he came to this conclusion by stripping away the media personnel’s opinions and only listening to the facts. However, this trader still may face a problem: When the source of our information is biased, our own bias will be affected by that.

Even facts can be presented to give credence to the bias or opinion, but we must remember that there is always another side to the story. Furthermore, constant exposure to a single opinion or viewpoint will lead individuals to believe that that is the only practical stance on the subject. Since they are deprived of counterevidence, their opinion will be biased by the available information. (See also: Is Biased Investing Holding You Back?)

Avoiding the Vague: Also known as fear of the unknown, avoiding what may occur, or what is not totally clear to us, prevents us from doing many things and can keep us locked in an unprofitable state. While it may sound ridiculous to some, traders may actually fear making money. They may not be aware of it consciously, but traders often worry about expanding their comfort zone or simply fear that their profits will be taken away through taxes. Inevitably, this may lead to self sabotage. Another source of bias may come from trading only in the industry with which one is most familiar, even if that industry has been, and is predicted to continue, declining. The trader is avoiding an outcome because of the uncertainty associated with the investment.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Options Broker 2020!
    Ideal for beginners!
    Free Demo Account + Free Trading Education!
    Get a Sign-up Bonus:

  • BINOMO
    BINOMO

    2nd place in the ranking!

Another common tendency relates to holding onto the losers too long while selling the winners too quickly. When prices fluctuate, we must factor in the magnitude of the movement to determine if the change is due to noise or is the result of a fundamental effect. Pulling out of trades too quickly often results from ignoring the trend of the security, as investors adopt a risk-averse mentality. On the other hand, when investors experience a loss, they often become risk seekers, resulting in an overheld losing position. These deviations from rational behavior lead to irrational actions, causing investors to miss out on potential gains due to psychological biases. (For more, check out: Understanding Investor Behavior.)

Tangibility of Anticipation: Anticipation is a powerful feeling. Anticipation is often associated with an “I want” or “I need” type of mentality. What we anticipate coming is some time in the future, but the feeling of anticipation is here now and it can be an enjoyable emotion. It can be so enjoyable, in fact, that we make feeling anticipation our focus instead of achieving what it is we are anticipating in the first place. Knowing that a million dollars is going to show up on your doorstep tomorrow would create a fantastic feeling of excitement and anticipation. It is possible to become “addicted” to this feeling and thus put off taking payment.

While easy money delivered to the door is more than likely to be grabbed by the eager homeowner, when things are not quite as easy to come by, we can fall into using the feeling of anticipation as a consolation prize. Watching billions of dollars change hands each day but not having the confidence to follow a plan and take a chunk of the money can mean we subconsciously decided that dreaming about the profits is good enough. We want to be profitable, but “wanting” has become our goal, not profitability.

What to Do About It

Once we are aware that we may be affected by our own psychology, we realize it may affect our trading on a subconscious level. Awareness is often enough to inspire change, if we do in fact work to improve our trading.

There are several things we can do to overcome our psychological roadblocks, beginning with removing inputs that are obviously biased. Charts don’t lie, but our perceptions of them may. We stand the best chance of success if we remain objective and focus on simple strategies that extract profits from price movements. Many great traders avoid the opinions of others, when it comes to the market and realize when an opinion may be affecting their trading. (See also: How Market Psychology Drives Technical Indicators.)

Knowing how the markets operate and move will help us overcome our fear, or greed, while in trades. When we feel we have entered unknown territory where we don’t know the outcome, we make mistakes. However, if we have a firm understanding, at least probabilistically, of how the markets move, we can base our actions on objective decision making.

Finally, we need to lay out what we really want, why we want it and how we are going to get there. Listen in on the thoughts that run through your head right when you make a mistake, and think about the belief behind it – then work to change that belief in your everyday life.

The Bottom Line

Our biases can affect our trading, even when we don’t think we are trading on biased information. Also, when an outcome appears vague, we err in our judgment, even though we have a conception of how the market is supposed to move. Our anticipations can also be deterrents from achieving what it is we think we want. To aid us in these potential problems, we can remove biased inputs, gain more understanding of market probabilities and define what it is we really want from our trading. (For additional reading, see: Measuring and Managing Investment Risk.)

Weird Psychological Quirks That May Be Affecting Your Trading

Usually we convince ourselves we are acting logically, and making the best choices. This convincing actually allows us to function in the world, because if we fully realized what we are doing at all times we’d drive ourselves nuts and probably get very little done. A little bit of self deception, it would seem, is necessary; it is impossible to be totally honest with ourselves all the time. But trading is one area where this self deception, or things hidden in your psyche, can hurt our performance. Here are a few obscure human quirks which may be affecting your trading.

Law of Consistency

People tend to remain consistent with past statements or actions. Past behavior sets a precedent for futures behavior, even if isn’t in our best interest. If you skip a trade once and publicly stated that you didn’t like the set-up, then chances are you will continue to skip that type of trade…even if it is a profitable set-up. An extreme case is someone who states “I am going to buy this stock even if it goes to zero.” And they do!

We all have seen this type of stubbornness, but usually we only see it others. Markets are dynamic, which means they are constantly changing, which means as traders we need to change with it. Realize when you are doing something self-destructive for the sake of consistency, and create a new plan instead.

Stuck in the Moment

Visualizing, or getting yourself out of the current moment is actually fairly hard work. Have you ever tried to do it?

You’re sitting at your computer watching the markets and the price is approaching one of your entry levels. Before that trade executes, visualize yourself following your trading plan–you execute the trade at the time and price dictated by your plan, the position size is correct and you can see yourself exiting (or choosing your expiry) according to your plan.

Most people don’t visualize in this way, and if they do they tend to focus on results. They visualize the money are about to make. That isn’t ideal though. Visualize following your plan, not results. Doing so reinforces good habits and is likely to result in you actually following the plan. Follow the plan and results will come…not the other way around.

Loss of Word Power

Over time, the more you hear something, the less powerful it becomes. Consider a smoker who constantly hears “That is going to kill you!” Maybe the first time the smoker heard it the statement had an impact, but since they just starting smoking they responded “I got time.” After years of hearing “That is going to kill you!” it has no impact though, and does not affect behavior in the least.

Traders face the same thing. They try to consume so much information that they re-read the same thing, said in many different ways, over and over again. What do you think happens? What they read loses it’s impact, because they skip over the things they read most often, such as creating a trading plan and keeping risk on each trade small. The scary thing is that these are the most important aspects of trading, yet most new traders just ignore these pieces of information because they hear them so often.

Did you just say to yourself “Yeah, I know that?” Many likely did, but knowing and doing are very different things.

The Bottom Line

After looking at these three psychological quirks we realize they are not that obscure at all, we yield to them every day. Being aware of them can help us alter course when it is prudent to do so. If we have developed consistency in something that is harming us, we have the ability to change it. We can visualize ourselves sticking to a process which is beneficial; this takes some work but pays off because it helps develop consistently good habits. And just because we hear something a lot doesn’t mean it isn’t good advice. Take information in and analyze it for what it is, don’t assume it isn’t worthwhile because you have heard it before.

Weird Trading Psychology Tip to Improve Day Trading Performance

Use key “trading thoughts” to keep your trading on track throughout the day

More than 20 years ago, when we started golfing, there was an old guy always at the driving range who could barely walk but hit a golf ball very consistently. Instead of barking random advice like so many others trying to help my young game, he would just say the same thing over and over again, every time we swung.

After a few swings, we would start hitting the ball better. He would continue saying the exact same phrase for another few shots. It was soothing. It relaxed my mind. Instead of trying to think about a hundred different things I just focused on the thing he was saying.

One day we may be hitting shots a little “fat,” and other days pushing it out of the right. No matter what the particular problem was on any given day, he had a small little phrase which helped us address it.

These, we later learned, are called “swing thoughts.”

We each know certain problems we have our in our game; the objective is to create very short phrases which address these particular problems, and/or keep us focused on only one thing instead hundreds. If you golf, you know that thinking about a bunch of different things while you swing is a death blow to your score. Trading is the same way.

About 10 years later I began trading as my sole profession. This thought exercise has become an important part of my everyday life in this field as well.

Key “Trading Thoughts”

Traders usually face the same few recurring issues or compulsions. Since each day is a bit different, some days may stir a certain issue more than another type of day would.

For example, when the market is swinging wildly this may induce a fear response, which makes you more afraid and less likely to take valid trade setups when they come (see Overcoming Trading Anxiety). When the market is very dull you may feel you can get a good read on it, and so you over-trade. These are just examples. Take a moment and think about what you typically struggle with.

Trading thoughts can help. As soon as you see what sort of day it is, or sense you are about to do something which goes against your trading plan, think of your trading thought for that specific problem. Keep a few relevant thoughts in your head throughout the day, reminding yourself of them every few minutes.

Key Trading Thought Examples

Trading thoughts aren’t magic, but they should be personal. Our trading thoughts may not work for you because you may have slightly different tendencies.

A trading thought should be short and concise, letting you know exactly what you need to do (or not do).

One that we constantly use is: “Keeping talking.” A bit strange, but while day trading we want to keep a constant dialogue going in our head about what the market is doing, and how that affects our trading decisions. As soon as that dialogue stops we are more prone to making impulsive trades. The dialogue keeps us constantly planning, so we remain in control.

Related to this, if the market is unfavorable for trading, we constantly remind ourselves “Unfavorable” or “Step aside.” This keeps us out of the market when it isn’t moving well for our strategies. If the market is moving well we say “Favorable,” and will often attach to this the strategy we want to trade under these conditions. This way, when a trade setup develops, there is zero hesitation. We know the market is moving well and we are prepared to implement my strategy the second an opportunity occurs.

The trading day is filled with movement a trader can potentially jump in on; yet are all those up ticks and down ticks good trading opportunities? NO! “Stick to the plan” is another phrase we repeat throughout the day. To us, this means only trade valid setups based on proven strategies in my trading plan.

Final Word

Come up with key trading thoughts that help you manage specific trading related issues. These should relate to specific issues you have noticed with your trading. Bring these trading thoughts to mind when certain issues arise. Better yet, constantly and regularly repeat your key trading thoughts throughout the day. This way, you help the problem from ever arising in the first place. If you tend to over-trade but are constantly reminding yourself to “Stick to the plan” or “It’s unfavorable conditions” you alleviate the compulsion to make impulsive trades.

Best Binary Options Brokers 2020:
  • BINARIUM
    BINARIUM

    Best Binary Options Broker 2020!
    Ideal for beginners!
    Free Demo Account + Free Trading Education!
    Get a Sign-up Bonus:

  • BINOMO
    BINOMO

    2nd place in the ranking!

Like this post? Please share to your friends:
All About Binary Options Trading
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: