The goal of trading is to make money by forecasting future price movements.This is inherently difficult because, as human beings, we cannot tell the future.A strong psychological foundation is the key to successful Trading. The human mind is a powerful, complex tool that quickly turns into a double-edged sword to those untrained in its control.
Surely many new traders analyze data announcements, or economic reports with the goal of buying cheaply before prices may run up, or selling ‘expensive’ before prices move lower; but those traders will often soon find out that consistent profitability is considerably more difficult than ‘out-guessing’ the market.
In this article, we’re going to approach a psychological road-block that many new traders struggle with in their effort to find consistent profitability.
Defining Trading Success
Human beings naturally recognize patterns. It’s an evolutionary trait; if a man or woman were to wander out of a cave only to get eaten by a bear, others in that cave should grow cautious of leaving.
We attach emotions to results because that’s the best way to move towards success, whatever the pursuit may be.
In trading, this often entails feeling good when we win, or feeling bad when we lose. This is the stimuli that guide our future patterns and decision making processes. But is this the best way for a trader to approach the market; hinging their decisions on what may feel ‘best?’
This is something I found during a research done with my students who have opted for my trading course Despite the fact that traders, on average, lost money – they still won well over half of the time in trading Nifty as seen in below chart.
Think about these winning percentages for a moment. These traders had that feeling of jubilation that comes from a winning trade more often than they had the feeling of failure after taking a loss.
So, despite the fact that traders lost money, on average, in these pairings, they still ‘felt’ like they were successful.
Is Feeling Successful More Important than Being Successful?
Just as the title of this article states, default human nature – that which runs towards pleasure but away from pain is the same thing that makes it so difficult for new traders to learn to trade.
And the reason for that is what happens on a per trade basis…
Remember, the traders above – while they felt successful more often than they felt failure – they were still losing money. So, they were still, on average, facing failure.
And the reason for this is because of what happens on an individual, per-trade basis.
So we wanted to find the reason that traders were losing money despite the fact that they were winning over half the time; and the answer is below:
As you can see in the above series of pie charts, traders lost, in many cases, significantly more when they were wrong, than they won when they were right.
And this is precisely how human nature can work against us as traders. When we get a losing position, we want to wait it out, hoping that prices come back so that we don’t have to take a loss. We desire that ‘feeling’ of success as opposed to thinking of the bigger picture, and the fact that this trade that has already shown us a loss has the potential to show us an even bigger loss.
And when we do get a winning position, that same human nature comes into work against us. We watch the position with fear, hoping that this gain doesn’t turn around and become a loss. So, we have a tendency to close these positions really fast in an effort to prevent a winner from becoming a loser…. Once again, allowing our actions to be driven and directed by that desire to ‘feel’ successful.
How can we beat our own Human Nature?
Just as “castles made of sand, fall in the sea, eventually,” traders who ignore the fundamental ideas of
1) Trading a sound concept
2) Having a trading plan
will soon find themselves adrift in the “Sea of Losers.” Don’t let that be you.
As discussed above the ingredients for successful trading we teach them as a part of our trading courses and make traders comfortable in learning how to trade using Intraday and Positional Trading Platforms and mastering trading psychology for Trading in Nifty and Stocks.
You need learn to trade in professional manner having proper entery,exit levels with Sl. Trade with proper risk management and position sizing. You will just need to follow the given set of rules of trading system. Following the system with proper discipline, you will see that the two most important enemies of stock market – fear and greed – will leave your mind for good.
In short, u will learn WHEN TO TRADE and WHEN NOT TO TRADE-and the latter is as important as the former because doing the trade at the wrong time can lead to big losses.
The Right Business Plan – Many traders experience initial success, only to fail when they try to grow their profitability and expand their risk-taking. The strategies that worked for getting off the ground may be very different from the strategies needed to make the venture consistently profitable. The successful business manages each day in a process-driven fashion, but also operates with a vision of longer-term opportunity and development. Many traders fail because they lack a sustainable growth plan, becoming torn in multiple directions when it is time to expand. Per Henry’s observation, they do not start up lean and lose too much capital early in their development.
While beating human nature in a larger context may be considerably more difficult than we can propose to counter in this article, doing so in trading can be quite a bit easier to implement.
First and foremost – look for minimum risk-reward ratios of 1-to-1 or better; or put more simply, only enter trades in which you can make more than you stand to lose.
Secondly, remember that any given trade that you place is unlikely to be anything more than just one of a thousand insignificant trades that you place in your career.
And third, don’t expect that you are going to ‘out-guess’ the market… because it likely won’t happen.
If this is challenging, place a stop and a limit on the trade to enforce this minimum 1-to-1 risk-to-reward ratio, and let the trade work. You can add or program for a break-even stop, or a pre-determined stop movement; but at all points – Plan your trade, and trade your plan.
Brahmesh Ji, brilliant article, thanks!!