A potentially good trader gone bad
The human psyche is like a triangle with the three points registering confidence, overconfidence, and self-doubt. The body of the triangle is made up of varying shades of these characteristics within which our psyche roams. We normally find a natural balance, usually orientated more towards a particular corner depending on our personalities, but occasionally we may find ourselves lurching out of control from one corner to another.
What has this to do with trading? Well, psychology plays a vitally important role in trading, and it is extraordinarily easy to move rapidly between these three points, often with disastrous consequences as far as one�™s trading account is concerned. Typically a new trader will be likely to start cautiously. They may invest in training that will teach them strategies and rules and emphasise the importance of discipline. This may get them on the road to some winning trades and an important building of confidence. Confidence however at this stage is fragile and easily derailed.
If the early phases have been successful then different scenarios can present themselves: a desire to up the tempo, trying out different strategies or managing risk differently, all of which is understandable. In the hands of a seasoned professional a change of tack will only be explored using due protocol, such as rigorous back testing, before going anywhere near the market with their hard earned money. With someone new to trading who has tasted success however, it is more likely to be a case of jumping in to see what happens.
What happens can often be painful causing the trader to withdraw to lick their wounds. They have moved from confidence to over-confidence and are now on the axis towards self-doubt. A different scenario but one with a similar result may be that after tasting success early on the back of a series of winning trades, they are then hit by a string of losing trades. This scenario is not uncommon in trading but if you are not aware of it, it can derail fledgling confidence, particularly if the trader hasn�™t changed their tack and there is no tangible reason for the change from winning to losing.
The galling thing for these two traders is that they both tasted success, it had been within their grasp, and now that touch seems to have deserted them. In an effort to regain it they may find themselves going back to the drawing board to discover if there were any hidden traps out there that caused the turn about. Of course in trading there is no end of information and different trading styles that can be dug up to improve one�™s trading chances. The list is literally endless. And as one wades deeper and deeper into the mire of information and alternative options, trying in vain to assess everything in order to maximise the chance of success, the reality is that one is getting further and further away from an effective means of trading, which is quite simply to keep it simple.
Less is more. A simple, effective strategy applied consistently according to a well-observed set of rules is all that is required, along with the discipline to implement it properly. For this to happen successfully and consistently it is important to have a clear head devoid of clutter, conflicting variables and information that only serves to keep you out of the market or confuse your implementation of a strategy. There is only so much to be learnt – how to apply an effective strategy, along with the psychology or discipline to implement it consistently. It is not complicated. You are then ready for the market.
Without doubt trading psychology is one of the most important if not the most important element of trading to be mastered to enable you to become a successful trader. It doesn’t matter what instrument you trade whether it be stocks, shares, forex or options and contracts of difference, failure to master your mind will result in an inability to reach you true potential.