Human behaviour psychology
is the key to understanding the current situation in the financial markets. You
can be a perfect analyst, able to count the price and time orientation points
till the ticks, but that does not mean that you are a trader.
All ordinary and
everyday feelings and aspirations emerge in severe market conditions, as well
as a chemical solution on a litmus paper. All senses inherent to us (such as
fear, greed, hope and etc.) in a fast stock exchange tempo sometimes exert a crucial influence on the trader's behaviour.
Weak and self-confident, extremely
greedy and sluggish — all these people categories are fated to be the market
victims. The market crowd impact is able to transform the trader — from an
outsider into a winner, and from a lucky one — into vanquished.
Knowing your
own abilities and preferences, positive and negative features can help to avoid
the collapse. If you add to this adequate valuation skills of psychological state and the proper market
participants behaviour, then success is guaranteed to you.
Thus, the main motivation, which makes you
take part in the speculative market's operations, is greed (strange as it may
seem). If your greed is inconspicuous you will make not many deals, missing a
lot of good moments.
But if your greed is endless and huge, then you will try
to make as many deals as possible, putting your head into the lion's mouth. In
the first case, it is recommended to get on with more calm business, in the
second one — it's better to play in the casino. Greed must be under cultivation not
as a draw, but as a useful plant.
Therethrough, you will be able to lead it
in a string. The main thing is that greed mustn't hinder you to make
decisions while driving the bargains. The outcome from the greed action will be
a motivation while making the deals.
Two types of motivation:
- Rational motivation. Usually, it is peculiar for the beginning traders prior to the first market intromission and also for the professionals. Expressed in a cold mercenariness while making decisions.
- Irrational motivation. Expressed in the player's hazard and peculiar almost for everyone, although, some can control this hazard, others are the slaves of their emotions and almost weirded to fail.
The next factor prompting the
trader to make deals in the hope to gain profit. Naturally, any job target is
earning money. However, when the hope supersedes the calculation, you are
risking over evaluate your possibilities during the situation analysis and
make a mountain - dream out of a molehill
- reality. You have to control
your hope taking into account a calculation and greed. Exactly a big HOPE leads
the beginners to the collapse.
A trader, who relies only on hope — is doomed
A hope determines the trader's behaviour just in two cases:
a) at the moment of accessing
the market (only hope of making a profit can make a person act in a certain way
in the financial market);
b) at the moment of loss
making, when appears a hope of the situation to change for the better.
If in the first case
everything is clear, in the second one — hope passes over three steps of its
development and existence. At the first step, when losses are not so
significant, the hope is inevitable and may be reasonable in some measure, if
you are following a certain scheme worked out in advance.
At the second step,
if the stop loss is cancelled or isn't set up with rising losses, the hope
touches its peak. At that moment it is the hardest part for a trader to
distinguish his hopes from real market actions. A solution — is to close the
loss-making position or let it sweat — mostly, it will depend on how strong the
trader's mind controls his desire and if the trader is able to evaluate the
situation adequately.
The third step is characterized by critical losses when
hope leaves the trader and is replaced with despair. This frequently comes
out with weak and beginning traders. A great many market participants
including successful ones know such a sense of emptiness when it seems that the
whole world works against you.
But nobody knows about you, so the market
malignancy is too exaggerated. Although, certainly, you can not miss the fact
that the main trader's goal is to earn at expense of another trader. A person
who had overcome the last step of hope outpouring can entitle himself as an
accomplished trader. Perhaps, at further trading, the third step events will
appear as a market fright.
In order not to face either
despair or fear it is necessary to bear responsibility for decisions that you
make. Remember that our weaknesses are mental food for stronger players in a
figural and ordinary sense.
The following risks can be
pointed out:
a) A human being tends to come under the
influence of crowd and take communal non-individual
decisions.
b) The decisions are taken by the crowd are provoked, as a rule, by the most unclever participants.
c) Strangely look the
references to the analysts, making much less money, compared to the banks and
individual investors.
Keep in mind one of the rules,
which will, probably, help you to evaluate the situation in a proper way:
The absolute majority of the
financial analytics begin massive publications about the current trend
continuation at the moment of its strong correction or its ending.
It may occur because most
analysts are the employees of the financial establishments, which always (or
almost always) follow the rule: trend — is the trader's friend. But, on another hand, there may take place intentional disinformation, as the part of
accumulated strong currency needs to be thrown off.
Needless to say, on one hand,
you mustn't go against the crowd, as it shapes up the main market trend. But, on
the other hand — you mustn't follow the crowd's opinion, as most likely, it
would be wrong. Tracing the crowd's actions, you have to puzzle out: are you at
the winners meeting or are you looking at the crowd of vanquished people.
The
winners can be seen because of the increasing deals volume and rising ADX
tendency. Other technical analysis indicators (such as MACD, RSI etc.) move sharply
along with the price. It is different from those who lost. Hereby, you have to
distinguish for yourself one essential rule:
Taking part in the market and
speculative trades you must always leave those who lost and join the winners.
A trial to apply knowledge
will, possibly, lead you to a contradiction with other traders and analysts.
These contradictions are caused not by our vision of events, but by the
psychological discomfort concerning that other traders and analysts don't
support your point of view (despite they base on the same knowledge). To handle
out this question bear in mind one of the main trading psychology rules:
DON'T AFRAID TO EARN
«INCORRECTLY» FROM THE VIEWPOINT OF TRADERS AND ANALYSTS!!!
Before we pass on the
psychoanalysis, you should also remember one more important remark, which was
found out by testing the traders:
We are inclined to risk, when
a venturousness is so high, but we afraid to risk when there is no threat.
Psychoanalysis of the
trader's actions serves to reduce your own weaknesses and help to get rid of
them. In accordance with well-known statistical data, more than 90% of
individual traders finish their careers at the very beginning, not achieving
any results. Applying to the theory of probability, this indicator appears to
be too overstated.
A theoretical size of «loss-making» traders can not exceed
50%, even excluding the traders with zero activity effect. What is the reason
for the significant contradiction of theory and practice? The most abortive traders
blame the small deposit sums for their mistakes, the absence of qualitative
information from the aspect of speed and volume, malignancy of the counteractants
— brokers or dealers, commissions and spreads etc.
Partly, these traders are
right: the reasons listed above don't help to make money for sure. Though, the main
reason for losses is in us — it's our «Ego». Unfortunately, you can test the
real «Ego» qualities without a professional psychoanalyst only amid «military»
market conditions or other extreme conditions.
Unfamiliarity with your own
«Ego» - the main risk factor.
Educing of real person's
qualities, his «Ego» can take several years. An individual investor has no time
for this, that is why he has to call on a professional psychologist or enter the
market as an «unstudied» trader.
To bring to light the psycho type, above all, you should find out if it is an active or passive trader
in front of you (even if it is you).
Prior to the position, opening
everybody is equal. They are so sure in their rectitude that they are ready to
persist in their opinion vehemently. Others are quiet. They listen to
somebody's opinion but act as they want to. The thirds can discuss whatever
you like and whenever you like, talking for 24 hours day and night.
After a little, while the
position opening (5-10 minutes for a short term position and the next day — for
the long term position) it becomes clear — was the deal carried out right or
wrong. And «right» not only from the aspect of position opening direction but
also the price and timeframe of its execution.
As you know, the outcome can
follow just 3 scenarios: profit, loss or zero results. Among them, only The first one considers positive emotions, and two others are charged with negative
energy. Thus, in a short time, it can be defined how the trader behaves
obtaining positive and negative emotions — aggressively or passively. Finally,
you can complete the following table for each trader:
|
The trader's reaction to an event |
Passive |
Active (aggressive) |
|
Making
profit |
|
|
|
Sustaining
losses |
|
|
|
Zero
result |
|
|
|
Total
(reaction amount): |
|
|
Trader's active reaction
consists in sharpness of movements and opinion alertness regarding the current
situation. A passive reaction shows itself in lasting inaction, some kind of
movement framework whatever happens. The result of this table completion will
be the first component determination of the final table.
The second element — is the
behaviour causality, i.e.: instinctive, intuitive or intelligent trader:
|
Trader's behaviour reasons |
Instinct |
Intellect |
Intuition |
|
While
a position opening |
|
|
|
|
While
a position closing |
|
|
|
|
While
a position maintenance |
|
|
|
|
Total:
|
|
|
|
Now, we are going to trace
briefly how these characteristics appear.
Any initial action of the trader is considered exactly as an instinctive wish to cater to different material
interests. As trading — is a work (it emerged that it is psychologically hard),
you have to make deals to earn money. That is to say, we can conclude that
the trader's instinct makes itself evident in the fact that at work you have to
work not just sitting in front of the screen.
The trader's intellect
consists inability to comprehend logically what is happening with him and with
the general situation around him and in reference to this take the most simple
and beneficial decision.
If the instinct acts unwittingly using some generic
memory: the teachers' advice, simple ruleset, then the intellect tries to
understand this advice and rules in accordance with his own worldview and
changing external conditions.
It is intellect, which can help to look for the way out from a possible dead end, where you can find yourself following the old rules.
The intellect can also give its own financial markets view and thus, survive
within it more successfully.
And, finally, the third «and»
- intuition. In philosophy, intuition is explained as a person's ability to
penetrate in things essence not by means of inference or logical thinking, but
due to momentary and inconscient enlightenment.
In reference to our theme — it
is a trader's ability to work and see the market «not by mind, but by heart».
One of the most famous speculators George Soros juxtaposes his intuition with
the technical and fundamental analysis, and if the suggested theory is
affirmed, he increases the aggression pace in the direction of the market
movement.
The causality table filling-in
involves awareness about using which data or conclusions are carried out the
deals opening/closing and the orders
motion within the position during the transaction.
If there is no objective
causes or you will not get a reasonable answer, then it is an instinct- or
intuition-oriented trader in front of you. Herewith, for an instinctive trader
is an essential orientation to the physical
causes of its fulfilment and reference to preceding experience and market
behaviour.
An intuition-oriented trader can not explain his actions reasonably
referring to foreknowledge. If the action is explained logically, it is an
intellectual trader type. At first thought, the last one is more preferential.
However, excessive rationality is often a fear covering ahead of the market
uncertainty, deal-making fright.
In follow-up of two previous
tables filling-in, we can (more or less) ascertain the trader's psycho type and
look through the recommendations.
|
Trader's psycho type |
Active (aggressive) |
Passive |
|
Instinctive |
Negative: excessive emotionality; Strong
susceptibility to a sense of fear, hope and etc. Positive: very resilient. Recommendations: calm down and take your time. |
Negative: downcast emotionality; contumacy;
reticence. Positive: merit factor of actions. Recommendations: take it easy oftener; «touch
and go» (concerning the deal's closing). |
|
Intuitional |
Negative: stress-susceptible; needs
permanent control. Positive: good reality apprehension; able
to make decisions amid full uncertainty. Recommendations: incessant control; take
it easier, |
Negative: too strong failure susceptibility; Ability
to accumulate the negative energy; meditativeness. Positive: «keeps the hair on». Recommendations: outdoor activity; make
deals more often; discuss
your actions with other traders, but adopt a decision by yourself. |
|
Intellectual |
Negative: gets tired fast; needs
long rest; disruptive
reaction to the fundamentals. Positive: able to take objective measures
quickly; self-analysis
ability. Recommendations: practise hardiness; At
first signs of attention easing – have a rest. |
Negative: very high latitude; contumacy;
thinks too long; «self-analysis»
inclination; excessive the sensation of fear influence; diffidence. cutinsistence
in goal achievement. Recommendations: accelerate the pace and calm
down; Treat
with caution to others recommendations. |
Concluding the discussion
about psychoanalysis worth noticing that it is almost impossible to change an
adult person, as a matter of fact, by the time we are 5 years old the core of
our «Ego» has formed. However, it is possible and even necessary to educate and
correct some character features needful for the trader.
Therefore, the primary objective of trader's behaviour psychoanalysis — is the psychological deficiency
outcrop, which can lead to financial losses, and also removal of disadvantages.
If the trader's negative features evade the correction, then it is better to recognize that trading in the
financial markets are not for you, the chosen way was wrong and try to
self-actualize in other activities.
The recommendations given
below will help the beginning traders to avoid a lot of mistakes and wrong
actions operating at Forex market.
Inspect your motives. Think over your real aspiration to trade. The discrepancy between your motives and kind of activity results in conflicts. If
you can not make up your mind — the game is up before it has begun.
Matching between the trading
method and your individuality. It is crucial to choose the method which suits your individuality and
convenience level. If it is unbearable for you to lose a significant part of the current profit in the opened position, then the long-term approach suggesting
the trend movement will turn out to be catastrophic for you, as you will never
be able to follow it.
If you don't want (or can not) to sit in front of a screen
with the quotations all day long, don't try to practise the intraday trading
methods. If you don't stand the emotional pressure while adopting the trading
decisions — try to develop an automatic system for market playing. The method
used must suit you and you must feel comfortable.
Control your emotions. From
time to time, all traders rub through stress and suffer losses. Worry,
disturbance, depression and sometimes despair is part of the market job. The
part of risk management is the ability to control your emotions. Don't let emotions
handle your trading. Focus on the matter, which you are busy with. Trade on the
basis of informative rational decisions, not emotions and imaginations.
Communication with other
traders is one of the ways to control your emotions. Other traders understand
the problems which you have faced and they can provide you with essential moral support when you lose courage.
This helps to see that you are not alone and that others had faced such
problems and managed to sort them out.
Your trading methods must be
profitable on average. You
can not win even having the best financial management skills in the world and
the strictest discipline if your trading methods are loss-making on average. If
you don't have a trading privilege, then all that money management and
discipline can give you is — a guarantee that your bankruptcy process will
roll on slowly. If you don't know what is your trading privilege it means that
you don't have it.
Create a method. To have a trading advantage you have to have a
method. The type of the method is not important. Some super traders use only the
fundamental analysis, others play by reference to the graph examination, some
traders use a mixed approach. The main thing is the method to be profit-making.
Craft or hard work. The general rule is that absolute efficiency
requires native ability, as well as hard work allowing to externalize the
potential.
If a native talent is not
enough, hard work can develop professionalism, but it won't be perfect.
The same principles are
applicable for trading. Practically, everyone can become a trader making a profit, but just some of them have a native talent, which allows being a super trader. For this reason, you can
learn a successful trading craft, but to a certain level. Be realistic in your
goals.
Discipline. Discipline is absolutely necessary to manage the
risks effectively and to use your method not hesitating about which deal to
handle. A beginning trader has no protection from bad trading habits, and the
best that you can do is to inhibit them. As soon as you become lazy and
negligent they will come back.
Be aware of your
responsibility. The responsibility for results
rests with you. If the losses were suffered due to broker's advice, advisors
recommendations or bad system response — finally, the responsibility will rest
with you, as you decide to take it to heart and do an activity.
Independence. You should think by yourself. Don't let yourself
fall for crowd hysteria. Besides, independence means individual decision
making. Never hold by others opinion. Even if they help with one or two deals
occasionally, at long last it will cost you money, needless to say about that
it changes your view of the market.
Confidence. Strong confidence in your own ability to win in
the financial markets appears to be a universal quality among successful
traders. Their peculiarity is an assurance that they «will win the game before
it has started».
Losses — is part of the
game. Great traders recognize in
full measure that losses are the elements inherent in the game called trading.
This fact recognition strengthens their confidence in themselves. As
outstanding players are sure that they will win in a long term, separate
loss-making deals, which turn out to be a necessary evil, do not frighten them.
There is no shorter way to the downfall than the loss phobia. If you don't like
to lose, then either finish trading, sustaining big losses or miss great
trading opportunities — each of them is enough to wipe off any chance for
success.
Advice search. A wish to get advice means a lack of
confidence. As said Linda Rashke: «If you feel the temptation to know somebody's
opinion regarding the deal, usually, this signals that you should better leave
your position».
Patience power. The expectation of favourable opportunities raises the
success probability. You don't have to be in the market all the time. As
explained by Edwin Lefevre in his classical book «Reminiscences of a Stock
Operator»: «There are usual fools, who act wrong at all times and in all
places, but there are Wall Street fools, who think that they must trade all the
time».
Stepwise arrival and outgo
from the market. There is no need to open or close the whole position
simultaneously. The position can be increased or contracted gradually, which
makes your trading more flexible and gives you a space for manoeuvre in case of
unexpected market situations. Most traders sacrifice such flexibility
without meditating due to the desire to be the right one, which is common to everyone.
A lot of traders notice that the stepwise market outgo method allows them to
keep the part of long term winning positions much longer than in other cases.
Being right is more important
than being a genius. Think about your
gainings, not trying to be a hero. Forget about attempts to evaluate the
trading success by reference to how close to the minimum did you buy, it is
better to draw attention to how often you choose the deals with a favourable
ratio of profit and risk. The result of the trading is essential, not impeccability of some deals.
Do not be afraid to look like
a fool. Don't claw hold to your
preceding wrong forecasts. Recollect all your forces to revise the situation
afresh and take the right decision.
Sometimes, the action is more
crucial than circumspection. Wait for a price correction to open a position — sounds chary, but more
often it is wrong. If your analysis, technique or inner sense says that you must buy not
waiting for the correction — do it.
It is also nice to catch the
part of the movement. Even if you have missed the
first part of a new trend you still have an opportunity to earn in its middle
part (if you are able to determine the reasonable point of protection stop).
Learn to be disloyal. Never keep loyalty to a position. Often, a
beginning trader is too loyal to its initial position. Hoping for the best, he
will ignore the signs of market situation changes and lead the deal to huge
losses. More versed trader realizing the risk management importance will leave
the market quickly as soon as it will be clear that the deal is to fail.
However, a really experienced trader will be ready to make a 180 degrees
reversal, changing the position to the opposite one if the market behaviour
points to such an operation method.
Fix the part of the profit. Take the part of earnings from the market to
protect the trading discipline from regeneration in complacency.
Hope — is a spoke in the wheel. Hope makes the trader stickle while dropping out of the
loss-making position, which doesn't let him enter the market in expectation of
correction for opening a position at a better price. Often, a hope for correction
leads to loss of potential profit from huge market movements. Don't rely on it
— open a position in accordance with the trend as soon as there is an opportunity
to define a proper protective stop level.
You can not win if you are
obliged to. There is an old proverb in
Wall Street: «Scary money never wins». The reason is rather simple: if you risk
money which does not presume to lose, all emotional traps of trading become much
more dangerous. The market rarely absolves the levity concerning the deals,
which comes out of despair.
Searching for adrenaline buzz
in the market — is too expensive. Adrenaline
buzz is related to market trading, but that does not mean success in the
market.
Identify and exclude the
stress. Stress during trading — is
a troubling sign. If you feel stressed, think about why and then do something to sort
out the problem. For example, you have found out that the main stress source is
uncertain of closing the unprofitable position. One of the ways to settle
this matter — is to start setting up the protection stop order every time you
open a position.
Give attention to your
intuition. Intuition — is a gathered
experience, which lies in the subconscious. The market analysis objectiveness
made up rationally may be compromised by other people suggestions (for
instance, regarding the current market position, willingness to change the
previous forecasts). The Subconscious is not restrained by such pressure.
Unfortunately, we are not able to push through our under self easily. However,
when it emerges as intuition, the trader should pay attention to it.
The prices are not occasional
— it is possible to win in the markets. Bringing to mind the academicians trusting in occasional nature of
market prices, Monroe Traut, futures trading adviser with one of the best
histories of risk and profit ratio say: «Perhaps, that is why they are
professors and I earn money doing that I used to do.»
Don't lock yourself into the
market. There is something but the
trading in this life. Totalizing the whole course of the lesson, we can say that
successful and effective work can take place only in case it includes 4 the
most essential elements:
- «Price forecasting» is used for determining the further market direction (upwards or downwards). It is the first crucial step prior to decision making. The price forecasting helps the trader to be defined concerning his actions tune. In other words, if he works at upturn or downturn of the prices. The upcoming market development pattern gives the answer to the main question, which faces the trader: which way to enter the market — long or short. If the price forecast turns out to be wrong, all previous and further efforts will go to smash.
- «Trading tactics» determines the certain moment to enter and leave the market. Its role is especially crucial while operating at Forex market, as the marginal loan is rather low and consequently, the «lever effect» is high, this gives the trader a right to make some slips. Often happens when the decision regarding the movement direction is right, but due to a delay of deal-making, the trader suffers losses. As a rule, the trading tactics has exclusively technical performance. Thus, even if the trader prefers the fundamental approach, then at some steps of his market work he will have to use the technical instruments to determine the certain points of going in and out of the market.
- «The capital management» means the corpus of questions concerning the trader's funds investing. This includes: optimal «portfolio» formation (for significant amounts), diversification, investment size estimation to the certain sector, with an account of risk (for significant amounts), using the stop orders, correct measuring of possible profit and loss ratio, choosing behaviour tactics after success and failure periods and certain work style: conservative or aggressive.
- «Psychological preparation». For each of us are peculiar our own character features, emotional singularity and habits. Cognition of yourself, correction or, in other words, an adaptation of your «Ego» to the market requirements appears to be one of the most essential factors for prosperous trading. A trader can achieve good results in forecasting, develop a perfect trading scheme and capital management strategy, but the absence of discipline, fear of the market and lack of self-confidence may knock out all achievements not giving a chance to obtain the looked-for result.
Probably, to «make the riffle»
it is better to follow the wisdom such as: -
«The winner is that who had won
himself in the battle, but not who had won one thousand people.»
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