Trading Psychology

For readers who haven’t been following this series of posts, it makes sense to read these posts first:

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It is indeed a very daunting task to sit in front of a trading terminal and be a passive trader just watching the flickering prices. At some point, our emotions get the better of us and we plunge into a trade. The following might help

There are a lot of shoes on the shelf, wear only those that fit you. In other words, don’t try and emulate others in terms of trading styles and methodology, do what works for you and stick to that.
Don't think in terms of what price you got into the position. Always think in terms of the entry point as last night's close. Every day he starts by assuming that the position he carries is wrong. As a result, he knows where his stop is going to be.
Traders who can sacrifice their ego and ‘listen to what the market is telling them’, have an edge over those who are dogmatic. So, the idea is to have firm beliefs, but these should be loosely held. Always, remember the idea is to make money, and it is not to prove that who is right or that you’re right.
If you have multiple positions, the tendency to ignore the smallest position is rampant. And this can prove to be very costly because small positions make us complacent.
If at some point one doesn’t have a trading position, we should be asking ourselves if we need to have one at all. Also, after a successful trade, take a day off, since successful trading is difficult to sustain. Moreover, winning streaks lead to complacency, and complacency leads to sloppy trading.
Apart from a price stop, the idea of a time stop is also useful. If a market should break and it doesn't, one shouldn't argue with the tape. If you argue with the markets, you will lose. When you're on a motorcycle, never argue with a car.
Don’t listen to anyone else’s opinion on specific trades. If you ever get tempted to seek out someone else's opinion, it is a sure sign that you need to get out of your position.
Trying to pick tops and bottoms while trading is a way of trying to force our will on the market. Unknowingly, we are forecasting what will happen before the market action.
In the face of negative news, if a market is trading a lot stronger than it should, that is bullish; the inverse is equally true.
If a losing trader doesn't know what he is doing wrong then it is a hopeless scenario. In such cases, he has to find out what he is doing wrong and stop doing that, it's that simple.
Trading is highly addictive because one has winning streaks and losing streaks, which means that there is variable reinforcement of whatever process we follow. Once the addiction sets in, not all traders account for losses and determine if they are playing a positive-sum game.
While trading, you can't win if you're trading at a leverage size that makes you fearful of the market. You can be right on the market and end up losing if you use excessive leverage. Hence, it is important to differentiate between respect for the market and fear of the market. While it is essential to respect the market to assure the preservation of capital, you can't win if you're fearful of losing. Fear will keep you from making correct decisions. "The larger the position, the greater the danger that trading decisions will be driven by fear rather than by judgement and experience" - Jack Schwager
Trades born of desperation don't work - you can't win if you have to win. The market is a stern master that seldom tolerates the carelessness associated with trades born of desperation. So, any recovery or revenge trades are destined to fail.
The ability to change one's mind is probably a key characteristic of every successful trader. Dogmatic and rigid, rarely, if ever, succeed in markets. One also has to have the ability to adapt and change strategies as markets evolve.
There is a very thin line that separates gambling from speculation. When we are gambling we take risks even when the odds are against us. Speculation implies taking risks when the odds are in your favour. You have to know when the odds are in your favour. When we are trading, the odds are decided by how old the trend is. To make a profitable trade, one has to know what the odds are. Any way you look at it, it all comes down to odds.
The key to trading is emotional discipline. Making money has nothing to do with intelligence. In trading, the person who can easily admit to being wrong is the one who walks away from a winner. Besides trading, there is probably no other profession where you have to admit when you're wrong. In trading, you can't hide your failures. The trader who tries to blame his losses on external events will never learn from his mistakes. For a trader, rationalisation of one's mistakes is a guaranteed road to ultimate failure.
Ideally trades last roughly 10 days. Whenever one is bearish or bullish, one is making a prediction. And, the accuracy of the prediction drops off dramatically, the more distant the forecast time. There are too many unpredictable things that can happen as time trading horizons stretch beyond 10 days - and 10 days is just a ballpark estimate. One has to judge the time duration for each trend independently. The reason is that it is easier to predict direction than it is to predict magnitude. Once we are directionally correct, we tend to overstay the good times by incorrectly predicting the magnitude of the move. One has to listen to the tale of the tape and get the hell out when the market is telling you to. This involves learning to take what the market is giving you and one shouldn't hesitate to take it even if it is small. Many times profit-making positions wind back to no-profit no-loss status and the dogmatic among us end up eventually booking a loss in such situations. Traders who don’t bow to the bloodless verdict of the market, will at some stage be carried out of the market. If that sounds a bit ruthless, then believe it, because it is true. The point is, if you can give up your ego and listen to what the markets are telling you, it acts as a huge source of information.
The point is that your senses deceive you. The moral is that in trading it's important to examine the situation from as many different angles as possible because your initial impulses are probably going to be wrong. There is never any money to be made in the obvious conclusions, markets are counterintuitive.
Most people can't control their emotions or follow a system. One should never fear the market, and if you do make a mistake, don't complicate it, just get out. Only by thinking independently can a trader hope to know when a trade isn't working and traders must have the humility to admit when they're wrong.
George Soros has a philosophy which says that it doesn't matter whether you're right or wrong; what matters is how much money you make when you're right and how much money you lose when you're wrong. The idea is that when you have tremendous conviction on a trade, you have to for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage. As far as Soros is concerned, when you're right on something, you can't own enough. This may not work for most of us, because there is only ONE Soros!

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