Psychology of Trading
• The most important aspect of Trading is
• Trading is about 20% Analysis, 40% Money
Management and 40% Psyclology
Psychology of Trading
• Everyone suggests what should one do
• Hardly anyone lists what should one “NOT” do
• The Internet is full of strategies that help one
analyze price, and even analyze the analytics
of price !!
• Even when practiced these rigorously one falls
short of his goal.
Why trading is a tough job ?
• Thinking of the outcome first jeopardizes the
• Try to think in terms of percentages and
points rather thinking in terms of money
made or lost
• Fixation towards how we think about money
should be changed
• Mental Accounting: It is the tendency to place
different values to the same sum of money
• In reality Money is Fungible: Rs.1000 in lottery
winnings, is same as Rs. 1000 earned from
Salary is similar to Rs. 1000 received in a gift.
• Money acquired by any of these sources will
have the same purchasing power !!!
3 Stages of a Traders Life
• Traders go through three stages of
development. When people first approach the
markets, they usually focus on the method.
Most of them do not survive this stage. They
are too inexperienced and do not have anyone
who can tell them how to stay out of trouble.
No amount of optimized moving averages or
fine-tuned trend lines will keep them alive in
• Traders at the second stage tend to grab
profits before their money evaporates in a
series of bad trades. Then one day they look
in a mirror and realize that the biggest
obstacle to winning is the person they see in
it. A trader who survives the second stage
comes to recognize that his or her personality,
with all its complexes, quirks, and faults is just
as much a trading tool as the computer .
• Traders who survived that stage become more
relaxed, quieter , not jumpy in the markets.
They are now in the third stage – focusing on
managing money in their trading accounts.
Their trading system is in place, they are at
peace with themselves, and they spend more
and more time thinking how to allocate their
trading capital in order to reduce overall risks.
Just business nothing personal
• Opportunity Cost: Time is not money, Time is time, And money is money.
• Often money that is just sitting can later be moved into the right situation
at the right time and make a vast fortune—patience, patience, patience is
the key to success—not speed. Time is a cunning trader’s best friend if he
uses it right --- Jesse Livermore
• Just Business, Nothing Personal - Treating your trading as a business
means accepting the fact that it is just business and you should not take it
• A common suggestion to traders is that you should always try to limit your
risk on a single trade to an absolute maximum of 5% of your trading
capital (and ideally a lot less).
• If you absolutely, positively cannot afford to lose any more money, you
absolutely, positively will lose more money. ”Don’t doubt this one for a
second. Think seriously about how much you can truly afford to commit
and then commit the entire amount.
Trading Myths - I
• Brain Myth – Losers who suffer from the brain
myth will tell you – “ I lost because I did not
know trading secrets “ . Many losers have a
fantasy that successful traders have some
secret knowledge. This fantasy helps support
a lively market in advisory services and ready-
made trading systems.
Trading Myths - II
• Autopilot Myth – Traders who believe in the
autopilot myth think that the pursuit of wealth can
be automated. Complex human activities do not lend
themselves to automation. Markets always change
and defeat human trading systems. There are good
trading systems there but they have to be monitored
and adjusted using individual judgments.
• These myths lead to System Tinkering...
Marketitis and Tickeritis
• Terms coined by Martin Pring
• Marketitis refer to the compulsive need to look at the
markets even if no positions are held. This will eventually
compel one to make a position even if its unnecessary
• Tickeritis is the compulsive need to look at the ticker
after positions are taken.
• This mostly leads to early exit without following the
initial plan properly.
• These two usually cloud ones judgments
Plan Of action
• Going deeper instead of going broader
• Knowing one tool in depth is far much better
that knowing many tools superficially.
• Bruce Lee: I am not afraid person who has
practiced 10,000 kicks once, I am afraid of the
person who has practiced one kick 10,000
• Investment Psychology explained – Martin Pring
• Trading Systems and Methods – Perry Kaufman
• Trading for a Living – Alexander Elder
• Come in to my trading room -
Reminisces of a Stock Operator – Edwin Lefreve
• Trading for Tigers – Robert Downs
• The Encyclopedia of Trading Strategies – Jeffrey Owen Katz and
• Donna Mccormick
• Encyclopedia of Chart Patterns – Thomas N. Bulkowski
• The Market Wizards – Jack D Shwagger