Psychology
Basic Market Psychology
THE STOCK MARKET IS LIKE A CASINO. The market wants your money. it makes money off of it. The odds are against you. It is like a casino with more information and in a way easier to lose your money.
You are gambling when trading blindly. Your wins are stupid luck and your losses are well deserved.
At a casino there is free alcohol being passed around because they want their gamblers to have their minds clouded to not think clearly and make irrational decisions. The market is very similar. You can be taken adrift in an emotional roller-coaster where you become excited at your earnings and feel rage, depression, and regret on your losses.
Trading emotionally is the same as gambling drunk at a casino. you make irrational decisions and trade with fear and/or overwhelming joy.
This is one of the big reasons many traders fail in the stock market and lose everything and get addicted to losses because they think they can turn it around.
A trader that keeps losing money on trades is just a loser. They are addicted to losing due to past feelings of upmost joy in their winnings. They behave very similarly to alcohol addicts, except that their speech is not slurred.
A great goal for a trader is if someone is sitting across from you they cannot tell if you are gaining or losing $2000. This is perfect because you will not be trading with emotions.
A sound psychological mindset is the number one key to a successful trading career.
Psychological Toxicity
How to Overcome Psychological Toxicity In Your Trading
Every day, people fail in the stock market. And I’m not just talking about the average Joe on the street. Even the smartest 1% of people like doctors, engineers, physicists, and mathematicians, can struggle to make a dime trading. It’s not because of a lack of trying, intelligence, or access to education. The reality is that the #1 enemy facing you as a trader is staring at you in the mirror.
Psychological Toxicity is a collection of self-destructive mental and behavioral patterns, including:
F.O.M.O. (Fear Of Missing Out)
Overtrading
Undertrading
Dopamine Addiction
Overcoming these patterns is your most important mission as a trader. It’s more important than learning technical analysis, reading news flow, or managing trades.
And you know what’s really scary? Psychological Toxicity gets worse with age and experience.
Psychological Toxicity: Identifications, Self-Recognition, And Solutions:
We live in a society that is completely drenched in adrenaline and dopamine -- and the markets are no different. We’ve all seen people that must be market participants at all times. They have to be involved because they view the screens like a casino floor, full of flashy lights, sirens, and bells.
These traders feel as if they’re always missing out on an opportunity, so they spend all their time scouring news, research reports, message boards, Facebook groups, and Tweets looking for something that will help them get one step closer to success. And, unfortunately for you, Wall Street is full of expensive services offered by people who ultimately have no true idea how to help you succeed.
You’ll see pictures of these characters standing in front of sports cars, expensive houses, and private jets, waving around wads of cash and screenshotted P&L’s with very limited information on how the money was truly achieved. And, sadly enough, many people will trust these so-called ‘experts.’ But statements can be Photoshopped, and you can rent a Ferrari by the hour.
You are getting a subliminal message that you can live your dream of being a financially independent trader. This is a type of addiction to excitement, mediated in part by the neurochemical called dopamine. The anticipation of the reward becomes much more powerful than the reward can ever be. It’s easy to start thinking "I have to get in NOW because the price is running away from me. I know I’m breaking my rules, but if I just chase it this one time, it’s okay because I know I can make a killing on this one. Why should I wait for the price to come to me? Maybe it won't, and then I will have missed it all. There's no fun in missing out.”
This sounds all well and good, and the dopamine brain pathways, which are activated by potential for reward, kick into high gear. The dopamine neurons are firing on all cylinders, and you’ll feel pure exhilaration. It feels wonderful... until it doesn’t.
Suddenly, the position starts to turn against you. You chased. It came back in. And now you’re looking at an ugly, disheartening, losing trade. And now you regret breaking the rules. You feel miserable, but hold on... it’s about to get a lot worse.
Right now, your odds of making a financially devastating decision are through the roof. The dopamine reward pathways of the brain shut down, and your brain’s neurological connections that mediate fear activate! As your emotional roller coaster starts nearing the ground, your brain starts releasing unique chemical concoctions into your body, flooding your bloodstream.
And just like that, your ability to make a logically based decision deteriorates rapidly. If you’re lucky, you’ll escape with a few cuts and bruises, and you’ll live to fight another day. You’ll recognize what you did wrong and simply walk away to recharge. However, you could also suffer from confusion, frustration, blaming, self-sabotage, and systemic toxicity. This will leave you feeling empty, confused, disillusioned, and just plain worn out. And if things get really out of control, you will average down, perhaps multiple times, because you’ll be convinced things will magically work out.
You could end up suffering a significant or even crippling blow to your account. And worst of all, your mind will be full of psychologically toxic thoughts. I’m sure you’ve been told at one time or another that you have to preserve your financial capital. It’s pretty obvious why that’s important. Without financial capital, you cannot trade. You can’t even open an account.
However, there is a second form of capital that’s even more important: your psychological capital. Money buys stuff and can solve some of your problems (at least your money problems). And if you do not have money, you are out of the game.
However, you must internalize the mentality that money is a byproduct of maximizing your psychological capital. Your psychological capital is the essence of the person you are -- as a trader, and as a human being.
My number one rule:
My number one rule of trading is to preserve your psychological capital. This means making yourself emotionally, mentally, physically, and spiritually strong and healthy.
Stand apart from yourself, and look at yourself with a critical eye -- almost as if you were advising someone else how to trade or how to live. When you imagine yourself giving advice to someone else, you are minimizing emotional charge. Since emotions are often the greatest enemy of the trader, you then put yourself in a neutral position.
You allow the newer, thinking portions of your brain to put the older, primitive, dopamine-driven brain into perspective. This is the most difficult journey you have as a trader. Your psychological capital is all you really have. You can go out and earn more money, you can turn your money over to someone else to manage, or you can stop trading and invest in some new activity. You have infinite choices about what to do with your money. But you have only one body, one mind, and one spirit.
When you are stressed, sleep-deprived, contaminated with worrisome thoughts, or in a toxic state because of bad trades, junk food, or dysfunctional relationships, you have nothing but despair, self-loathing, anger, or depression. You are in a state of mental and physical disease. And you should not be trading. In the end, if you lose your health, you lose everything. Money might be able to assuage this misery, but you’re just putting a band aid on a large, gaping wound. Eventually, the wound breaks open, becomes infected, and just gets worse unless you deal with the source of it.
As always, you have the power to be the best you can be in every aspect of life. It's really quite awesome when you think about it. You are the problem, and you are the solution!
If you want to get a true picture of who you really are, what you are capable of doing and becoming as a trader and a human being, then stop looking outside of yourself. Go within, as the answers are all there. I promise you that it will be the most amazing journey of your life.
I once read about a survey listing the most stressful jobs in the world. Sitting at number three behind specialists in charge of nuclear disarmament and being an elite soldier in the U.S. Special Forces is daytrading. So trading is stressful.
Stress can often lead us to do things we know we shouldn’t be doing. Stress triggers defensive behaviors that cause traders to avoid high reward situations that contain moderate risk. Instead, the trader will often opt for the safe haven route, where situations are low risk -- but also low reward.
Unfortunately, when you trade to avoid all risk, you are literally shooting yourself in the foot.
The “trading not to lose” mentality appeals mostly to those traders who feel they can make money in this market while completely eliminating the risk aspect. We all know that’s just not realistic. Yes, you can curb your risk, but there’s no way a trader can completely eliminate it. And sometimes, when you take a moderate amount of risk, you can actually get outsized rewards.
10 Symptoms of Psychological Toxicity
There are several ways you can diagnose yourself if you fear you’re suffering from Psychological Toxicity. I have identified 10 symptoms which you can find in the next section. If you’re a brand new trader, you may be surprised at how many pitfalls you can fall in.
And if you’ve been around for a while, you may remember doing some of these things yourself.
You attempt to use a strategy or methodology, but when it comes time to implement it, you freeze up and do something completely different.
You actually come to a self-realization that you are doing something you know you should not be doing -- while you are doing it. And you don’t stop.
You feel like you have dug yourself a hole with a shovel, and you’re trying to climb back out with a spoon.
You exit trades too early, stunting the potential of your winners.
You exit trades too late, allowing your winners to turn to losers.
You chase trades all the time, giving yourself bad entries before you get stopped out. You feel like you are buying high and selling low.
You think of negative life issues while you are actually trading, and you just can’t focus on the market.
You blame others for your problems and can’t take responsibility for your own results.
You are “dying of a thousand paper cuts.” You set tight stops to reduce your risk, but you keep getting stopped out. You are taking small losses on each trade, but your account is shrinking because those paper cuts are adding up.
You don’t think of trading as a job and instead you focus on being your own boss. So you go to bed very late, which makes you tired, unfocused, and unprepared. And you have no urgency to be at your best, though you assume you’ll fix these bad habits at some point in the future.
The Science
Ever since we were young, we have learned all the rewards life has to offer as well as its bitter pains. It can feel like good times and bad times were thrown randomly upon us. When it comes to day trading, your brain will track down your most painful trades, and your best trades as well.
This is your amygdala at work. It is the subconscious part of your brain that tries to naturally protect you physically and mentally from any harm that could be directed your way. Your brain will store this information. But day trading offers you the ultimate contradiction. If we will inevitably encounter rewarding situations and painful situations, how does one avoid the psychological damage done by this constant chaotic flux?
Each human being perceives and handles pain differently. Factors such as your upbringing, genetics, and surroundings all impact this. In the markets, traders who keep going back and forth between winners and losers can become extremely emotionally imbalanced as their brains try frantically to eliminate the pain.
Thus lies our ultimate conundrum:
How does one remain psychologically stable while enduring the ups of winning with the downs of losing?
The Solution
The solution is to take the highest probability of winning trades possible. Or, put even more simply, you need a high win rate. This is the best way to avoid psychological damage while keeping your conviction and confidence. here is where I want to give you a huge edge.
The majority of successful professional traders I have met don’t rely on a plethora of indicators for their trading. They just know what works for them.
The trick to finding success is finding one indicator at a time that makes sense to your style of trading and makes you money. My biggest advantage is that I know what is working right now (in terms of indicators and more), and I always look to pass this advantage onto new members.
Technical Analysis?
When approaching technical analysis, you will find thousands of indicators that traders and market gurus alike swear by. You can find thousands of indicators on every chart platform. And with most technical analysis being available to the public for free, (www.freestockcharts.com for example), it leaves the trader asking which one is best suited for them.
I personally do not believe in any form of technical analysis that does not offer a look into future movement. Forward analysis is simply using an indicator or methodology that will give potential future entries into a stock. Since most indicators do not offer a great sense of forward analysis, I simply do not use them. I do not believe in any indicator that does nothing more than paint a technical picture of what has happened already, without offering me a high probability glimpse into the future. And when I see probability, I’m looking for 70%. Also, when using technical analysis in general, you must remember that these things were created prior to the existence of black boxes. It is of my humble and firm belief that many forms of technical analysis that were effective in the pre-black box era are no longer effective today.
Fear of Missing Out (F.O.M.O)
Fear can be the final gate that prevents a trader from making a trade that makes money. Fear is the prevailing negative emotion that halts traders in their tracks and causes them to experience what they detest most -- losses. Fear can be looked at as a double-edged sword.
On one hand, we fear losses. On the other, we fear missed opportunities. Traders who fear too much will ultimately neuter their strategies by adding a negative ingredient into their concoction.
The root of all fear is an ineffective trading strategy.
When we finally nail a good trade, we often exit too early for we are afraid to hand back our hard-earned profits. Sometimes the trend is just beginning and exiting too early does not let us realize the full fruition of our potential profits. This is one of the biggest mistakes a trader can make.
We know that we need to have a positive profit-loss ratio in order to have long-term success. If you lose every other trade, but your profit is 20 percent larger than your average loss, you will be quite pleased with your long-term results as a trader. However, this is only possible if you let your profits run as long as the market goes in the direction of trend. That’s why fear of loss and fear of missed opportunity continues to plague traders every single day.
Do not suffer from this fate. If the market is going in the direction you expected, let it exhaust itself. Only then should you lock in your profits. This will keep you striving for maximum reward, and you’ll finally hit that home run trade. On the other hand, we can fear opportunities, and this causes us to get in a stock too early. It is human nature to get impatient, and the ability to wait for opportunities and to let them present themselves is nothing short of a virtue. We start searching for opportunities like a foolish hungry lion, running blindly through a field instead of waiting patiently behind the high brush.
Do not run around desperate for an opportunity. Traders will present themselves, and when they do, you have to capitalize on them. Once you develop your conviction and confidence, you will have the ability to overcome anything the market throws at you, especially fear.
Optimism vs Realism vs Pessimism: The Psychological Explanation
“Neither should a ship rely on one small anchor, nor should life rest on a single hope.” -Epictetus
Right down to our very DNA, human beings are “hardwired” to be optimistic in general. Social science and neuroscience both suggest that we as humans value optimism above realism.
Is one better than the other? Are both needed in the world of trading? To delve into this matter deeper, one must understand that there are not clear lines between realism and pessimism.
The Traders Evaluation of Trading Events:
Every trader will have evaluated three events, subconsciously and consciously, after EVERY single trade. These events may indeed be inflicting psychological toxicity upon your mental health.
The Internal and External Dimension: Whether or not we think the move of the trade was in our control.
The Stable and Unstable Dimension: Whether or not we think similar trades in the future will provide the same result.
The Specific and Global Dimension: Whether or not we relate this new result to previous trades, both winning and losing.
Dr. Martin Selegman, former president of the American Psychological Association who was legendary in the field of optimism, discovered that both optimism and pessimism can be found in the way you explain events that have happened to you.
Would you consider yourself an optimist? A realist? Or a pessimist?
If your mind has evaluated a trade as having an Internal, Stable, or Global cause, it will have a greater positive impact on your trading psychological health than if you feel your trade was to due to an External, Unstable, or Specific causes. In the next section, there is a traders’ guide to Optimism, Realism, and Pessimism, based on Dr. Selegman’s work.
Optimistic Traders Mindset
Winning Trades Reasoning: Internal, Stable and Global
Losing Trades Reasoning: External, Unstable, and Specific
An optimist who just lost money may say:
“I did the right thing, it just didn’t work this time!” (Internal)
“I’ll do better next time.” (Stable)
“The market flushed me out this time, but I will have better luck next time.” (Specific)
An optimist who scored a winning trade may say:
“My hard work helped me find this trade.” (Internal)
“I will capitalize on the next trade that sets up like this.” (Stable)
“I remain confident in my trading prowess.” (Global)
Pessimistic Traders Mindset
Winning Trades Reasoning: External, Unstable, and Specific
Losing Trades Reasoning: Internal, Stable, and Global
A pessimist who just scored a winning trade may say:
“Anyone could have capitalized on that trade.” (External)
“I just got lucky this time.” (Unstable)
“That trade only works for me once in a blue moon. (Specific)
A pessimist who just locked in a losing trade may say:
“I’m a complete idiot for taking this trade.” (Internal)
“I’m going to lose on every trade in the future.” (Stable)
“Those cursed signals blipped me out.” (Specific)
So where does the “Realist” come in? If you can generalize your trades with positive thinking and positive experiences, your brain will associate trading with winning, thereby fortifying your trading psychology in a way where you will seek those winning trades subconsciously. This will mean your generalizations will ultimately transform into a reality.
Shifting Optimism
To help shift your mentality to that of an optimistic trader, try to always avoid generalizations for bad trades, and only generalize good trades.
A healthy mentality and belief system ultimately comes from a high ratio of positive thoughts to negative thoughts. Make sure you remain positive and realistic when evaluating your trades and you will already be leagues ahead of the competition.
The Transformation of Your Brain
“We can complain because rose bushes have thorns, or rejoice because thorn bushes have roses.” -Abraham Lincoln
Why we need to condition our minds to become more optimistic:
The war over control of your thoughts is a process. Just like going to the gym for a day, a week, or a month does not give you immediate results, conditioning your mind takes time. Like working out, mental conditioning requires upkeep and continuous practice to maintain. This will not only gravitate better trades to you, but will also change your perspective on life in general. There is undoubtedly a lot of mental stress that can inflict toxic psychological damage upon you as you explore the harsh dungeons of the stock market. By exercising your brain with new thinking patterns, you can learn to naturally deflect the psychological attacks that the stock market will attempt to inflict upon your mental health.
It never ceases to amaze me how one hundred students can learn the same exact information, and yet only 10 of those students will become good traders.
This is, of course, if you believe the studies that show approximately 98% of traders do not succeed right away, or achieve their desired goals in trading. Why was this happening? Is it their I.Q.? Well, some of the people who did not achieve their goals immediately were extremely smart. Even brain surgeons, lawyers, and engineers fail at trading. Was it their lack of motivation? Many of these people dedicated their lives to learning how to trade, yet never got to profitability.
So what does success at trading require? According to Dr. Martin Selegman, in order to select people for a challenging job, you must search for three characteristics:
Aptitude
Motivation
Optimism
I personally believe that with optimism comes motivation and aptitude. There are ways to exercise your brain to think more more optimistic thoughts, which in my humble opinion is the number one thing every trader can do to improve. This will also ultimately reflect positively on the trades you choose, the stocks you find, and, of course, your overall P&L.
Curing Psychological Toxicity
There are several ways to go about curing psychological toxicity. Brain exercises, diet and physical activity have been proven to work. Ridding yourself of “negative attachments” is also a very powerful way to expedite the healing process.
I have found that reading this is absolutely the best start to curing fear, FOMO, overtrading, negativity of all forms, and every psychologically toxic implication of trading. Sounds too good to be true, right? Read this as many times as you think you need to, so long as you are aware and can practice becoming better, then you will succeed!
I have helped countless traders overcome toxicity and, in my experience, reading this is one of the only ways.
If there is something I can do to motivate you to move in the right direction, please let me know. I’m serious! If you are unwilling, unable, or unwilling to commit, you are reducing your ability to remove this toxicity!
Last updated