Introduction To Psychology

[Leth]

Trading Psychology And Discipline
by Jason Van Bergen - Investopedia

Your psychological mind set may play a larger role in your trading career than your chosen technique or any other details associated with your day-to-day practice. Indeed, discipline is just one attribute of trading psychology, but it just so happens to be the most important psychological factor that affects a trader's success.

There are four components of discipline that I believe are absolutely essential to a successful career in trading:

1) Training and practice - Never content to rest on his or her laurels and accept the possibility that his or her trading ability has peaked, the successful trader is always involved in education, training and practice; decision-making skills must be continually enhanced so they exhibit the automatic, lightning-quick qualities of a computer but with the benefit of superior human judgment.

2) Controlled behavior - The successful trader has an extraordinary amount of self control. Never letting emotions take over when entering or exiting a trade, the disciplined trader is largely immune from panic and does not let euphoria cloud judgment when trades go exactly as (or better than) intended. A trader's emotional state should be the same on the days on which he or she makes $50,000 as on the days on which twice that amount is lost.

3) Trading rules - Similar to the last point, the successful trader has developed a set of trading rules that are religiously followed. If his or her style of trading dictates that a trade must be exited once the stock reaches its upper range, the trader will exit that trade at that exact price and will not wait a moment longer.

4) Punishment - The final essential component of the discipline of trading is that trading possesses a self-punishing feedback mechanism. If a trader breaks his or her trading rules and strays outside of the guidelines for controlled behavior, his or her edge will inevitably be lost. The punishment may be quick, as it is in the case when the opportunity for profit is sabotaged by the trader's momentary loss of focus. Punishment may also be longer term, which occurs when the trader gradually strays from his or her trading rules. This may bring success at first, but it turns to failure the further away the trader strays from his or her established pattern. Whatever the exact circumstances, a trader who fails to exhibit the qualities associated with discipline will surely lose, whether quickly and painfully in the short term or slowly and gradually over the long term.

......Trading is difficult work and serious business. Successful trading is impossible if you take things with only a modicum of seriousness. And disciplining oneself requires time, patience and a great deal of hard work. A trader has to observe, learn and analyze long before turning thought into action.

If you are one of the few human beings that possess the qualities of discipline that I have outlined, you are well on your way to trading success. But if you start dabbling in trading only to realize that you are slipping on any behavioral tenets, stop and take stock of your actions. Ask yourself what it is that is causing you to stray from your disciplined path. If you are able to adjust your pattern to get back on track, more power to you. If, however, you are not able to quickly reign in control, you may want to give second thoughts to your trading endeavors. The trading profession offers much potential for handsome rewards, but the punishment for stepping off the straight and narrow path of rigid discipline will inevitably lead to financial ruin.