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How To Win Big In The Stock Market Using The Psychology Of Trading

 

The stock market will get the best of every trader at some point. That is just a fact right? Well…I don’t believe it is and I’ll tell you why.

In my experience, the difference between successful and non-successful traders is self-awareness, not market favoritism. The stock market isn’t a “thing” that pursues personal vendettas…it’s simply a stream of data. And in fact, the only thing that gives meaning to this stream of data is our background knowledge of it, and our own interpretations and experiences with it. Making the best and most consistent use of this knowledge and experience, requires an understanding of our own personal data stream first—that is, knowing who we are, what our tendencies are, our strengths, weaknesses, beliefs, and perspectives.

The Psychology of Trading

I am often asked, what went wrong? Why did “this” or “that” trade go against me? Why is this market so horrible for trading? Why does the market hate me? I respond with a question of my own; “Can you explain to me your thinking for entering the trade…let’s start there?” Usually I am met with a response that involves a nod to a particular newsletter or the hint of a stock guru and a hot trade of the week etc. Not surprisingly, this response attempts to explain someone else’s thinking behind a trade more so than the individual’s thinking—and also not surprisingly, this type of trader typically comes to express at some point, that the market is out to get them. But don’t get me wrong, a feeling that the “market is out to get you” is not limited to get-rich-quick hopefuls…it strikes traders with far more experience as well.

In my opinion, the moment we frame in our mind, that it is “us against the market,” we instantaneously sabotage our success as traders. It’s all down hill from that point on because for one, the market doesn’t even know who we are and neither do the stocks. Tell me if this sounds familiar? We buy stock XYZ and hours, days or months later, we sell it for a loss. Then, in an effort to “get our money back,” we re-buy the same poor performing stock in order to exact not only financial recovery but…what? Revenge against a stock that had it out for us? Pride? A moral victory against our nemesis?

Technical Indicators

This common occurrence may bring a smile to some of our faces—if we are among the fortunate—but that thinking/strategy is all too common and all too often the undercurrent of thinking that ruins a traders future plans, even before they have a chance to discover what the successful trader has learned. And this is: the market is just a stream of data flowing along with or without our presence. Our goal is to find the currents that suit our needs and to ride out those currents with relative ease, not to become the determined salmon fighting every inch of their way against the current in a life or death struggle. The market—or stream—is what it is, and we have the choice to fight it or ride it.

What is our goal when we interact with the stock market? It is a simple question that too few take the time to consider. Add to that, this question—why am I placing this trade? I find that even fewer traders pose this question with the necessary amount of forethought and at the appropriate time. If we don’t know why we are interacting with the stock market, or understand what our fundamental rationale for executing a trade is…then we need to take a step back and take a serious look at these areas of our trade plan.

A trader’s goal is to create profits on a consistent basis. We all know that riding this data stream and becoming a “river-rafting” guru is far easier said than done. But why is this? Why can’t each and every trade make it to the promise land? Why do so many fail, seemingly, even before they execute their first trade? Why are so many frustrated with the results of their trading and the movement of the market? I believe it has a lot to do with this idea of self-awareness, market perspective, and confidence born out of planned consistency. It certainly doesn’t come from pitting ourselves against the market and waging a one-sided fantasy battle!!

Trade Plans

In my experience, successful traders are consistent in their own behaviors and execute trades without fear of the result. Not without fear of consequence…but without fear of the result. Among other attributes, I find successful traders to exhibit a confidence in their trading systems and in their own personal philosophies. They begin with trade plans and build confidence systematically, by way of working to grow and improve their trade plans. They develop criteria and checklists that identify potential trades, and then utilize consistent and pre-established rules for executing their entries and exits. They consider their judgments sound—for either a profit or a loss—because they have learned to first trade by plan and not trade by emotion. Successful traders know at all times, what their goal is and why they are placing each specific buy and/or sell.

So how do you become the river rafting professional and ditch the I’m-going-to-be-the-first-salmon-to-reach-the-top thinking? I believe we get there by stepping back regularly, and looking inward. We must consider and review our perspectives of the market and make efforts to reconsider and make changes to, any defeatist attitudes we maintain about the market and our place within it. We must all develop a proper mental structure for interacting with the market. The consistency that we most desire will not be found thru indicators or market information. It is most important to find—and will be found—within our own attitudes and beliefs, regarding the market and the results of our individual trades and plans. We make or lose money on our trades; nobody and no “thing” does this for us—or to us.

So no, success is not about the latest stock market craze or about the most effective technical indicators. Success begins with our internal discipline—not with technique or market knowledge…or by the power of “this” oscillator or “that” moving average. Even with the knowledge of a new and improved trading style, we will still suffer the same pitfalls if we have not set-up the correct mental structure to keep us from repeating reckless and unplanned trades.

Marc Douglas, author of Trading In The Zone, puts it this way. Marc says, “…when you acquire the right mind-set, you will be able to trade without fear. You will no longer be susceptible to the multitude of fear-based errors that come from rationalizing, subconsciously distorting information, hesitation, jumping the gun, or hoping. Once the fear is gone, there just won’t be a reason to make these errors and, as a result, they will virtually disappear from your trading.”

I believe Marc Douglas has hit it spot on. It’s easy to fall under the belief that the market has it out for us and an easy conclusion to reach because it implies there is no more we can do ourselves to correct poor results. It removes responsibility and conveniently points outwards. But there is nothing easy about trading and relinquishing responsibility only serves to create unnecessary turmoil and failure for traders. The fact is…the stock market has no personal vendetta and the data stream itself has no meaning, until we apply our background and experience. If you are in a rut or have struggled with negative feelings and beliefs about the market, fear not, you have come to the right place. Together, we will work to develop winning attitudes (mental analysis) that use effective trade plans (technical analysis) to obtain trading consistency.

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