Hi guys hi from Andrea Unger.
How important is psychology in trading?
Sometimes you read it’s 90% psychology 10% technique, sometimes you listen to people saying psychology is nothing, you need a good system.
Everything is true, everything is false! I believe that to approach trading properly you need a balance among all the components, good technique, good risk management, good position management, risk is one thing, position is another so I split them in 2 and also psychology and a number of other things such as a good infrastructure, a good machine and so on.
Also, the technique can be split into entries, exits, duration, time horizon of a position and many other things.
So psychology on one side is one component of this, end I would say that each of these components has the same importance and should have the same weight in this cake as ingredients but there is also another way to look at psychology and this is something that is supporting you generally in what you do.
Let’s imagine when we talk about football.
There are excellent football players, champions, but these sometimes do badly in important matches.
In the final they make mistakes, they mistake a penalty kick or they create a bad fault in defense area or anything like that.
They are really champions who have an excellent technique, but who psychologically fail when there is an important match and obviously when there is this important match they harm their team in a double way because they do bad so they don’t give their contributions and sometimes they also take all the other’s doubts psychologically because they see that their champion is not doing well.
So also in trading, we have this sort of psychology keeping us up or down. That champion is still a champion, but when he becomes psychologically weak, he fails a match.
In trading, we have the basic psychology which is important for discipline, for example just to follow a plan, and then this hidden psychology that is keeping us from finalizing things properly.
When you start doubting about what you and do you don’t really know how to go on, you jump from one approach to another, yesterday you were believing in price action, today you start testing the Elliot waves, so I’m not saying price action is bad, Elliot waves are bad! I am just saying that you jump from one approach to another looking for some sort of a Holy Grail which obviously does not exist and you never give enough time to a chosen approach to show its benefits.
It’s like when you train for a marathon and after a while you don’t see an improvement in some of your running times of certain distances so you change way to train, but actually you have not given enough time to your body to digest all the work out that you have been doing, so you have not given time to see the benefits of the work done.
The same happens in trading when you put together many things but you don’t give enough time to let them produce the results that you expect, you will change your approach and it’s very difficult to cope with different approaches when you never really finalize one of them. So my suggestion is that you have to be careful about this.
I’m not suggesting one approach or another because you can be a discretional trader choosing one approach, you can be a systematic trader choosing only to use systems, but also, in this case, you can start doubting and stopping it before it actually shows what benefits you expected.
If you really can’t cope with the stress from trading, you either don’t trade which I always suggest because not all people are good for trading, but if you really want to trade the only choice you can do is to try much much smaller.
I don’t suggest the paper trading because again when you paper trade psychology is heavily cut out because there is no money in the market and it’s really different when you start having your money inside, but if your money put inside is smaller much smaller, you can start approaching this stress in a different way much smaller and slowly… such as a homeopathic approach… and slowly you can withstand that kind of stress and then increase your sizes afterward.
The only thing that you have to do is to be very honest with whatever you do and try to understand if you want to change a plan is it because you really got some new information you totally ignore before so that you have now a clearer and more complete picture which leads you to change your plan?
In that case, it is fine because you have a new awareness about that kind of problem or if you just find a good excuse to change your plan.
It’s not easy, but you have to be honest with yourself saying I’m cheating, I’m simply no more confident with that approach because I’ve been waiting too long for some profit and I’ve changed to this other one, but for no real specific reason.
So I’m actually cheating myself I’m the fool and I am also a cheater! This is wrong, so you have to be honest and aware of that.
Try to keep it as small as you can withstand it is the only way you can try to go ahead and grow with the sensation of trading stress facing every day a new challenge.
This is it, guys.
Ciao from Andrea Unger.
See you next time.