How does your psychological trading profile stack up? Is your mind supporting or sabotaging your success? Are your emotions helping you to make potentially winning decisions or are they working against you?
Behavioural finance psychologists would have us believe that traders are essentially irrational creatures at the mercy of their basest emotions, greed and fear.
Trading, they assert, is 90% psychological and 10% methodological.
CompareShares went in search of the latest trading psychology viewpoints and discovered that the current thinking in teaching institutions is that understanding your own psychological parameters and those of the people you are trading against is the primary key to all profitable trading.
Ron McIver – Lecturer in Financial Economics, School of Commerce, University of SA
According to Ron McIver, lecturer in Financial Economics, University of South Australia, over-confidence is the greatest trap for traders.
McIver says that in general traders believe that they possess above average skills. Off the back of this is the often erroneous assumption that skill is behind a good trade when in fact it is probably the result of randomness.
Referring to author Nassim Nicholas Taleb’s book, Fooled by Randomness, McIver claims that most people don’t recognize that success is usually due to random factors as opposed to innate brilliance.
Over-confidence, says McIver, distorts thinking.
“If you’re over confident you tend to over trade and under estimate the risk.”
He says that over-confidence is a product of the vast amount of information available today, which has led to the false notion that more is better.
“Not all information is good information,” he declares. “A lot is just noise, which won’t help you.”
To avoid the pitfalls that arise from over-confidence McIver advises asking yourself why a trade worked and if it’s reasonable to expect it to work again.
“You get over-confident because you think you’re more in control than you are,” he says.
“Traders need to be honest with themselves and say, was my strategy good or was I just lucky?”
Mike McMahon, Director of Education, Online Trading Academy
Mike McMahon, Director of Education at US based Online Trading Academy says trading is about understanding human sentiment. He claims that most people don’t recognize this fact and focus only on analysis and execution.
“Consequently they fail because they’re looking for a mechanical answer that doesn’t exist,” he says.
Suggesting that the maxim, ‘to thine own self be true’ should be the catchcry of every trader, McMahon maintains that our belief systems are being constantly manipulated by the media and institutions and our habit of lying to ourselves makes us easy prey.
“The greatest obstacle is not ignorance it is the illusion of knowledge,” McMahon says.
His bottom line is that trading is not about learning how to make money, it’s about learning how not to lose.
A losing trade, he says, is almost always due to self-deceit.
“Either you didn’t do the correct research, you omitted to see that you were being overly-optimistic or you didn’t acknowledge that the greed monster had got you.”
McMahon’s advice is “move out of your ego”, realise that trading is an acquired skill the same as driving a car, know that “trading is a harsh mistress”, which means diligence and discipline and remember that money is made from “fast, clean decisions”.
Robert Rabbin, Leadership and Communication Advisor Specialist and founder of Real Time Speaking
The key for traders, says Robert Rabbin, Leadership and Communication Specialist and founder of Real Time Speaking, is the ability to take in financial indicators and convert them to meaning.
The way to do this, he explains, is to stgelop the mind into a ‘real time system’, which causes it to respond to signals as fast as they happen.
(The concept of ‘real time’ comes from the computer industry and refers to computer systems that take in information and update files instantly.)
The aim, says Rabbin is to cultivate the sort of 1% focus and 360-degree awareness that prime athletes, martial arts experts and high achievers in business possess.
“It is this spacious awareness that enables us to hear and then follow that still, intuitive voice that successful traders rely on.
“When people are stressed they lose that awareness, become really contracted and begin to make reactive as opposed to creative decisions,” he says.
Rabbin maintains that the way to hear our gut instinct is by keeping our attention in the present as opposed to letting it race ahead to the future or rummage in the past.
He suggests that the quickest and most universally accepted technique to become present is a simple breathing practice.
Just take two slow deep breaths, he advises.
“It brings the attention and awareness into the present. Because the real battle is between having a present and aware mind, which is open to what is happening now, versus being lost in useless thoughts.”
Rick van der Zwan, Associate Professor, Department of Psychology, Southern Cross University
Traders need good emotional intelligence in order to process information calmly and coolly, says Rick van der Zwan, Associate Professor, Department of Psychology, Southern Cross University.
“The market behaves like a group and traders with high emotional intelligence have the ability to understand how other people are thinking and feeling and predict how they’re going to react,” says van der Zwan.
He defines emotional intelligence is an ability to understand how others are thinking and feeling in response to a situation or set of behaviours and says that the trick is in separating from the caring and compassionate aspect of empathy.
“Good traders don’t care about anyone else. They’re only interested in making money for themselves. So they’ll have a coldness about them that will allow them to step back and watch how people respond to market forces and then make their own judgements in the cool light of day, says van der Zwan.
He says that the approach that doesn’t work is to be emotionally engaged and let your heart, ego or pride dictate your decisions.
His advice is to step back from your own personal investment, pretend that you are someone else and calmly and rationally ask yourself for guidance.
“People often have the answer within and all they need to do is take themselves out of the equation,” he says.