With the pace of information spreading globally eclipsing speeds ever seen in human history, never before has it been so easy to accumulate knowledge on any topic. This has empowered investors globally who desire to learn to trade. Webinars, online tutorials, classroom experiences, and courses are available at the fingertips of every investor with an internet connected device. However, with all the information available on the web, it is difficult to sift through all the materials to filter out the noise and find relevant materials. Knowledge is power, and education is key to successfully investing, but recognize that certain resources have ulterior motives when it comes to providing information.
Discipline as the Foundation for Success
In general, as a skill, trading is not something that can necessarily be learned without real world experience and patience. To effectively learn to trade, any successful investor must start by honing their discipline. This is the common attribute of all profitable traders. Discipline serves as the foundation on which any victorious strategy is built. Without 100% discipline 100% of the time, any well devised game plan can quickly unravel. Discipline is what allows successful traders to control losses and take profits despite human-beings’ natural tendency towards greed. When individuals lose their discipline, it is easy to identify the point at which psychology changed from neutral to negative as results begin to spiral out of control.
Psychology of Intermittent Reinforcement and its Impact
Psychology is another important pillar of any successful strategy as investors learn to trade. Optimism and pessimism are a trader’s worst enemies as the change in attitude can losses to escalate quickly. These emotions are caused for a number of reasons. Oftentimes, when an individual finds success in a trade, it promotes the idea that the individual is clever and thus developed an insight into how things work. This is nothing but a false sense of security that often damages a trader’s effectiveness and serves as the beginning of a trader’s demise. Brokers and market-makers have built businesses on this very principle of intermittent reinforcement and its behavioral implications.
Take for example experiments performed on lab mice. By pressing a lever in the cage, the mouse sometimes received a reward. The mouse does not know when the reward will come, but knows that by pushing the lever, a reward might eventually appear. This invariably leads to the mouse pushing the lever in inexplicable number of times in anticipation that a reward will eventually come. The same idea can be applied to traders who think they are clever. Once a winning trade has been made, the psychological implications are drastic. This clever individual believes that they have an edge over the market and this behavioral change causes individuals to place numerous losing trades with the anticipation that eventually they will win again, and make everything back. This is the point of no return.
Sound familiar? Visited your local casino lately? It is the same principle that makes gambling a profitable business for those who operate gaming venues. One winning bet has a permanent effect on outlook and psychology. Traders are in reality just larger mice, running through a bigger maze. Just like a gambler hopes, wishes, and prays for positive results despite the propensity for the opposite, traders find themselves in a similar psychological space when losses start to mount. It is important to identify and recognize this characteristic because trading is not just about profitability, but equally about preventing loss.
Have a Game Plan
All of this can be avoided by carefully setting out a trading strategy before getting started and sticking by that very strategy. It involves careful understanding of the risks of trading, and also what rewards should look like. When greed takes over a trader’s psychology, all is lost. Many traders have found themselves in situations where they have turned winning trades into losing trades as a result of their inherent desire to profit more. The opposite scenario of losing trades turning into winners is equally damaging. Just remember, the market it is an inanimate object, it does not care about feelings and owes nothing to participants. Hoping that a trade will turn around, or run higher is psychology that should be expressly avoided. When these factors are identified, it is best to stop trading, walk away from the computer, and reset psychology to a neutral point before resuming. Remember, hubris and cleverness will not be rewarded.