How Trading affects psychology

By | July 13, 2015

1. Trading affects psychology as much as psychology affects trading . Many traders experience stress and frustration because they are trading poorly and lack a true edge in the marketplace. Working on your emotions will be of limited help if you are putting your money at risk and don’t truly have an edge.

2. Emotional disruption is present even among the most successful traders – A trading method that produces 60% winners will experience four consecutive losses 2-3% of the time and as much time in flat performance as in an uptrending P/L curve. Strings of events (including losers) occur more often by chance than traders are prepared for.

3. Winning disrupts the trader’s emotions as much as losing – We are disrupted when we experience events outside our expectation. The method that is 60% accurate will experience four consecutive winners about 13% of the time. Traders are just as susceptible to overconfidence during profitable runs as under confidence during strings of losers.

4. Size kills – The surest path toward emotional damage is to trade size that is too large for one’s limit. We experience P/L in relation to our trading fundvalue. When we trade too large, we create exaggerated swings of winning and losing, which in turn create exaggerated emotional swings.