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Is Human Psychology Affecting Your Trading Skills?

, | February 14, 2018 | By

The human element is often the factor that determines whether a trader achieves success in the marketplace. Unless you recognize the many challenges that our ingrained psychology throws at us, interacting with the markets in a consistent and profitable manner can prove difficult.

As it has been repeated many times over the course of history, “we are our own worst enemy.” In the arena of modern futures trading, this old proverb can certainly prove to be true. To remedy this, we’ve outlined a couple of common psychological factors that affect trading skills, followed by four ways you can prevent or reduce their impact.

1. Emotion-Based Trading

Many volumes have been written about the impact of emotion on active trading. After all of the analysis and study, overcoming emotion-based trading boils down to the management of fear and greed.

Fear comes in several forms and can be a destructive influence to profitability:

  • Fear of failure: In active trading, fear of failure is typically related to a personal attachment to capital. It can lead to many bad habits, including cutting profits short and letting losses run.
  • Fear of success: It seems counterintuitive, but if a trader does not expect and feel worthy of success, then self-sabotage becomes a very real possibility. Habitually giving profits back to the market is a sign of this impediment.

The second component of emotional trading is greed. In the markets, greed deals with the direct acquisition of money and presents several pitfalls:

  • Overtrading: Being too active in the market is a common mistake among traders. In an attempt to bolster profits or make up for a loss, regularly taking trades that fall outside of the adopted methodology can crush the bottom line.
  • Reckless risk management: Increasing a trade’s potential reward through magnifying leverage or allocating unreasonable amounts of capital are sure-fire ways to prematurely blow out a trading account.
  • Haphazard trade management: Aspiring to improbable profit targets in the hopes of making a blockbuster trade can be detrimental to profitability. Not only are the targets hit less frequently, but all unrealized profits from positive trades are given back.

It’s important to realize that both fear and greed are rooted in our DNA. In most environments, they contribute to survival. In the futures markets, they can be fatal, as they hinder your trading skills.

2. Performance Anxiety

Another nasty word in the trader’s lexicon is anxiety. Anxiety is defined as being the body’s response to a perceived danger. In everyday life, physical stimuli largely determine one’s relative level of anxiety.

In the markets, many aspects of our personal psychology determine anxiety levels. Whenever a trader’s fight-or-flight instincts are triggered, many trade-related problems may arise that impact performance negatively:

  • Indecisiveness: Increased levels of stress can detract from focus, inhibiting decision-making. The inability to act decisively can result in substantial opportunity costs.
  • Hyper-aggressive trading: As the fight-or-flight instinct takes over, one tendency is to “fight” the market. The primary side effect is taking riskier trades and more of them.
  • Impulsive trading: Trading on impulse rarely works out well. Impulsive trades are noncommittal, meaning the trader has little confidence in their outcome. In turn, the trader frequently opens and closes position as he whimsically dodges in and out of the market.

As with fear and greed, anxiety is a part of every human’s makeup. It is normal to feel your heart pounding immediately before executing a trade. However, when anxiety begins to dictate behavior, action must be taken to remedy the situation.

Managing Your Trading Psychology

The good news is that it doesn’t take six months of reading the complete works of Sigmund Freud to get a firm grip on your trading psychology. Traders have several ways to immediately avoid or reduce many of the common blunders that affect your trading skills:

  • Adopt a comprehensive trading plan: A definitive plan governing trade selection, trade management and money management promotes consistency within the marketplace.
  • Automate: Sometimes emotions and anxiety are simply too much to overcome. If this is the case, taking a hands-off approach to the market may be a wise course of action. Through automation, a trading strategy is executed from top-to-bottom without the need for human intervention.
  • Adjust your timeframe: Not everybody has the personality for short-term trading. Investing with a longer time horizon in mind relieves the stress of constant decision-making.
  • Consult a market professional: There is nothing new under the sun. Talking with a veteran of the markets can help in understanding and overcoming mental issues impacting performance.

If you’re struggling to overcome some of these challenges, consider exploring our StoneX resources. Many options are available to help traders like you achieve longevity in the marketplace.

Download the eBook: Futures and Options Strategy Guide