TRADING PSYCHOLOGY: AM I MY WORST ENEMY WHEN TRADING?

Vincenzo Desroches - A Shareworld Contributor

For an investor to be successful, three essential qualities must be present: knowledge about what you are doing, experience gained from both good and bad decisions, and most important of all, control of the emotions. Buying and selling stocks may often involve long timeframes to develop these qualities, but for a forex trader, timeframes shrink, actions must be concentrated and assertive, and the influences of the psychology of investing are suddenly exacerbated.

Warren Buffett, one of the world’s richest men and world renowned investor, once wrote that to invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What is needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. I doubt if Mr. Buffett ever traded foreign currencies, but if he had, he would have learned that his statement above was perhaps more relevant when applied to forex trading. A successful forex trader must control his emotions and be extremely disciplined in his approach. However, behavioral experiments in the realm of investment psychology demonstrate that our internal programming can be our own worst enemy when pressured to make split second decisions, especially those involved with act of selling.

Whether we like it or not, we are born into this world without a lot of control in the matter and immediately begin absorbing whatever world and associated behaviors surround us. Our minds are preprogrammed in these early years, and we then spend a lifetime attempting to understand and to unwind the unwanted personality traits that seem to betray us. Free will is a personal asset. But it helps to know what might be masquerading as free will may only be unhealthy hardwired programming emanating from our unconscious minds.

Self-examination is now in order. Tests show that people with obsessive qualities, those bordering on perfectionism that is common in today’s demanding workplace, tend to sell too early or hold on to losses too long. Obsessive people have a great deal of unconscious guilt from their childhoods. Success actually stimulates anxiety, and losing money conversely appeases their inner feelings of guilt. Live forex charts do not generate optimism.

You need not be obsessive to experience feelings of greed or fear when in the midst of trading. Research has shown that people value a Pound lost twice as much as a Pound gained. The emotional overweighting of money lost probably accounts for the panic we feel when the market suddenly moves against us. These findings are consistent with basic psychoanalytic theory that posits that loss is the most disorganizing event to the sense of self. The threat of loss suggests pain, impending failure, and loss of self- esteem. Our minds will shift into overdrive to avoid these types of situations.

So what is a trader to do? We cannot fire the firm of "Me, Myself and I". We certainly do not need a course in psychology or to pay a professional for his advice as we recline on his office couch. Awareness is the first step. Developing documented trading routines, practicing them in a real time environment, and fixing on exit strategies beforehand are accepted ways for increasing focus and eliminating emotional distractions when disciplined decision making is a must. Our number one objective is to increase our cash position in a consistent manner as we trade. There will be gains and losses, but it is the net result over time that is important. Focus on consistency and your routine in times of stress to overcome the foibles of the mind, and success will surely become your trademark.