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Trading Psychology

Why Traders Intentionally Make Bad Decisions

“To Err is Human”, but in trading it is a common occurrence that traders will knowingly do things that cause trades to go bad. The situation we’re looking at is not losses that are the result of testing out a trading system or a specific indicator. Nor are we looking at simple errors made purely by accident. If our goal is to profit, then why would we do these things that are clearly against our better judgment? This phenomenon has many very unpleasant results that are experienced quite regularly in the trading world.

The Trader’s confidence can take a severe blow when these intentional mistakes occur on top of losing money. Additionally, people will then engage in a lot of putting oneself down for having done these things. Depending on the size of the loss, this can be the start of a rather nasty cycle that perpetuates the problem and sets the stage for it to happen again. Until the source of the problem is discovered and the trader does something to address it, the self-sabotaging behavior is likely to happen again and again. This doesn’t just happen only to new traders either.

For an example, one such trader (a real person that we’ll call Mark) with over 50 years experience had been going through this month-after-month for over a decade since he started trading from home. Mark has done just about everything in the futures industry that there is to do. He worked on soybean farms and at the shipping docks loading ships and coordinating shipments and orders. For about another ten years, Mark was on the floor of the exchange running orders. From there, he worked both for and as an introducing broker in the commodities industry until he decided to retire at the age of 59. Needless to say, Mark had plenty of exposure to trading, but for nearly 15 years, Mark has been losing money. But why, and why does he keep doing it?

Mark knows how to trade. As a broker, he was very successful. He’s tried just about every strategy and system there is. He’s pretty sharp and knows his way around the computer and what he’s looking at on the charts. Mark loves trading and looks forward to getting up every morning to get in front of the computer. On a typical day, he might make $600 or lose $800. Most often times he loses. When his wife gets home from work (yes, she still works at the age of 70), he’s usually brooding in his easy chair after kicking himself and calling himself “stupid” or “idiot”. In all these years, he still has yet to have a profitable year. He’s also not sure how much longer his wife is going to let him keep on this way.

In response to the question why he sticks with his current method, and why he doesn’t pursue a system that he knows is profitable, he simply says that he doesn’t because they lack excitement. This is a simple fact: a well-planned trade, where you have already determined what you’ll do before you place the trade regardless of the market move can be very boring. But… when you enter trades without a plan, or if you’ve deviated from your system, the suspense can be very intense.

Why do people take the time to read entire books instead of just skipping to the end to see if the hero triumphs or fails? Why do millions of people watch football games, rather than simply check the scores in the morning? It is the suspense, the excitement of not-knowing the outcome, that brings the excitement. The moments that are most enjoyed and fully captivate us are when the ball is in the air and hasn’t been caught yet, when the hero’s fate hangs in the balance. In being human, there is a part in all of us that desires that excitement.

At the conscious level, profits are what everyone wants (who doesn’t?). Many people decide to become traders because trading offers the opportunity to realize very significant financial rewards. The danger is that it also offers the excitement that another part of us desires at the subconscious level. If that part of you isn’t being fulfilled in other areas of your life, it is likely to seek fulfillment in your trading. Excitement from not-knowing the outcome in your trading is where the results can be disastrous. The solution is to include activities in your life that tend to this very human desire, and let your trading be a little boring - but profitable.

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