Thoughts on Trading Psychology

Trading Psychology: Taming My Mr. Hyde



By S. Wade Hansen, 2 August 2007



All of us have trading demons. The story of Dr. Jekyll and Mr. Hyde remains extremely popular today because we all know we have our own Mr. Hydes we have to deal with. My Mr. Hyde is over-confident and has entitlement issues.



Yesterday, after I made my post outlining how stop loss orders had saved my account while I was on vacation last week, I found myself wondering if I had had any sort of a "feeling" before I left on vacation that the JPY was going to have some sort of correction while I was gone. And then I caught myself, and I literally started laughing out loud.

You see, I have a problem. I always believe I'm right, which makes me prone to believing my hunches are always right too. Needless to say, in my early days of trading, that cost me a lot of money.

I had to set up rules in my trading, not because I thought they were generally a good idea (which they are) but because I have to have them, or I will blow up my account. It's a good lesson I learned early on.

Unfortunately, many investors never take the time to sit down and evaluate themselves. They'll spend plenty of time evaluating MACDs and Gann lines, but they won't ever look at themselves to see if they are handicapping themselves.



I found that the majority of my problems early on as a forex investor stemmed not from my technical analysis but from my trading personality. I like to make quick decisions, I have a hard time looking away from the charts and letting the trade do its thing, and I have a hard time believing I could have ever been wrong so I chase bad trades. That is quite a list of bad investing traits, I know, but I have learned how to cope with them. I started making longer-term trades.



Longer-term trading keeps my Mr. Hyde in check because I'm not operating off of the pressure cooker that is a 1-minute chart like I used to. Daily charts move much more slowly and much more steadily. I don't have to make quick decisions anymore, I don't have any choice but to walk away from my charts to sleep, etc., and I don't have the same urge to chase bad trades. Becoming a longer-term forex investor has made all the difference in the world for my account.



Ask yourself, what are your demons? What can you do to tame your Mr. Hyde? Trust me, while it feels exhilerating to let Mr. Hyde come out and play, your account will get fatter if you keep him in check.

Yes Chasing trades one way or another will come back and bite you!
Learned that my self too.

Ditto!

Trading is a lot like hitting a baseball. You have to know which pitches you hit best and be patient enough to hit the pitches in your zone. In trading this translates to knowing and understanding how well your system works and having the patience and self discipline to wait until you have the most favorable setups for your system.

I think you have given some good advice here. The problem is many people think long term trading means entering the market without putting in stop loss orders. They believe "I am in it for the long haul" so just purchase more as the price goes further against them. This is a very poor strategy and a lesson learned for those that purchased GBP/JPY at 250+ in the past few weeks. Long term trading can be quite successful, but it is imperative to always have an exit plan in case things do not turn out the way you expected them to.

Yup, don't i know it. My own biggest demon used to be trading too big for my account looking for those big wins. Not anymore though. I learned!

I seem to have a never ending supply of demons to tame. Trading sure keeps me growing.