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Trading Psychology - Why Traders Knowingly Make Mistakes
Author: Brian McAboy  | Posted: 09-11-2007 | Comments: 0 | Views: 24 | Rating: (52)  (?) 
 We all make mistakes, but in trading it is a common occurrence that traders will knowingly make decisions that result in losses. The situation we're looking at is not losing trades that are the result of testing out a trading plan or a specific indicator. Nor are we looking at simple errors made purely by accident. If profit is our goal, then why would we do these things that are clearly against what we know to be right? This phenomenon has many very undesirable consequences that are experienced quite regularly in the trading world.
A person's self-esteem can take a major beating when these events take place on top of the loss of money. Other after-effects often include quite a bit of negative self-talk for having made the mistakes. Depending on the magnitude of the error, this can be the start of a rather vicious cycle that perpetuates the problem and sets the stage for it to happen again. Until the root cause of the issue is discovered and the trader takes action to address it, the self-sabotaging behavior is likely to continue. 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 repeatedly for over a decade since becoming an individual trader trading from home. Mark has done just about everything there is to do in the futures industry. He spent time on soybean farms and at the shipping docks loading ships and coordinating orders and shipments. For about another ten years, Mark ran orders on the exchange floor. After that, 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 experience in trading, but for nearly 15 years, Mark has been losing money. But why, and why does he continue?
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 intelligent and knows his way around the computer and what he's looking at on the charts. Mark loves trading and is excited about getting up every morning to get in front of the computer. On a typical day, he might make $600 or lose $800. More often than not 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 end a year in the black. He's also not sure how much longer his money is going to last.
In response to the question why he continues to trade this way, and why he doesn't make use of a strategy that he knows can make him money, 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 which way the market moves can be very boring. However... when you enter trades without a plan, or if you've deviated from your system, the suspense can be very powerful.
Why do people take the time to sit through movies instead of going straight 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 hold our attention are when the ball is in the air and hasn't been caught yet, when the hero's fate is uncertain. As humans, there is a part in all of us that craves that excitement.
At the conscious level, making money is what everyone desires (who doesn't?). Many people decide to become traders because trading offers the opportunity to realize very substantial monetary rewards. The real risk is that it also offers the excitement that another part of us craves at the subconscious level. If that part of you isn't being satisfied through other channels 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 keep yourself regularly involved in activities in your life that provide sufficient excitement, and be okay with it if your trading is a bit boring - but profitable.
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About the Author:Did you know that it takes anywhere from 7 to 20 YEARS for most to develop the Trading Psychology to profit consistently and confidently? Can't afford to wait that long? Go to => www.InsideOutTrading.com
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