Trading Psychology - Why Traders Knowingly Make Bad Decisions
by Brian McAboy
We all make mistakes, but in trading it often happens that people will intentionally make decisions that cause trades to go bad. Now we're not talking about losses that are the result of testing out a trading system or a particular combination of indicators. Nor are we talking about simple errors committed purely by accident. If profit is our our objective, then why would we do these things that are totally out of alignment with our better judgment? This phenomenon has many very unpleasant results that are experienced quite regularly in the trading world.A person's self-esteem can take a major beating when these intentional mistakes occur along with losing money. Additionally, people will then engage in a lot of putting oneself down for having made the mistakes. Depending on the size of the loss, this can be the start of a rather nasty cycle that compounds the problem and sets the stage for it to happen again.
Until the root cause of the problem is discovered and the trader takes action to address it, the self-sabotaging behavior is likely to happen again and again. Experienced traders can encounter this as well. 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 spent time on soybean farms and at the shipping docks loading ships and coordinating shipments and orders. For about another decade, 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 experience in trading, but for nearly 15 years, Mark has been losing money.
But why, and why does he continue?Trading is definitely nothing new to Mark. As a broker, he was very successful. He understands just about every strategy and system there is. He's pretty sharp and knows what he's doing on the computer and how to read the charts. Mark loves trading and looks forward to getting up every morning to get busy with his trading. 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 end a year in the black.
He's also concerned about 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 make use of a system that he knows is profitable, he simply says that he doesn't because they are boring. This is a simple fact: a well-thought out trade, where you know what you'll do before you get in regardless of which way the market moves can be very boring.
However... when you enter trades without a plan, or if you've done something outside your rules, the suspense can be very powerful.Why do people take the time to read entire books 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 thrill.
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. In being human, 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 choose trading because trading offers the potential for very significant monetary rewards.
The real risk is that it also offers the thrill that a certain part of us craves at the subconscious level. If that part of you isn't being fulfilled through other channels of your life, it is likely to find its way into your trading and seek satisfaction there.
Excitement from not-knowing the outcome in your trading is where you don't want it. What you need to do is to include activities in your life that tend to this very human desire, and let your trading be a little boring - but making money.
Article Tags: Forex Trading Psychology, Forex Trading, Trading Psychology , Stock Trading Psychology