The Intelligent Investor

It is said that stock trading is 85% psychological and 15% methodological. Does this then imply that regardless of Stock trading method, a trader that has control over their emotional issues will thus be a profitable trader, or will it be impossible to ever control emotions without the proficient implementation of method? The stock trading method point will suggest that not only are these statistics not the case - trading psychology does not exist.

Trading method will be the determinant of profitability, and this will be done through -

- the ability to understand the methods inherent strengths and weaknesses

- the ability to maximize these strengths and minimize the weaknesses.

Viewpoint OF Trading Method

Stock trading psychology has become so widely discussed and promoted through consultants and books that it has become a very convenient rationalization and excuse for losing. Why take the responsibility for a lack of work ethic and stock trading without any concept of plan, an honest assessment which would be a hit on the traders self-esteem when you can just blame it on trading psychology instead?

Stock trading psychology - that a trader creates from existing personality traits that are not initially related to trading, but surface from trading without method understanding. The outcome of course is fear, but wouldn’t this be the case when doing anything that was perceived as dangerous, and which was being done without the necessary understanding and skills?

Trading, with its inherent characteristic of accepting financial risk while participating in unknown outcomes, is certainly dangerous, and thus the more preparation and understanding that is needed.

Trading Scenario

Consider the a trading plan which has the following three setup types -

- initial which your intended trade entry

- first continuation which is used to enter a trade in case you have either missed your initial entry, or you decided that you wanted more confirmation because it was a counter direction trade

- second continuation which is intended as a trade addon setup, but is also one last chance to enter a trade.

You get an initial sell setup that triggers, but you do not take the trade = trade1.

The trade breaks cleanly and goes to what would have resulted in a partial profit, and then before price goes down further, it retraces back to the area where the sell was done. This price holds so the swing remains short, and from this hold of what is now resistance, you get the trigger of your first continuation setup.

BUT you don’t take this trade either = trade2.

Why wasn’t the trade taken? You decide that after missing the initial entry that you have missed the trade, your emotions and biases tell you that the move has gone too far. Again, this trade breaks cleanly, not only adding to the gains of trade1, but also giving a partial profit on trade2.

Price now consolidates between the lows and the price resistance that you would typically be using to stay short if you had taken either the initial trade, or the first continuation trade.

Instead of the swing reversing after consolidating, it continues down again, and with this continuation your second continuation setup triggers = trade3.

AND AGAIN - you dont take the trade. After all, if you didnt take either of the first two trades, how can you possibly take this trade; maybe you were wrong when you thought that the move had gone too far to take trade2, but certainly thats the case for trader3.

Filed under: Trading Articles