On the world's financial markets and stock exchanges. Part 10
The main purpose of the lecture: lies in the short but very succinct phrase of the famous Jesy Levermore: "There is a time to buy. There is a time to sell. And there is a time to go fishing".
Psychological basics of stock trading
Why does the price change? Because the relationship between supply and demand is changing. Why does it happen? Because an event occurs.
A chart is nothing but a market reaction to an event. The reaction is a behavior (which is what psychology studies). Thus, studying the price change chart is the study of behavior (psychology) of market participants.
How will a person behave in an extreme situation? For this you need to know the character, sex, upbringing, etc. But in another situation a person will behave differently - the experience will affect it! But in a crowd reaction to events acquires certain patterns - the crowd is primitive. A diagram shows the crowd behavior patterns and they are subject to prediction. What guides us?
Desires are acquired feelings. Instincts are inherited from birth and are subdivided into:
The herd instinct contradicts all the others. That's why trading is a process of self-discovery and an obligatory personal experience. The main purpose of the market is to inform, namely to communicate your wishes to others, and then to inform you and the world of the answers to your wishes, whether they bring you gains or losses.
Being a good analyst is difficult. Being a good trader is even harder. Many think they will get rich as a smart, computer-literate person or because of past success in business, you can even buy a mechanical trading system - it's like sitting on a chair with 3 legs, sooner or later you will fall down, because there is no 4th leg - psychological preparation and money management.
The question of choice: who to live with, where to work, what markets to trade - answers for many appear by accident, without much thought - no wonder many are unhappy.
Trading is a process of self-discovery and an obligatory personal experience. The main purpose of the market is to inform, namely to communicate your wishes to others, and then to inform you and the world of the answers to your wishes, whether they bring you profits or losses.
Pros and cons of stock trading:
- + freedom in time and space, independence, interest
- - psychological burden, risk.
Question: Do you really want to make money in stock trading, or do you want the thrill of it?
- The thrill of trading may be a loss as well as a gain.
- Mostly they come from the process itself (from riding fast)
- short-term exhilaration from the thrill of trading
The psychology of the market
A market is nothing more than an agreement in price and a divergence in value. No deal is made until there is a discrepancy in value and an agreement on price.
We buy government bonds when we prefer to have government obligations instead of holding the money that is paid for them. Our fantasy (trading is a fantasy game, but more on that later) is that the "value" of the bonds will increase. We buy them from some unknown trader who is convinced otherwise. Namely, that their value will go down. We have a clear disagreement about today's value and future value, but we agree on the price.
The market is the perfect mechanism for determining the true price.
But psychologically, price and value are linked by a rubber band a mile long - the market swings on it.
The search for and determination of the exact price takes place in a market where at every moment there is an absolute balance between the energy of those who want to buy and those who want to sell.
The social purpose of artful investing is to defeat the dark forces of time and ignorance that envelop our entire future. The real, private goal of the most skillful investing today is to "outdo anything and everything," as Americans well say about it, to outsmart the crowd, to slip a bad or devalued coin to another. So in defeating the dark forces of time and ignorance, we are left with the alternative of submitting only to our personal and subjective hunches. And these, of course, are intertwined with our personal and subjective emotions such as hope, fear and greed.
The basic rules of the market:
- Rule 1: market ahead.
The combined acumen of all current and potential investors is usually greater than that of a single individual. Is it possible that "others" know something we don't? We can never be sure of that. We would have to agree that it is a risky task to stay ahead of the knowledge of the entire market and disregard this market knowledge of prices in advance.
- Rule 2: The market is irrational.
The market can react quickly to the facts, but it can also be subjective, emotional and subject to just one whim of changing trends. Sometimes prices can fluctuate according to the financial situation and interests of investors, wandering between mass hysteria and indifference rather than between securities rates. Consequently, the private investor's attempts to be sensible may in fact prove to be absurd behavior. (Try opening a position before the American session on the Euro/Dollar pair)
- Rule 3: The environment is chaotic.
Macroeconomic forecasts are usually too imprecise to be of any value to investors, and that's because economic correlations are constantly being affected by small but significant factors which no one can predict or estimate, but which can change everything. Even worse: the same is true of financial markets.
These three rules have been around as long as markets have existed, and yet very few people understand what they mean.
But today we have a fourth rule, formulated by technical analysts who use charting in market analysis: the rule states that these charts are self-fulfilling. If many people draw similar lines on similar charts and equip their computers with a homogeneous decision-making system, the results will be self-fulfilling.
- Rule 4: Graphs are self-fulfilling.
If many people use the same charting systems, they can make profits on their trades, regardless of whether they are actually right.
Factors that additionally play against us:
- the market is organised in such a way that many people lose money
- Commissions and price differences
Every trader is responsible for his own behavior. An indispensable component of maturity is the ability to sort oneself out and approach the choice of activity responsibly. The consequences of an immature decision or flirting with trading can include psychosis, increased neurosis, exacerbations of disease, and even suicide. On the other hand, the decision to go into trading, as a happy epiphany of a mature mind, promises priceless treasures, and it is not just about monetary gain. Markets today are the most accurate and sophisticated psychological monitors in the world. Trading may prove to be the most accessible and effective psychotherapeutic program in existence if handled properly.
Trader's Psychology. From defeats to victories!
The average trader experiences serious stress when trading the markets. This raises the following questions for traders:
- How can I enjoy and profit from trading on markets at the same time?
- Why do I enjoy it so much if it often leads to disappointments (losses)?
- How do I maintain inner harmony and peace of mind - mine and those close to me - in the raging whirlwind of the markets?
- How do you cope with nerves and worries, constantly being in an atmosphere of danger and risk?
- Why do many traders/investors constantly lose money?
- How do you find reliable brokerage companies among the many ones that offer their services?
Those who treat trading calmly, and not engage in it as in a battle to the death, those who look beyond their losses and master the art of "dancing with the market", are constantly winning. The key to a good dance, i.e. making a profit on the market, is the ability to relax and simply move with the flow. Dancing with the market means moving with the flow of the market - up, down or sideways with a sense of harmony, trust, gratitude and, even love. To dance really well and enjoy the process of dancing, you must allow yourself to move to the beat of the music, not according to a pre-determined plan.
How can you treat a person?
- As a partner, friend or girlfriend
- as an enemy or rival
- as an object (neutrally)
How do you view the market? - Neutral!
The market offers a host of temptations and the market creates a thirst for new acquisitions and a fear of losing what we have gained. These feelings disturb our appreciation of new opportunities:
- your feelings have a direct impact on your account
- When you're in the market, you're up against the best minds in the world. The field of your game is designed for you to lose; if you let your emotions interfere with the process, the battle is over.
- After winning many feel like geniuses (it feels good to feel so smart that you can break your own rules and win!) Such players go into self-destructive mode, abandoning their own rules, then they take revenge on the market (there are many examples of leaps from riches to poverty and back).
The sign of a successful trader is the ability to build a fortune!
To dispel doubts, we need to understand the game we are playing. This game is a competition of our own beliefs. If we want to change our results, we must change our beliefs. Beliefs are what we believe to be true. We almost never question our own beliefs, but that is what a loss-taking trader must do: assess their own beliefs not only about the market, but also about themselves.
Few traders know why they trade, far fewer know how they trade.
We all usually give superficial reasons: to make money fast, for the fun of competing with other traders, for the prestige of the profession, etc. Having made your last trade, what caused you to lose - because you didn't guess that the market would move the other way, or because of an underlying, unexamined belief that you can't get rich that easily? If the reason is the latter, it's time to get rid of some old beliefs. How do you free yourself from your beliefs?
Understanding the difference between process and content is very important for success in the market. Generally speaking, we've been taught to be goal-oriented, prioritising, evaluating what's more important than that. We make lists of our goals, plan for them, and then neglect the present and mentally live in the future. The abnormality of living in the goal space rather than the present moment space is that we focus on the future and cannot control or even be aware of what is happening now.
We cannot trade well while we plan how we will trade tomorrow. Living today is a prerequisite for good trading. Pay attention to the process, not to future goals and desires. One way to live for today is to make sure that all (or most) of our beliefs are based on "grounded versus unfounded" assessments. This is not an economic, fundamental, technical or mechanical approach. It is a behavioural approach using information generated by the market.
We traders are usually influenced by our latest mistake and do not pay attention to what is happening in the market at the moment. In other words, we base our beliefs on our past circumstances, and any incoming information will be filtered so that it does not conflict with our beliefs. If reality conflicts with our beliefs, we will deny reality and distort incoming information in an effort to preserve our precious beliefs. It is no surprise that we fail in the market, having been exceptionally successful in other professions. In the market, you either face reality or suffer losses.
It's easy to make money on the stock market! Changing your beliefs is not easy!
Making money is easy if you understand the basic structure. It's also easy because the market itself becomes the ultimate teacher. It will always tell you exactly what to do and when to do it. If things aren't going well for you, it will correctly point out where you went wrong and what you should have done. A great teacher, the market gives way to no one and is always eager to show you how to act.
To tune in to the market you must make your goals less stringent!
Contrary to the claims of all-knowing gurus, we downplay the importance of the present whenever we set goals. In the market, things don't always work out the way we want them to. We don't enjoy getting ready to trade in the market if we worry about possible losses. We don't enjoy spending time with our children if we worry about their future. We don't enjoy maturity if we worry that illness may suddenly rob us of the joys of life. We deprive ourselves of the joys of free flight, of enjoying the rich opportunities that life and the market offer us, here and now.
If you set yourself up for a certain trading result when you are bidding, you lose "elasticity". If, on the contrary, you loosen up, open your heart, you enter a state of flow. Question: How can you trade without having a goal?
Answer: define as many goals as you want. Then do the necessary preparatory work and then - work until you reach your goal. When you are satisfied that you have made the most successful trade so far, leave the market alone and wait for the result.
Example: "If you were a farmer, and farmed the way you trade, you would plant seeds and then come back every day to dig them up to see how things are going. Once you've decided to do the trade, let the fruit grow and ripen and then reap it. Stop digging up the seeds."
If you are anxious, you are at the mercy of a bad habit. If - honestly - you are not, you are trading well and you want what the market wants. Whenever you are anxious, you want what you want, not what the market wants. The market is neutral. It does not know or care about what you want.Most traders confront the purpose and function of the market and therefore incur losses. Picking tops and bottoms is inconsistent with the nature of the market. A jumble of conflicting indicators united by the power of greed is the worst tool for trading the market. We don't need a new indicator or strategy. We need a new experience - a new sense of what should be born in the right hemisphere and an intuitive understanding of the market.
Important characteristics for success in trading the financial markets, according to traders themselves:
- Reaction speed
- Stress tolerance
- Willingness to take risks
- Emotional stability
- Ability to work in a team
- Ability to process several types of information simultaneously
- Ability to correctly evaluate information sources
- Learning ability
- Communication skills
- Analytical thinking
- Mathematical ability
- Organisational skills
- Computer literacy
- Social skills
Now compare with the personal success factors. According to the 100 largest investors and investment managers, active and successful in the financial markets for more than a year
- Quick decision making ability (stress resistance, aggressiveness, willingness to take risks)
- Understanding of the market
- Emotional stability
- Ability to process information
- Demanding integrity (inquisitiveness)
- Information processing (computer literacy, social skills, mathematical ability)
Most traders spend most of their time expecting a good gamble, but once they have entered the market - they lose control - an essential element is missing, which is controlling emotions! If your mindset does not match the market, if you ignore changes in mass psychology, then you have no chance of winning! You need to be able to focus on reality, to see the world as it is.
There is an opinion that the Market is a game for men?
Because 95% of active traders are men, but the number of women is higher among corporate traders and women are more successful. Stock market game is like an extreme sport - only 1% of them are women. Men gravitate to risk, the more monotonous their work, the stronger their desire for extreme sports. But experienced extreme gamers die more often, because they take more risks.
You can succeed in the stock market if you treat it as a job. Emotions are death!
For a long time, zoologists have wondered why gorillas don't breed in captivity. It doesn't mean they're not sexually active. It turns out that this is because they do not have the right conditions for it. All animals need a sense of danger to get a taste of life. If there is no risk, we try to create risks artificially, because risk and the feeling of life are two sides of the same coin. Risk is incentive to live. Life without risk loses its meaning and value. Today we don't know where to put this free time, and we have lost the opportunity to struggle. Most people fill this gap with television, but you and I can fill it with market work. We have to understand, firstly, what our needs are, and secondly, how they relate to the market. We have to make choices every day, come to terms with the results and gain experience. Risk is the trigger in life.
The actual reason why most traders are constantly making losses is because they are working with new information using old, inappropriate categories.
There are only two kinds of working with new information:
- Changing it (distorting it) to the extent that it conforms to the old organisation.
- Allowing new incoming information to self-organise, taking other, new and unpredictable forms of organisation.
This is the difference between a successful approach to trading and another - more widespread - approach that leads to losses. Traders who allow new information to organise their trading will act in sync with the market, making them winners. Trying to align new information with old categories distorts both the information itself and the trade.
The Psychology of Loss
If we briefly describe the "road to ruin", it goes something like this:
- Specialize in a small number of markets and trade only in them all the time.
- Get information about these markets from random tips, hearsay and good advice from friends and taxi drivers.
- Trust the information you want to hear to a greater extent.
- Adjust the information so that it confirms what you have done.
- Buy when your neighbour and everyone else is buying and sell when the market has crashed.
- No one likes to be out of the market, especially selling short. So most of your time you think the market will go up.
- Make sure you get a huge amount of scrappy information and never important information in perspective.
- Improve the practice of looking at prices in breakdowns (on computer screens, in stock lists) instead of studying them in perspective .
- Don't create a policy of potential losses and take advantage of the huge opportunities that appear in the market.
- Close long-term investments in a week's time because they have already yielded profits .
- ...And keep short-term investments if they have produced losses...
- ...renaming them as "long-term investments".
- Or instead using an inverted pyramid structure when things are going well. Replenishing stocks to "improve average performance" in a downtrend.
- Use the same tactics whether the market is trending, in a consolidation zone or performing a trend reversal.
- Move stop-loss orders when the market is going against you, because you are hoping for a reversal soon.
- Relying more on the opinions of others than the facts themselves.
- Use market prices as your main criterion for determining fundamental value.
- Hide losses by hedging instead of taking them.
- Evaluate each investment individually.
- Forgetting that this financial market is the cruelest in the world.
If you don't know who you are, the market is too expensive a place to find out.
Psychology of personality
We all trade on our own core sets of beliefs. Trading success has little to do with price and time. From our point of view, markets are not economic, fundamental, technical or mechanistic - they are behavioural. Markets are made up of traders with all the variety of their timing, levels of preparedness, amounts of capital and goals. That's why at times markets seem to us very much like a person - then angry, then irritable, then confused, then moody, then alert, or even drowsy.
Let us ask ourselves the question and try to answer it honestly ourselves: "Why play in the financial markets?"
- It`s freedom, it is chess, a preference and a crossword puzzle at the same time (many participants are singles).
- Achieving self-realisation.
Many have an intrinsic need to achieve excellence, but the best are hard working people and the goal of a professional is not to make money, but to work competently and confidently. Winning should not make you happy and losing should not make you sad. The problem with self-realisation is that people are inherently self-destructive, while the market offers unlimited opportunities for both, and those who have no peace with themselves satisfy their conflicting desires in the market.
What should be done? Fix in your mind the fundamentals of trading.
- I have come to trade for life!
- Take your time! It is easy to lose money!
- You must develop your trading system.
- Always remember about money management.
- Always remember - that the weakest link, is the trader himself!
If you do not know what you want, you will appear where you do not want to be. It is necessary and sufficient to want what the market wants.
Fantasy and reality of the market
The successful player is a realist. Only losers act based on fantasies. Here are some universal fantasies of market players:
The myth of intelligence or trading without a head.
It is not terrible to make mistakes - it is bad to make them again! If you make a mistake for the first time - it means you live. You search, you experiment. If you repeat mistakes - it is a neurotic syndrome.
- I lost money because I didn't know the secrets (a demoralized player gets money and buys secrets)
- from an intellectual point of view the game is very simple (you need cunning and cleverness)
- Blame the broker, the Guru, the news.
When the pain builds up slowly and gradually - the natural reaction is to endure and wait for improvement. The dream trader also holds a losing position, hoping that the course will change in the right direction.
The myth about insufficient capital
Often market carves out stops and moves on
- losers take market trends as a confirmation of their conclusions
- amateurs do not anticipate losses and do not prepare for them
The myth of autopilot.
Try driving a car on cruise control during rush hour on the main highway of a major city. It won't work for you.
- Autopilot enthusiasts are trying to relive their childhood experiences - their mothers fed them, fed them milk, gave them warmth and cared for them, taking full responsibility for them.
- You cannot count on the goodwill of the market
Cult of personality
- Many people pay lip service to independence, but when they get into a bind they start looking for gurus.
Every trader should have 3 basic components
- A realistic personality psychology.
Always most failures in life are caused by self-destruction and one should not look for various reasons everywhere, the reason is in oneself.
- A logical working system.
To change, you need to find the reason (keep a diary, analyse trades, work through mistakes)
- A money management plan.
Almost all professions provide insurance for participants (your boss, a colleague at work can warn of wrong behaviour - in the stock market game there is no such support) Self-destruction must be controlled, a psychological insurance (money management rules) is necessary. Those who do not learn from their mistakes will relive them.