Trading Psychologie

How do you define fear? "A strong emotion caused by anticipation or awareness of danger, it
implies anxiety and usually the loss of courage." This definition of fear is useful in helping define
the issues that traders face when coping with fear. The reality is that all traders feel fear at some
level, but the key is how we prepare to address our concerns related to taking on risk as a trader.
Mark Douglas, in his book, ‘Trading in the Zone’, says that most investors believe they know
what is going to happen next. This causes traders to put too much weight on the outcome of the
current trade, while not assessing their performance as "a probability game" that they are
playing over time. This manifests itself in investors getting too high and too low and causes them
to react emotionally, with excessive fear or greed after a series of losses or wins.
All traders will encounter fear at some stage, no matter whether you are a professional or a
novice trader, this seems inevitable, and to succeed and fight fear, traders will have to work
through this positively. Winning traders manage their fear, while losers are controlled by it.
Winners take positive action in spite of their fears.
Two of the greatest fears that a trader will encounter can be,
1. Fear of Loss
2. Fear of Letting a profit turn into a loss
Fear of a Loss
No matter how skilled you may be in your technical analysis, or your study of fundamental
analysis, or your having devised some brilliant trading strategies – but you may still face
roadblocks on becoming a successful and a profitable trader. Why? – Overcoming fear of losing
money. I have never met a trader who really likes losing money – at the same time I have never
come across any trader who has NEVER lost any money. I know of one leading “guru” on charts
and technical analysis in UK, who regularly lectures at seminars, once admitted that despite
being brilliant in his study of technical analysis, he has failed miserably in his trading, having
blown his account many times – now he just concentrates on teaching trading to others!
Fear of losing is not a problem, but it is how you handle the loss. A trader, who is relaxed, can
look forward to another trade. Your success or failure in trading depends on your attitudes
towards your gain as well as losses – and how you handle them.
The market does not know that you, the traders exists, you or for that matter any trader cannot
do anything to change the market or influence it. Only YOU can control your behaviour.
Whether it is a big drawdown on an account, or a good profitable trade, a professional trader
uses his head to stay calm and will look for his new trade. Only a novice trader will become
excited and depressed. You are simply wasting your precious nervous energy!
The primary difference between a professional trader and a novice trader is how they handle a
loss. One of the greatest reason for a lack of success in trading is because most traders played it
safe, they are so afraid of losing that they simply do not pull the trigger, even when they have a

great trade! To a professional trader, winning means being unafraid to lose.
Imagine how many times did you fall down, before you finally learnt to ride a bike? Or how many
times did the baby fall down before the child went from crawling to walking to running?
So for most novice traders, the reason they do not win in their trading is because the pain of
losing money is far greater than the joy of being a winning trader, on the other hand losing
inspires a professional trader, for he will look at that as a way to learn from that loss and he will
always ask the question, how can I profit the next time? The winning trader will have a trading
journal, where he records his trade; he will pull out the chart, and study it carefully, why the
trade made a loss. A professional Trader is more concerned about avoiding a big loss, and less
concerned about small losses.
One trader that I had recently coached had an overall winning trade of 80%, yet his overall
monetary record is of having a massive loss. He likes trading stock futures, particularly the stock
Google, had many, many successful trades on the long side, but finally he went short at $179
and at the time of writing this book, he was still short with the price at $198. He had many
opportunities to come out with a small loss, but “he did not want to take a loss”. This position
has stopped him focussing on new opportunities.
The longer you can stay in the game with a sound trading plan, the more likely you will start to
experience a better run of trades, that will always serve you well in times of temporary trading
slumps. Being a cricket follower, I see that even a world-class cricketer goes through a lean
patch, be it Botham, Tendulkar or Richards – But they all come back with a bang, so it should
not be different for a trader.
What is important is how well you execute your trading plan, and stay focussed with ruthless
discipline. With a good trading plan you should be able to have an entry and exit strategies,
which you will action decisively and not hesitantly.
Fear of letting a profit turn into a loss
I am often asked when do I take my profit? - I simply say, “Go with the trend! – Let the profits
run, and cut the losses short” But what do most Traders do? They SNATCH PROFITS and let the
losses run! Too many traders want to lock in a quick profit to guarantee that they feel like a
winner.
In the above example of a trader who was trading Google, had he just followed the above rule, of
letting the profits run and cutting short the loss, he would have quadrupled his equity. Yet now
he is close to getting wiped out. He is now saving money from his full time job, to fund his
account to have another go!
So when do you take profits? For example I tend to break my trade into 2 lots, or 4 lots,
depending on what time frame I am trading. So lets say If I am trading a shorter term time frame,
I break my trade in 2 lots, so that as soon as I am say 30 points in profit, I close 50% of my trade
and then for the remaining, I move my stop to break even. This way I am guaranteed that I will
not lose! I will let the second lot run and I am seeking to ride the position with a trailing stop on
the remaining portion of the position. Quite often I get stopped out, but imagine if only 2 out 10

trades you catch are a “big move” – what would that do to your bank balance! – The key is
patience.
If however, I were trading a longer-term time frame, I would break the trade in 4 parts, taking
25% profits gradually, and at the same time trying to catch the big move. This strategy has given
me the most confidence.
In 2003 I went long on the Nikkei Index, after it broke out of its long downtrend. I was so
confident that the bottom was made here, having started of with a wide stop I was now hoping to
ride this all the way up! The position was broken down into 4 parts, i.e. 25% each portion. The
target for each portion was 250 points, 500, 750 and finally 1,000 points. As soon as my 250
points were achieved, I moved my stop to a Breakeven point in money terms, then a limit order
to take profits as the Index went on a run! One of my Trader friends said “ I was crazy” –
subsequently he ate his words. In so many years of my trading experience, I have yet to come
across anyone, unless they have not told me, to have achieved a thousand points. All you need is
faith in your system, with discipline to follow your goal and a lot of patience!
One of my goals is to target a point gain of 5,000 points on Google, either on a short side or
Long. You will know of it, when I achieve it
So just how do you achieve the faith in your system, the discipline and patience? In my opinion,
for a novice trader, it is vitally important to have some sort of consultancy from experienced
traders or have a trader’s coach to guide them. Few thousands spent on being mentored, will
more than be paid for not only from the profits that you will make as a result – but also the
losses you will not sustain. Refer to the section “A trading coach” for more information.
You have a choice, and only YOU, can make that decision

By Jay Lakhani, Forex Trader.