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Psychological challenges of trading

  • Wiley Global Finance WILEY GLOBAL FINANCE
  • Trading
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Is talent a matter of genes, or is it acquired? Perhaps no single question so dominates the discussion of performance. It is true that most elite performers display early talents. It is also true, however, that a sizable proportion of gifted youth never attain prominence and fall well short of their early promise. Recent research suggests that neither nature nor nurture is sufficient for the emergence of expertise. It is the interaction between the two that supercharges development. Just as a child must experience many challenges on his way to adulthood, a trader must face and overcome a set of hurdles. Each step in the rite of passage brings the trader to the next step in becoming a true professional.

Successful professional traders know that their greatest enemy is in their own minds. The emotions of fear and greed are more powerful than any market forces in creating losses. Unresolved issues from a trader’s past can show up when a trader is bored, frightened, worried, or thinking about anything that could remind his unconscious of forgotten events. The psychology of trading is recognized as a major issue in maintaining a trading career. For this reason, traders who are committed to long-term careers are lining up to deal with their psychological and emotional issues and working on their self-discipline. This type of work is just as demanding as the research and development phase of a trader’s career. Having completed this work is like being handed the key to the kingdom, giving you freedom to trade at your optimum level.

Build on your strengths

You are most likely to find trading success by exploiting what you are already good at. Your trading niche will take advantage of distinct competencies that you already possess and already employ in other facets of your life.

There is much in the trading world you will need to filter out

If trading is indeed a performance field, there is no reason to believe that elite performance will be found in better indicators, faster or more comprehensive software, newsletter tips, or coaching advice. Only a directed developmental process will allow you to internalize market patterns and act upon these with confidence. Better golf clubs will not turn a duffer into a pro; the finest wrenches will not make one a master mechanic. You will hear many promises of quick rewards in the trading world, but these cannot replace training.

Peaks and troughs in trading performance are likely to be the norm rather than the exception

If markets indeed change their patterns of trending and volatility over time, traders never really reach the end of their learning curves. There are apt to be periods in which market cycles change and the new patterns have not yet been internalized. These are also likely to be periods of drought in traders’ profits. What is important is to survive these performance troughs through proactive risk management, a prudent savings plan, and a determination to not traumatize oneself and thereby preclude fresh learning. An excellent predictor of long-term trader success is the ability to prepare for inevitable lean times when the earnings are good.

Your emotional experience in trading will reflect your success in structuring your training

Properly structured training will generate sustained experiences of learning, mastery, and confidence. They will contribute to a sense of efficacy. These positive emotional experiences are precisely what you need to be able to handle the inevitable stresses of risk and reward as you increase your size. Properly configured training will also serve as training to enter and sustain the flow state in which we activate our brain’s executive functions and will make our best decisions. If your learning experience is under structured, you will be at greater risk of emotional frustrations and conditioning effects that disrupt coping. In sum, my best advice is to truly treat trading as a profession if it is to be your career. A profession is a field that requires extended education and specialized training. It is a field that demands that you be responsible and that you execute that responsibility with professionalism. Trading can be a wonderfully challenging and rewarding activity, but it can also leave the unprepared emotionally wounded and financially bereft. Don’t be too quick to put your account at risk in hopes of making money now. Take the time to learn and build a career that will sustain you for a lifetime.

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Article copyright 2011 by Brett N. Steenbarger and Adrienne Toghraie. Reprinted and adapted from Enhancing Trader Performance: Proven Strategies From the Cutting Edge of Trading Psychology and Trading on Target: How To Cultivate a Winner's State of Mind with permission from John Wiley & Sons, Inc. The statements and opinions expressed in this article are those of the author. Fidelity Investments® cannot guarantee the accuracy or completeness of any statements or data. This reprint and the materials delivered with it should not be construed as an offer to sell or a solicitation of an offer to buy shares of any funds mentioned in this reprint.
The data and analysis contained herein are provided "as is" and without warranty of any kind, either expressed or implied. Fidelity is not adopting, making a recommendation for or endorsing any trading or investment strategy or particular security. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before trading. Consider that the provider may modify the methods it uses to evaluate investment opportunities from time to time, that model results may not impute or show the compounded adverse effect of transaction costs or management fees or reflect actual investment results, and that investment models are necessarily constructed with the benefit of hindsight. For this and for many other reasons, model results are not a guarantee of future results. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and the income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.
1. Active Trader Services are available to investors in households that place 120 or more stock, bond, or options trades in a rolling twelve-month period and maintain $25K in assets across their eligible Fidelity brokerage accounts.
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