How to overcome psychological barriers in trading?
The trading market is a magical place where many people who are quite normal in daily life can become intensified, impulsive, bold, and reckless once they enter the trading arena.
Recently, in a TV series "Fanhua" directed by Wong Kar-wai, it blatantly portrays the behavior of us retail investors under the influence of market sentiment and the brutal outcomes that follow.
The psychological barrier in trading is a significant hurdle, yet it is an enchantment that must be overcome. Behind the market are people, and only by understanding human nature and breaking through psychological barriers can one reach the shore of profitability.
Today, I would like to discuss with you the 7 common psychological barriers we often encounter in trading, along with some methods to overcome them.
Perhaps in this article, we will see many reflections of ourselves and confront the less admirable aspects of our human nature. However, only by truly facing them can we talk about solutions. I hope that all of us traders can encourage each other.
1: Fear of Missing Out (FOMO)
Many friends are quite conflicted when trading, often having thoughts like:
This opportunity is just too good; it would be such a pity to miss it!
I closed my position too early; if I had held on a bit longer, I could have doubled my profits.
If only I had cut my losses earlier, I wouldn't have lost so much...This variety is really hard to deal with, should I switch to another one?
It's just like being in love, constantly worried about gains and losses, does she love me or not? Is she thinking of me? Is she with someone else...?
Always dissatisfied with one's current trading situation, missing or making mistakes in daily trades, feeling regretful or annoyed, there is not a single day when the heart is at ease, how can one do well in trading like this?
In my opinion, such trading is a "three-no product."
First, there is no unified technical standard, second, there is no fixed trading cycle, and third, there is no fixed trading variety.
Often, it's aimlessly looking for opportunities on trading software, and even after a profitable order is closed, one still stares at the market. As long as the market continues to rise, one starts to regret closing early, as if missing out on a fortune.
If a losing order is stuck, there's regret for closing too late. If an order is stopped, and the market retraces, one feels that it shouldn't have been stopped, mentally calculating how much less would have been lost if the stop had been delayed.
This trading market is too vast, with dozens of futures varieties, dozens of forex varieties, and thousands of stocks, with opportunities galore. We traders are like mice that have fallen into a rice bin, it's a dazzling array, one wishes to swallow all the rice at once, and ends up suffocating.
The more this kind of extreme environment is full of temptation, the more one needs to have clear goals and focus on the key points. As the saying goes, "Two birds in the bush are not as good as one in the hand," no matter how much profit there is, if you can't get it, it has nothing to do with you; what you can grasp is your own.
Let's take a good inventory of how much capital we can invest, how much risk we can withstand, how much energy we can put into trading, choose the right cycle, the right variety, and position size, plan a feasible trading strategy, set a possible profit target, and within our capabilities, do well in the market we can do well in, that's enough.A single word "greed" can not only ruin your trading but also your entire life. Learning to be content and happy is a form of life wisdom.
2: Fondness for getting something for nothing
There are individuals in the market who enjoy probing for insider information, even willing to pay for it. They also like to discuss trades with others, inquiring about what deals others have made, how much money they've earned, and how they can follow suit. They are in search of a technique to buy at the lowest price and sell at the highest, or a trading system that can provide a permanent solution, allowing them to earn money without effort.
A friend once told me, "Brother, I've found a trading system; can you help me review it to see if it's usable?" Hearing this left me stunned. It was as shocking as if someone said to me, "I want to lose weight; can you run for me?" We must understand that making money is inherently difficult. If it were so easy, there would be millionaires everywhere, and where would the poor come from?
Trading is about snatching profits from the mouths of intelligent individuals, more challenging than any business in your daily life. If you do not mentally prepare yourself and plan to work diligently on research, you cannot possibly earn money.
Reviewing trades is a labor-intensive task in trading. It's not just about knowing whether the trading system can make money; it also involves understanding all the details of the process of making money, including the profit rate, profit cycle, maximum drawdown, highest consecutive loss count, consecutive loss cycle, and so on.Only by experiencing it yourself, testing it, and refining it can you have confidence in the trading system, form execution power, and truly make it work for you.
Such an important matter, I myself wish to do it thousands of times, how could I let someone else experience it for you?
Moreover, the money we have is earned through our own hard work, and we are the first responsible parties for it. In reality, would we hand over the decision-making power of matters related to our own interests to a stranger?
It's like lending money and randomly pulling someone off the street to be the guarantor. Something that is completely impossible in reality, how can it completely change in trading?
So, remember, there are no free lunches. Trading is a skill that requires you to study, practice, and go through a complex process to gradually form your own trading strategy. The experience of others can assist you, but the final strategy must be formed by yourself.
3: Fear of Missing Out on Trades
In the first few years when I started trading, I had an almost obsessive love for watching the market. At that time, it was not popular to use a mobile phone to watch, so I sat in front of the computer all the time except for sleeping and going to the bathroom, and I ate while watching the market trend.
Because I really wanted to know whether the market trend I had judged was correct, and whether my orders could make a profit, just like wanting to fast-forward a TV show, I wanted to know the result quickly.
Moreover, I was particularly afraid of missing the opportunity to make money. At that time, I liked to do intraday short-term trading, getting in and out quickly, and the trading was very exciting. As long as I observed market fluctuations, I thought the opportunity to make a profit had arrived, regardless of how the market fluctuated, in which direction it fluctuated, or how much space the fluctuations would have. As long as the market came, I took it all, busy from morning till night, and enjoyed it very much.
Of course, during that time, I also experienced losses and gains, just like a small boat floating on the water, rising and falling. The most feared thing was to encounter a big market trend, and I would be trapped at the peak or the bottom at once, suffering a big loss, and the small boat would directly capsize.After a busy year or two, you might end up losing everything you have.
In fact, so-called speculative trading is not about becoming a speculator, but rather about waiting for the right opportunity to invest.
If you already have your own trading principles and want to improve the addiction to watching the market, fearing to miss out on the trend, then distance yourself from your trading screen.
Do not look, and your heart will not be in turmoil, and your hands will not itch.
You can learn to place orders and set up alerts, and then check when the opportunity arises. The rest of the time, you can do your own things, read books, watch TV, browse videos, or even go out for a dance; just do not watch the market.
This method of physical detachment is quite effective, and over time, you can gradually break the habit of constantly watching the market.
4: Perfectionism
Some time ago, a friend left me a message: he said he was doing trend trading, had taken long positions in crude oil futures, and the market was rising well, but when he exited, the profits would always be given back by about 20%, which was quite uncomfortable. Is there any way to prevent profits from being given back?
As traders, we all want our trades to be perfect, ideally buying at the lowest point and selling at the highest point; no stop losses, all profits; not wanting to make small money, but only wanting to make big money; can the success rate of our trading system be higher? Can the profit-to-loss ratio be higher? It would be best to achieve both highs.
But just as the moon waxes and wanes, imperfection is the fate of trading.When we constantly focus on the point of "how to make our trades more perfect," our purpose of trading changes. What we pursue is no longer simple profit, but how to be completely right, how to do better and higher. Once the goal changes, the path goes astray, and the destination of profit is never reached.
A trend trading system, not being perfect and having profit taking is normal, but in the long run, as long as this trading system can make a profit and earn money, then this trading system is very good. There is no need to be entangled over the 20% profit taking, because it is just a small episode in the trading process that makes you feel uncomfortable for a moment. Although you feel uncomfortable for a moment, the result of the trade is good, isn't that enough?
In the world of trading, the process is not that important; the only thing that matters is the result of profit. Once you understand this point, you will know how to make choices.
5: Fear when opening a position, fear when holding a position, fear when stopping loss
Does everyone have this feeling that the longer you trade, the smaller your courage becomes?
It is easy to understand that a newborn calf is not afraid of the tiger because it has not experienced the pain of failure and does not know the cruelty of the world, so it is naturally not afraid. Therefore, trading novices are fiercer than one another.
However, the longer you trade, the more cautious you become, even fearful. Because you have made mistakes and have had very painful lessons, it is like a conditioned reflex, and you will be afraid when you encounter it again.
You are afraid when you see the entry point because you are afraid of making the wrong direction, the more you look, the more tangled you become, and as a result, you miss the entry point; you are even more afraid after you get in because you are afraid of the order stop loss; you are also afraid when you are profitable, afraid of profit taking. In short, the entire trading process is spent in fear.
I have also had this state, precisely because I was really scared of losing money before. Every time I opened a position, I would naturally think of my previous losses, and I was very unconfident in my trading. Originally, I was a very decisive person, but I became very indecisive.The end result is that even if you can see the right moves, you can't make them, and even if you do make them, you can't hold on to them.
What should you do in this situation?
In fact, for friends who encounter this situation, I suggest you stop trading first. Your trading psychology is already sick, similar to someone with acrophobia, who gets dizzy and weak in the legs every time they stand at a high place. Trading without adjusting your mindset is like trading with an illness; the more you trade, the more you lose, and the more you trade, the more afraid you become, creating a vicious cycle.
At this time, you need to build confidence in trading by yourself, and there are three steps to do this:
(1) Do a review.
Review your own trading strategy for many years, for multiple varieties, until you are thoroughly familiar with the market trends of several decades and have a deep understanding of your trading system, gradually building confidence.
(2) Practice with a demo account.
Almost every trading software comes with a demo account. Use the same amount of capital as your real account to practice with a demo account, strictly follow your trading rules, and see how your trading strategy performs in future market conditions, thus building confidence a second time.
(3) Start with a small position.
Most psychological issues stem from the position size. You have a misconception about your ability to withstand risk; you think you can afford to lose 100,000, but in reality, your psychological tolerance is at 30,000.Enter the market with a small position, and at least half of your psychological issues will be resolved. If at this point your strategy is profitable, although the profit is not much, your confidence is accumulating. When you can be indifferent to the current position's losses, then gradually increase your position size.
These processes are like pushing dumbbells, starting from 10 kilograms, to 15 kilograms, 30 kilograms, 80 kilograms, step by step, so as not to cause muscle strain and also to increase your confidence and tolerance.
In the trading market, slow is fast, do not seek quick success.
6: The mentality of luck
Speaking of the mentality of luck, I have the most say because I made a lot of money when I started trading more than ten years ago, all due to luck.
Why is that? Because my trading was very simple at the time, I entered the market, made money and ran, and if I didn't make money, I would add to my position. If it didn't work once, I would add more times and wait for a rebound. Although sometimes I would be stuck very deeply, I was lucky at the time and could always escape from danger. Each time the money was made with a thrilling heart, but indeed, I made a lot of money in this way.
But the mentality of luck can make me, and it can also destroy me. When encountering a big one-sided market, continuous replenishment of positions cannot untie the knot, and finally the position becomes heavier and heavier, the loss becomes bigger and bigger, and eventually the position explodes.
After the position explodes, all the previous profits are like a bubble bursting, all gone at once, and there is no profit, no principal.
What's more terrifying is that my mentality was blown up. I started to be unwilling to get back to the original, became impatient and impatient, and was also afraid of losing money again. After the position exploded, it was really a rout, and from that time on, I kept losing for a long time, and I couldn't stop.
So the mentality of luck seems to be a small thing in trading, but it is like the butterfly effect. A small butterfly wing may have caused a hurricane, and it cannot be underestimated.Many people enjoy placing small positions at key levels during trading. A minor market pullback can earn them a little money, and they take pride and pleasure in this profit, never tiring of it. However, over time, there is a certain probability of getting caught in a trade that could wipe out all the previous gains. One might win by luck once, but there is no way to consistently win by luck.
Thus, relying on luck is exchanging a significant risk for a limited small profit, which is a very unwise trade. The correct approach to trading should first involve using limited risk to maximize profits as much as possible.
Later, as I gradually developed a trading system, I no longer had this mentality and behavior of relying on luck, because the trading system defines every move of the trade, where to enter, and where to exit, all clearly. Additionally, using the trading system has allowed me to make money slowly, and the risk of each trade is controllable. I no longer have to experience the anxious and uncertain state of trading.
7: Self-hatred and unwillingness to accept defeat
In the early years, I rented an office with a few friends to trade together, and one of them had a particularly irritable temper. It was fine when the orders entered the market and made a profit, but once there was a loss, he would mutter and complain, cursing the market and blaming everything around him. Sometimes he would be very frustrated, hating himself for not being able to control his own actions.
I left that office after half a month because I felt that the entire space was filled with negative emotions, which would infect everyone, making them feel defeated in their trading.
Feeling defeated in trading is a very normal thing because you will inevitably make wrong trades.
Especially in the early stages, it was hard to accept the stop-loss in trading, feeling that a stop-loss was an admission of failure, and it meant a loss. The pain of exiting a trade with a stop-loss was overwhelming.
Sometimes, you might even encounter consecutive stop-losses. After several consecutive losses and margin calls, the emotions can be devastating. You might especially hate yourself for not strictly following your trading rules, feeling regret, frustration, and even wishing to punish yourself severely.
Therefore, I deeply understand the sense of defeat in trading, especially when the position is heavy. This feeling is very uncomfortable and has to be swallowed by oneself.However, we must understand a principle: we do not engage in transactions just for this one time; we may have to do it dozens, hundreds, or even thousands of times. With profits come losses, and losses are inevitable. We need to establish certain rules to control losses, not to avoid them.
Moreover, the market is powerful, and we are insignificant. No matter how much pain and discomfort you feel, the market will not care about your feelings or give you another chance. So, when you hold onto your pitiful self-esteem and try to compete with the market, it remains oblivious, and you are only making things difficult for yourself.
Therefore, do not torment yourself or wear away your emotions. What you need to do is return to rationality, either by cutting your losses and exiting the market in a timely manner or by regaining your senses and starting anew.
We have all experienced these psychological states to varying degrees in trading, and I believe many friends can empathize with this. It is also a test of the market for traders. I hope that friends who read this can take it as a warning and avoid falling into the trap of psychological pitfalls.