If you have ever wanted to have an edge in trading, one that gives you knowledge, skills, and tools that most others lack, then this book is for you.
Because in order to be successful at trading in the financial markets, you need more than just knowledge of chart reading, technical indicators, and other mechanical aspects of trading.
You need to understand how psychology can make or break you in the world of financial markets. It's not just money being transacted in the markets; it's also your emotions which can be as volatile as the stocks you are trading.
In this course on trading psychology you will learn
Learn the importance of controlling your emotions when making trading decision
Learn how to master self discipline and stick to a trading plan
Learn how to learn from mistakes so you do not repeat them
Learn how to refine your skills through simulated paper trading without risking money
Learn how to use spreadsheets and journals for tracking trades
Learn how to have a confident mindset while maintaining a flexible and open mind when trading
Learn how to avoid getting too attached to our ideas (marrying positions)
In addition, this book delves into ideas from the realm of psychology and behavioral economics and demonstrates how they apply to trading :
The sunk cost fallacy and how it can keep traders stuck in losing trades
The hindsight bias and how it can lead traders to believe "they knew it all along"
The confirmation bias and how it causes many traders to seek out only the information that reinforces their own ideas
The bandwagon effect and how it can lead traders to embrace a herd mentality that often results in losing trades
Analysis paralysis and how traders fall victim to the mistaken idea that more and more analysis leads to better financial outcomes
This and much more is can be found in The Psychology of Trading....
In this lecture, I encourage new traders to evaluate their psychological makeup and disposition in order to determine whether or not trading is for them. We look at how individuals approach risk, which will set the stage for future lectures that address how risk can best be managed.
We learn in this lecture what paper trading is, in addition to how it can help traders develop and refine their skills without having to risk financial capital. Although paper trading is not very exciting, it is a crucial step in every trader's educational process.
In this lecture, we find out why it is so important to set goals that fully lay out what one wants to accomplish as a trader. We also look at a tried and tested method for setting goals.
The goals of a trader are important, but it is also important to delve deeper and determine precisely what motivates traders to participate in financial markets. This lecture will help traders figure out exactly what propels them to trade.
Self discipline is a key component to being a successful trader. Considering how many rules have to be followed in terms of making the appropriate entries and exits, and managing money and risk, it is essential that traders have the ability to maintain discipline at all times. This lecture looks at how self discipline can make or break those trading the financial markets.
We need to make as many mistakes as possible without having to pay a monetary price. We do this by making mistakes in the paper trading account discussed in Lecture 3. However, once we graduate to the world of real trading, we have to face mistakes with a solid plan. This lecture will address how we can learn from our mistakes in a most effective way.
In order to survive and thrive as a trader, you have to be more preoccupied with preserving your money than making money. To do otherwise is just gambling. If you play good defense and prevent large drawdowns in your account, then no matter what happens, you can always manage to survive to trade another day. In this lecture, we address the risk of overtrading, how it can impact you financially and psychologically, as well as what you can do to counter it.
Trading with excessive position sizes can lead to emotions overtaking logic as the driver of trading decisions. We turn our attention here to how traders can control position sizes based on risk limits and trading systems.
Risk limits put precise limits on how much a trader is willing to lose on any given trade. A good risk management strategy must lay out exact numbers in terms of how much money can be risked on a trade. In this lecture we look at ways traders can establish logical and psychologically acceptable risk limits.
The hindsight bias leads traders to believe--only after the fact--that they were capable of predicting something that happened, that they basically knew the outcome all along. In trading, it usually leads traders to feel like they missed out on something by not going long or by not going short. In this lecture, we see how traders never "knew it all along" and should avoid falling prey to the hindsight bias.
The sunk cost fallacy often manifests in the tendency of traders to average down on losing trades. Averaging down is when you add more shares of a stock to an existing position when that stock goes down in price. In Lecture 12, we see how short terms traders are often making huge mistakes when they average down on losing equities.
Trading should be a lot like the hypothesis testing process in scientific endeavors. We don't want to get into a trade and then immediately go look for evidence that supports our position. We want to look for reasons we might be wrong. We want to find evidence that contradicts our position. In this lecture, we see how many traders do not do this; but instead, they fall victim to confirmation bias which leads them to seek out information that confirms exactly what they want to believe is true.
The bandwagon effect occurs when we adopt beliefs merely because the majority of other people we are exposed to have adopted those beliefs as well. This is why we often hear someone refer to people "jumping on the bandwagon." Lecture 14 shows how the bandwagon effect can lead to a herd mentality that doesn't always end well for the trader who falls victim to it.
There is a point at which we can absolutely overload ourselves with such an abundance of information that our judgment and decision making faculties become completely overwhelmed and confused. And this can affect our ability to stay disciplined and true to our system of trading, which should be much simpler. We see in this lecture how "analysis paralysis" can cause us to overanalyze data to the point that we have difficulty make good decisions in trading the markets.
There is a tendency to avoid looking at information that is unpleasant or that is not in line with what we want to be true. Closing your eyes and not looking at the reality of the situation is never a good option. In order to avoid losing money, you have to stay on top of your finances. In the 16th lecture, we look at how avoidance of reality can be a major impediment to good trading.
Attachment in trading is sometimes referred to as "marrying one's positions." Many equities can stir the emotions if we have a personal connection to the products or services provided by a company we own stock in. Flexibility and open-mindedness are prerequisites to being an effective trader. In this lecture, we will look at the importance of not getting attached to any stock or asset class.
One source of psychological stress in trading, especially for very short term traders, can come from the computer hardware and software used to trade and keep track of movements in the market. This is especially the case when it comes to the actual trading platform provided by your brokerage which you use to buy and sell equities
In this lecture, we will look at the prevalence of trading coaches and trading rooms. Do new traders really need coaches and trading rooms?
There are countless numbers of trading vehicles out there which track almost every sector, sub-sector, and asset class one can imagine. It is usually best to pick a sector or asset class in which you will become highly specialized. In this lecture, we look at how specialization can give traders an edge.
Louis Jackson has been trading stocks and options as a career since 2010. Prior to becoming a full time trader, he worked as a college instructor teaching political science courses. He has a B.A. and M.A. in political science.
He is a self-taught trader who specialize in sentiment trading, volatility trading, and advanced technical analysis.