Psychological Challenges of Speculative Trading 2

After such a loss, traders blame themselves, repeatedly going through the details of the unsuccessful trade. They blame the market for the “wrong behavior” or themselves for errors in what then seems an absolutely clear situation. Sometimes, the trader-market relationship takes
the form of a vendetta. Traders consider the market as their personal enemy, treat it in an unfriendly way (even with hate) and dream of immediate revenge. Doing so, they miss the fact that they are essentially blaming nature for changing sunny weather to rain. It is very important to be prepared beforehand for this change. Trades should always have close at hand one or a few options in case of sudden change of the situation/weather, so that their foresight assures their good time or good profit.
The third main psychological problem is trader uncertainty, especially when traders are inexperienced in abilities and skills—specifically about each market position they hold. Immediately after each position is opened and a money contract is bought, traders start questioning their choices. This is revealed most vividly in the case of a moderately active market at the moment of fluctuations close to the opening price of the position. Any movement (even insignificant) against their position causes traders to have an irresistible desire to sell the recently acquired contract to limit losses, until it is too late and the market does not shift too far away from their position opening price. On the other hand, an insignificant market shift in the desirable direction causes the same desire to eliminate the position, until it provides for any (even tiny) profit and before this profit does not turn into losses.
Scared and troubled traders rush and race about. They open and liquidate their positions too often, and experience many small losses and gains. Within a short period of time, they turn intermittently into bulls or bears. As a result, they suffer losses on a dealer’s spread and/or commissions when there were no significant market changes, and all the market fluctuations were no more than just regular market “noise.” Such losses are typical for beginners and individual traders with small investment capital or little experience and insufficient psychological preparation.
Not uncommon are cases of traders’ impulsive decisions on trading, without any plans or serious preliminary market analysis. The position is opened under an impulsive, invalid emotional reaction. Often, it can be explained by traders’ fears of losing a brilliant opportunity to earn money they think is being offered by the market at that moment. I have witnessed these attempts to jump onto the last carriage of a departing train, and such attempts have ruined a lot of traders. Many traders cannot calmly watch any kind of market movements. Some of my students have confirmed this reality. If they have no positions at the moment of more or less
significant market movement, they consider it as a lost opportunity to gain profit. This can inflict a serious shock to them. When they have no position, they seem unable to realize that each market movement can be considered both ways, and the opposite situation can quite possibly develop. Statistics show that, at each market movement, the chances to lose are much higher than to profit. How does it happen that reasonable people (who in everyday life, without any emotion, can watch a bank cashier counting other people’s money) consider the fact of market movement as a threat to their own pockets? Why is other people’s money in the hands of a bank cashier not considered as a lost profit, whereas capital shift on the market and the corresponding quote fluctuations are the causes of negative emotions? I think the answer is in the illusory simplicity of business itself, which is considered by many people as a good and simple opportunity to earn a lot of easy money. Similar notions are widely spread among novice currency traders. The soon traders abandon such ideas, the sooner they become professionally efficient traders.
The most difficult problem for every trader (regardless of their experiences) is to learn as quickly as possible how to recover quickly from losses, which are inevitable in this business. At the same time, they must learn to handle shocks and psychological damage inflicted by the losses, because these situations could negatively influence their future work. The losses themselves and the fear of losing, both of which permanently torture traders, negatively influence their ability to make reasonable decisions in a complicated situation. These factors also undermine traders’ ability to follow their own rules about trade strategies and systems. I have become personally acquainted with hundreds of traders and have watched their activities. I have taught many students, and have had my own experience as a trader at various steps of my career in the currency market. Therefore, I have come to the conclusion that the main causes of trader failures in speculative operations in the FOREX market are without a doubt those associated with psychological trauma—the inability to control their own emotions and to find an adequate way to fight stress.
I have explored ways of solving the psychological problems that arise from operations in the FOREX market, with the focus on increasing selfresistance to stressful situations and increasing trade effectiveness. As a result of my research, I have managed to develop a trading method that also helps to withstand shocks and keep emotions under control. To solve the problem of stress, I had to separate the problem into several parts and solve them one by one. First, it was necessary to develop the philosophical conception of my attitude toward market situations. By this I mean not only the general trade methods, which are discussed in the second part of the course, but also my own conception of the market and associated psychological problems, which most traders (including myself) have to overcome daily.

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Psychological Challenges of Speculative Trading 1

Asuccessful trader’s career mainly depends on his or her psychological stability in stressful situations, which are common in the process of trading. Theoretical knowledge can be acquired by reading professional literature; practical skills and experience are acquired in the process of actual trading. The most difficult process is adjusting psychological stress, because in real life it is impossible to completely eliminate the stress factor influencing human activity. Underestimating the stress factor could play a mean trick on traders and even completely block their abilities to make reasonable decisions in real trading situations. The psychological stress of those trading in the FOREX (and any other) market is extremely high. Traders must work under permanent psychological pressure, making decisions in highly unpredictable and uncertain market situations. Each trader goes through mistakes, failures, and losses in his or her own way, in accordance with his or her personality and temper. Some might blame their failures on the market’s “wrong behavior,” which didn’t comply with the trader’s brilliant forecast and caused the failure of the magnificently planned speculative combination. Others blame themselves and their own inabilities to make right decisions in situations, which afterwards seem to be simple. It is an interesting fact that, in hindsight, traders usually find the decision that should have been made at the lost critical moment and can reasonably prove their point of view. Why can they find
the right decision so easily and quickly in hindsight? Was the trader unable to do so at the right moment? I don’t think it can be simply explained by looking at yesterday’s situation from today’s point of view. I do notthink it can be explained by the fact that classical technical analysis allows for multiple explanations of almost any market situation. It is always possible to find an appropriate basic explanation for any market shift after the event takes place. In the heat of the moment, however, the trader was influenced by stress, and that stress caused the error. This is proven by the fact that most novice traders show exceptionally good (and even phenomenal) results trading dummy accounts but can’t even come near those results when trading with real money.
Being permanently under stress, a trader can often make insufficiently considered, impulsive, and, therefore, wrong decisions that result in losses or premature liquidation of profitable positions, that is, in lost profit. Sometimes, after a few successive failures with various trades, traders becomes fearful of the market. They are in a state of psychological stupor, and even a simple market situation may cause panic. They cannot overcome their emotions or soberly evaluate the current situation, and they are unable to make any decision—reasonable or otherwise. In many cases when the market situation shifts against the trader’s position, they can only passively watch the growth of their losses, because they are unable to make any decision at all. Often, after the market stabilizes and traders have the opportunity to calmly analyze daily diagrams of currency fluctuations, they come to the conclusion that the main cause of failure was not the lack of knowledge or training but their own emotions. However, the situation cannot be reversed. Time has passed, money has been lost, and everything should be begun again.
Another problem that causes severe and even catastrophic consequences is the trader’s wishful thinking. In this case, traders are sure that their forecast of market trends is solely correct. They feel the market cannot and should not give any surprises. They do not consider other options that could be helpful or they think of other options in a vague and uncertain form. Sometimes, traders consider a market shift against their position as short-term and temporary. They begin to average their positions.
They acquire new contracts at a lower price in the hope that the market situation will come back, and all the positions will become highly profitable. Afterwards, as the situation worsens, they will be able to come out of the market without serious losses. Being sure they are right, traders lose the ability to critically evaluate the condition of the market and accordingly their own position in the market. In this case, they consider only those basic and technical features that justify their wishful thinking, and they discard the contradicting features. This wishful thinking costs them dearly and can lead to psychological frustration. The market’s “wrong behavior” not only deprives traders of a certain amount of money and often ruins their trading account, but also undermines their self-esteem and their hopes of being a winner in the trading battle.

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Developing a Trading Method

The most difficult process is adjusting the human psychological factor, because in real life it is impossible to completely get rid of the psychological factor influencing human activity. I think it is very important for the reader of this book to follow me in creating the method, beginning with the definition and identification of the problems that need to be solved. Then, after initial ideas are formed, we will continue to the development of effective trade principles and the creation
of an integrated conception of systematic trading methods. I would like each trader to understand the essence and logic of my method, which allows a transition from vague emotions and desires to specific targets, in order to develop an effective trading technique. I think this approach to training is the best. It allows the trader to not only follow my line of thought but also, using the information acquired in this book, to extend each trader’s individual (not only professional) experience, with the aim of critically evaluating the acquired information. For this reason, I decided to violate the traditionally taught sequence of many books, manuals, and training aids, and state my book in the sequence of the development of my method. The psychological problems shared by many traders will be addressed, and the conclusion will be proven that it is necessary to switch to a systematic trading method without forming a rigid mechanical trading system. This desire, and the necessity to get rid of the excessive and permanent psychological stress that negatively influences the results of my everyday trading inspired me to develop the new systematic trading method. The initial requirements for the optimal trade methods and the consequent trade systems are formulated. Next, some basic elements for the trade method development are described - using trading tools corresponding to the basic principles of effective trading. Along with my own ideas and elaboration, they will be used as the basic components of effective trading. Each trader goes through mistakes, failures, and losses in his or her own way and in accordance with his or her personality and temper.

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choose dealer : RECENT INDUSTRY DEVELOPMENTS

Some significant changes, both positive and negative, took place in the FOREX trading world over the past few years. First let me mention three positive changes:
1. By the year 2006 the industry of FOREX trading had become more government regulated in the United States. Nowadays, the NFA regulates most of the dealers and introducing brokers conducting business in the United States, including foreign dealing companies providing services to U.S. customers. So, now the probability for a trader or an investor to become a fraud victim has greatly decreased.
2. Stronger competition among numerous dealing companies has made them offer their customers better services that include more sophisticated trading software, lower spreads, and faster and more accurate trade execution.
3. Reputable dealers now offer their customers the opportunity to trade contracts as small as $10,000. This is good for beginners, who today can make real trades without risking too much money while learning the business.
However, along with positive changes there also were two negative ones:
First, the same competition among dealers that improved quality of their services overall led to the situation that now almost every dealer could be considered a bucket shop. Today the dealers routinely trade against their customers, especially those individuals with smaller trading
capital. In order to increase their revenues, some of the larger dealers on a daily basis carry an uncovered exposure totaling well over $100 million of the positions taken by their customers. At first glance it seems that there shouldn’t be a problem. The rule of the game is that the house must always win and there are reasons to believe that most of the clients’ trading capital sooner or later ends up in the dealer’s pocket anyway, pretty much like in the gambling industry. (Dealers’ back office statistics show that approximately 60 percent of their clients’ total trading capital is being lost in trading annually.) However, unlike in the casino business where the house
is always able to control each and every aspect of the game, there could be some very dramatic and fast changes in the market that wouldn’t allow the dealer to cover its exposure before it becomes too late. Unexpected, almost instantaneous, and sizeable shifts in currency exchange quotes could be damaging to the point where a dealer would not be able to fulfill its financial obligations toward its customers. The other change that I consider to be rather negative is the trend of most dealers lowering their margin requirements. Today it is quite possible to find a dealer offering to its customers a margin as low as 0.5 percent. Dealers present low-margin trading as an opportunity for customers to achieve greater profitability with smaller investment capital. It is true, but trading on full leverage also could easily cause the loss of the entire trading capital in a single trade in a matter of minutes. It looks like trading in the financial market is turning into a casino-style business, which is not good in my view.

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