THE PSYCHOLOGY OF TRADING

MASTERING HOPE, FEAr AND GREED

Generally, when a trader writes about the psychology of trading it is directly from his own experiences in the market. Usually there is other added information from the traders observations of the aotions of other traders. Most, if not all of these perspactlves come from personal experience, and they generally repeat in each individuals trading patterns. Mr. Ganns first book, written In 1923 and titled, "Truth of the Ticker" was just such a writing. In this book he emphasized the pitfalls to successful trading which come from human emotions.

I too have gone through most all of the emotions which Gann presented in that 1923 book- hope, fear, greed, the need for patienoe, and the need for both nerve (or courage) and knowledge.

Trading is in many ways an art rather than a scienoe. The Importance of being able to master yourself is far greater than any system of analysis. If you have a systematic approach that finds trading situations which will be right 80 percent of the time, you may still loose money. You have to be able to execute the trade, and this is where many traders go wrong. Many either wait too long, whioh is a problem with courage or fear. Or they dont have the patienoe to wait until the time is right, and enter the trade to early. The rooet important part of trading the markets is mastering yourself.

Gann said that you must be prepared for hope, fear, and greed, and you must be aware of when you are trading from a basis of these emotions.

Succeseful trading requires virtually every trader to change certain habits and attitudes. In most cases. Identifying and changing these attitudes is a difficult proposition. What makes you successful in business and life is different than what makes you suocessful in trading. In normal situations suooess comes from being able to oontrol circumstances, subordinates, machines and so forth. You make decisions, stick by them, make plans work and manage your subordinates. Control is what helps make you successful. If you make decisions and you dont play out the plan, you loose. But the market is different in that you cannot control the market. You may find yourself trying to control it with expectations, and this will lead to trouble.

As you cannot control the market, you must flow with it. You will probably find, if you have not found this already, that you have to change yourselT to trade successfully. The reasons this are numerous, and as I am not a psychologist, I can only touch upon them. It seems that many things that a pereon naturally matures with, and learns from years outside of the markets, do not apply to the markets. Everyone, I do not care who they are, or what theyve done, has to change in some way to become a succeseful trader. It just doesnt come naturally.

Of the mistakes that traders make, emotion can be one of the greatest. Greed, the desire to gain more than a position will naturally give is one of these problem areas. Greed can cause one to overstay a profitable position. You may find yourself thinking, "If it just moves three more points Ive got a 100 percent profit". When you find yourself thinking in this fashion, or routing -cheering for a marker which is moving your direction, be careful. A second effect greed has upon many traders is to cause them to over position, or take a larger position in a trade than should be taken if good money management is being used. When you put more into that position than you know you can afford, you may find yourself in a panic to get out of what could otherwise be a profitable trade.

You should plan your trading in such a fashion as to keep yourself out of stressful situation. If your normal position is ten percent of your trading account and you see that great trade coming up, and you put in fifty percent of your money, you will probably panic if the trade starts to move against you. You may close out such a trade before your plan is oomplete, before your protective stop is hit, only to find you have sold out of a long position at the low of a counter trend movement, or out of a short position at the intra day high and that your plan you devised while the markets were not trading was correct after all. It is one thing to be certain that a trade is a good trade and take a position, but it is another thing, entirely, to be greedy and over position in that trade. If your wrong, you will loose too muoh, and if your trade is correct, you will find yourself constantly ooncerned with it and probably loose sight of the original plan. Some individuals can manage themselves well in this type of situation, but this is not the norm. If you find that you are ooncerned with a trade to the point of not being able to sleep, or thinking of that one position constantly, greed is a problem. Over positioning, or investing too much capital in a trade, oan be a traders worst mistake.

Hope, or expectations, will also manifest itself in suoh a fashion as to foil as excellent trading plan. If you buy a security in the hope that it will go up in price ana you will profit, with no method or evidence, or buy on a "tip", what you might think is a bit of inside knowledge, then you have entered the market on the wrong basis. Remember, when hope is the basis for investment strategy- beware. Reason and evidenoe should be the basis for trading. A second effect of hope is when a position moves against you and you have not used a protective stop. In this situation you may find yourself hoping that the prioe moves back, replacing action with hope.

Fear is another problem that must be oonquered. I believe most psyohological problems are fear based. Fear of missing the move will oause you to position early and likely stopped out at the point you shoula be getting positioned. It can cause you to trade out of a long position near the low, or exit a short position near

the high. On the other hand, a healthy fear of the market can help you trade by a plan. Gann said that a fear of the market was the first sign of a suocessful trader. On the other hand, you must not fear taking a loss. Respect of the market helps to give you the discipline to trade only when you have the right plan and circumstance. But, fear of taking a loss will often result in the failure to take a trade. So, here you have to develop a balance which gives you a respect of the market, so that you trade from evidence and a plan, and courage to take that trade when the time is right.

Most traders run into a problem when they make a losing trade. When you make that losing trade and you take the loss, and you dont become emotional about it then you are doing well. But if you make that losing trade, (whioh Is Inevitable), and you punish yourself, or feel bad, or start looking at your checkbook, etcetera, then you probably had better take some time to assess your situation.

Plan to keep yourself out of trouble. Do not involve your self esteem in your trading. Try not to tell people what you are trading and why, because this will involve your self esteem, and you will find hope coming into your mind. Try not to make predictions of events from your work. Of ccurse with this work, you will find it hard to not do that, but if you avoid telling people what you feel will happen in the market, you will avoid expectations in your trading. If you have made a oertain prediotion, your expeotations of that happening will increase. You will want it to happen. Hope beoomes involved again, and this will muddle your thinking. By keeping your thoughts to yourself, your self esteem is not involved, and you will not have to fight that psychological problem. Do your best to avoid the emotional problems that trading can bring on.

You will know that you have reaohed a point of being psychologically able to trade, when you can make a plan and not change it. When you can watch the market move against you, with your plan in action- your stop in the market, and not have the desire to get out before the market hits it, you are ready. You should make your plan when you are not emotionally involved in the market. When the market starts to gyrate, if you have the urge to change your plan and you dont, then you are ready.

There is a cycle that many traders go through. Often, a trader will start out with a reasonable plan. He uses good money management and doesnt expect more from a trade than it will reasonably give him. He starts to make money, only trading what he should trade, and when he should trade it. He has respect for the market, but no fear of taking a loss, or of trading from good evidence when the time is right. He begins by doing well, making money, catching some good moves in the stocks or options or commodities, and he starts to feel as if he is a pretty good trader.

At one time or another, this trader looses his respect of the market. He begins to overposltion and loose sight of the original