The Experts at Dummies - Trading Psychology for Dummies

Trading Psychology For Dummies

Published by: John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030-5774, www.wiley.com

Copyright 2022 by John Wiley & Sons, Inc., Hoboken, New Jersey

Published simultaneously in Canada

The German original published 2021 under the Title Trading Psychologie fuer Dummies

Copyright 2021 by Wiley-VCH GmbH, Germany.

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This translation published under license with the original publisher Wiley-VCH GmbH. Germany.

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Library of Congress Control Number: 2022941293

ISBN 978-1-119-87958-9; ISBN 978-1-119-87959-6 (ePDF); ISBN 978-1-119-87960-2 (epub)

1. Chapter 4

1. Chapter 3
2. Chapter 4
3. Chapter 5
4. Chapter 11

Trading psychology the psychological basis of securities trading generally isnt taken very seriously, even though experts maintain that your emotions and your mental state are actually what determine the success or failure of your trading business. Those in the know are clear on this point: Trading is 80 percent psychology and 20 percent methodology. Trading is fundamentally a matter of character.

Trading the common term for the short-term trade in securities, currencies, and financial derivatives has become increasingly popular recently. Discount brokers especially have been seeing record numbers since 2020. They promise they'll make stock market trading as easy as pie with the help of their various trading apps. This has a certain attraction for a younger, less experienced generation and encourages gambling. But a word to the wise: If you're looking for an adrenaline rush and you think that leveraged products will make you rich overnight, you're sure to hit the rocks sooner or later. Trading in financial instruments is a sophisticated business and requires not only lots of patience and discipline but a clear head as well. You dont stand a chance without a plan, a strategy, and processes you can rely on.

Regarding terminology, I'd like to make one thing clear from the start: When I say traders in this book, I'm referring to those private investors who independently invest their own money on the stock market at their own risk and on a short-term basis. The time period can be as short as a few minutes (scalping) or as long as a few weeks (position trading).

Fundamentally, trading in this sense is the opposite of a long-term investment. You're looking for calculated short-term profit. If you make regular contributions to a stock portfolio in order to prepare for retirement, you're a long-term investor, not a trader. Admittedly, you could turn a trading position into a long-term investment now and then, perhaps because you dont want to sustain a loss, so you use a bit of mental jujitsu on yourself and voil your short-term investment is now presented as something you'd always intended as a long -term investment. (I talk more about this bias known as mental accounting later on in this book. I know: The suspense is killing you.)

The stock market is all about psychology, and trading places psychology under a magnifying glass. Limiting beliefs, self-doubt, a lack of self-control, unprocessed traumatic experiences from the past, those negative conversations you hold with yourself (self-talk, to use the current jargon), and harmful patterns of thought will all come to light sooner or later as you go about your work as a trader. As such, trading turns out to be quite an expensive way to work through your personality issues. After all, you're risking your own money on the markets conceivably, money in the form of savings you worked very hard to accrue. And the numbers are against you because (according to statistics) over 90 percent of all private traders on the stock exchange dont earn any money. The vast majority close their trading account within a few months, feeling frustrated often, after suffering a total loss. The success rate is particularly low for those operating in the short-term arena.