Humble Your Rivals With Your Trading Skills

Essentially good traders make huge profits from bad traders. When they win someone else loses. The makings of a good trader can be explained using a simple analogy.

Imagine there is a set of twins, both of whom are traders and are identical in almost every way. They both have the same trading system, same entries, exits and money management rules. They both commence trading with exactly the same amount of money, using the same broker and receive the same buy signals.

After two months of trading, you would expect each twin to end up with exactly the same amount of money. However, one twin has a 30% increase in his account while the other has a 10% decrease.

So, what causes one trader to be a success and another to fail?

The reason for this difference lies in their psychology. However similar they may be, it must be remembered that ultimately they are different people and therefore think differently. One twin may get too greedy or too fearful, cutting his winning trades short and letting his loses run, while the other twin has a firm commitment to stick to his strategy no matter what and hence reap more rewards.

How an individual thinks plays a huge part in the way he trades. What's more, every person is different and so the way he approaches trading will also be different.

- The 'good' trader is someone who will respect his tried-and-tested rules, sticking by them no matter what.

- The 'bad' trader is someone who will let his emotions determine when he trades. This will result in inconsistent trading and ultimately failure.

I don't pretend to be the first person to say psychology is an important element in becoming a successful trader. In his book,Trade Your Way To Financial Freedom the renowned American psychologist Dr Van Tharp discusses the role that psychology plays in trading success. He divides trading into three 'ingredients of trading': trading system, money management and psychology.

He believes psychology plays more of a part in the make-up of a successful trader than the other components combined. Emotions such as fear, greed, vanity, pride can be so powerful and have the potential to undermine you. They have caused droves of successful people to ultimately fail on their journey into the trading world.

Two classic examples where a trader is controlled by his emotions, would be when he closes out a position either too early or too late. Holding on too long demonstrates what is referred to as 'loss aversion' - the trader's tendency to strongly prefer avoiding losses than acquiring gains. This is an emotional response hardwired into our genetic makeup.

In application this means that when facing a losing position, and the price is going down, a trader will hold on because they don't like the idea of losing. They're holding on, hoping the price will turn around. Many times it never does. On the flip side, you could also say loss aversion causes traders to close out positions too early. When a trader sees a small profit, he is afraid of losing what he already has so he closes out the position too early.

These emotional responses are in direct opposition to what a good trader would do - cut his losses short and let his profits run. Haul in your emotions, stay disciplined and never step away from your trading plan. That is the makings of a good trader.

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