Daily Wisdom 33 - Who are you and where are you going?Don't get caught up in the bells and whistles only to lose your way.
Psychology
Why Beginners Lose Money Even in an UptrendIf you like this analysis, please make sure to like the post!
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In this post, i'll be focusing on the psychology aspect of trading and investing that most people overlook.
Contrary to common belief, in my personal opinion, understanding a trader and investor's own psychology is significantly more important than educating oneself on trading techniques and learning how to read financials.
'Buy low sell high' is the motto. As simple as it sounds, why do most people lose money trading or investing?
There are four major mistakes that most beginners make:
1. Excessive Confidence
This stems from the idea that people think of themselves as special. They think they can 'crack the code' in the stock market that 99.9% of people fail to, and eventually make a living trading and investing. However, taking into consideration the fact that more people lose money in the market, this form of wishful thinking is the same mentality as going into a casino feeling lucky. You may actually get lucky and win big the first few times, but in the end, the house always wins.
2. Distorted Judgements
While simplicity is key, the approach most beginners make in trading and investing are too simplistic, to the extend where it's hard to even call it a trading logic or reason to invest. They spot a few reoccurring patterns within the market, and this is almost as if they discovered fire. It doesn't take long to realize that the "pattern" they spotted was never based on any solid reasoning, or worse, wasn't even a pattern at all in the first place.
3. Herding Behavior
The fundamentals of this is also deeply rooted in a gambling mindset. Beginners are attracted to the idea of a single trade or investment that will make them a millionaire. However, they fail to realize that there is no such thing. Trading and investing is nothing like winning the lottery. It's about making consistent profits that compound throughout time. While people should definitely look for assets that have high liquidity and some volatility , the get-rich-quick mentality drags irrational beginners into overextended/overbought stocks that eventually drop drastically.
4. Risk Aversion
Risk aversion is a psychological trait embedded within all of mankind's DNA. Winning is fun, but we can't tolerate losing. We tend to avoid risk, even when the potential reward is worth pursuing. As such, many beginners take extremely small amounts of profits, in fear that they might close their position at a loss, trading with a terrible risk reward ratio. In the long run, their willingness to not take any risks leads to losses.
Depending on the price action, they also go through seven phases of psychological stages:
- Anxiety
- Interest
- Confidence
- Greed
- Doubt
- Concern
- Regret
As we can see in the chart for the S&P500 (SPX) , there are price points at which beginners would buy during their 'confidence' phase, and sell during their 'concern' phase.
As a result, they would be losing money even when the market moves in an upward trend.
Even when the market is at a clear uptrend, it goes through phases of impulse moves, and corrective moves.
However, as beginners are swayed away by their emotions, they fail to recognize the overall trend, resulting in them buying high and selling low .
Conclusion
The most important thing that beginners need to realize before they start trading or investing is that human beings are emotional beings, and as a result, they are not different from the rest of the people in the market. All successful traders and investors throughout history have had superb meta-cognition. They understand their own psychology, as well as that of other participants in the market, allowing them to make rational decisions with patience, rather than hasty decisions based on emotions.
Daily Wisdom 21 - Indicators gauge your feelingsLook at things from a different perspective. Maybe then you will find what you're looking for.
Daily Wisdom 19 - You are how you trade"Fear is a sickness. It will crawl into the soul of anyone who engages it. It has tainted your peace already. I did not raise you to see you live with fear. Strike it from your heart." - Apocalypto
Can a Strategy be bought?To be successful as a trader, you have to understand that this activity is a continuous battle for survival. If you don't think like a warrior, you will have a very short life as a trader.
More than eighty percent of retail and intraday traders will kill their accounts in their first three months. The most successful traders learn the painful and costly rules of survival in the markets through trial and error.
The word "strategy" comes from the ancient Greek term stratēgía ("office of the general, command, generalate"), from stratēgós ("the leader or commander of an army, a general"), from stratós ("army") + ágō ("I lead, I conduct"). In other words, it is a matter of "thinking like a general".
The most important book on this subject, the Sunzi Bingfa , poorly translated as "The Art of War", deals with planning and strategic analysis. The fact that this book deals with strategy, not war, explains why its methods are perfectly applicable to the planning of market operations and to any other activity that requires foresight and analysis.
According to its author, the Chinese general and philosopher Sun Wu , known as Sunzi (Master Sun) or Sun tzu, success is not for the strongest or the most aggressive, but for those who best understand their situation and what their alternatives really are. By studying and understanding the strategic framework proposed by Sunzi, you will be able to analyze almost instantaneously any competitive situation in the markets, detect opportunities and make appropriate decisions.
This contribution and the following ones are a tribute to the millenary wisdom of this classic work and a gift to those novice or expert traders who, like me, were defeated before the markets for not having a Strategist mentality.
Dario van Krauser
Strategists Trader
Daily Wisdom 16 - Track what mattersDaily behaviors leads to results. Too many focus on the results while lacking daily behaviors. No wonder they fail.
The Art of Zen Trading1. Create an awareness of your body.
2. Pour happiness into everything you do.
3. Detach. "Connected to everything, attached to nothing."
4. Set process-based goals.
5. Breathe, be aware of the present v the illusion.
6. Everything is temporary.
7. Trading is skillset building.
8. Mistakes and failures are a requirement.
9. The fight is the real reward.
10. You yourself have to engineer your own peace, happiness, and success--moment by moment, action by action.
Daily Wisdom 09 - Are you aligned?After years of searching for the holy grail, the trader found himself.
