This is the second part of a two part series on errors in thinking that can keep you from becoming a successful trader.

The difference between winning and losing traders is usually not market information, inside knowledge, exotic trading techniques or better brokers.  It is all about mindset.  This article lists some more mindset errors and concludes with a brief discussion on overcoming errors.

Successful traders have adopted some winning mental attitudes that allow them to thrive, while most people try the incorrect and flawed cognitive approaches that are prevalent in the world (where they are commonly protected from the consequences of their actions), and unsurprisingly get wiped out by the market.

Here are some more errors.

Attempting to process too much data

When I began as a futures trader and placed my first stock index futures trade, I rang the broker for the opening quote (there was no Internet trading then).  He gave me the quote, then asked if I wanted to know how the Nikkei had opened.  I said “OK”, even though I had no idea on how to use that data.

Then I read a copy of the national financial newspaper in the hope that it would help me with my trade.  Again, I had no idea which stories or numbers would help me.  After a few days of this, I began to get overwhelmed.  Eventually I worked out that I needed very little data to trade, and that most data was not information (that is, something that was useful or informative).

Again, here is a quote from Darvas’ book:

The solution was whispering to me but at first I could not credit it.  It was so surprising, so simple and yet so extraordinary, I could hardly believe it.  It was: My ears were my enemy.

It dawned on me like a revelation that when I was travelling abroad I had been able to assess the market, or rather the few stocks in which I was interested, calmly, neutrally, without interruption or rumour, completely without emotion and ego.

…There were interruptions, rumors, panics, contradictory information, all floating into my ear.  As a result of this my emotions became involved with the stocks - and the cold, clinical approach had gone.

The human mind can process a limited quantity of data, so make sure that what you look at is relevant.  Avoid numerous indicators, studies, tips, advisory services and focus your thinking on the important.

Listening to other people

In trading, most gains accrue to a small number of individuals.  This means that most people are wrong, most of the time.  Jesse Livermore wrote about the importance of ignoring tips or market gossip, even from those who would presumably be in a position to have good understanding or knowledge.

You can put conventional market wisdom such as “You can never go wrong taking a profit” into this same category.  Another class of the same thing is seeking guidance from brokers.

Generally brokers have very little understanding of the direction of the market.  If they did, they would be investment professionals, or trade on their own accounts and not have to take phone calls, or ring up people for business.  They are sales professionals, not market oracles.

Herd thinking means decision by consensus, conventional wisdom, listening to tips or asking for a broker to hold your hand.  Herd thinking is the antithesis of successful trading.  You need to move away from this and be able to make up your own mind.

Not having a system

Business is all about systems.  That is why franchises are popular.  You have seen businesses without systems.  You put your car in for a service, and they don’t have it ready, or have left the power steering disconnected.  You buy your lunch and some days get too much, other days not enough.  A business system ensures a consistent outcome.

Trading without a system is like the business that loses your car keys after a service.  If you trade from the seat of your pants, you will lose.  You need a trading system that is a winner.  You need a trading system that suits your view of the market and your risk tolerance.

You can either build a system or buy one.  Generally the systems you buy tend to overtrade and have bigger losses than most people are comfortable with.  I am currently evaluating a commercial system, so check out the reviews to see whether that is the type of thing you want.  Otherwise, you’ll have to build your own, and make sure you thoroughly backtest it for quality.

Conclusion

How can you overcome these obstacles?  Well there are some obvious ways: do your homework before starting to trade, get a working system that you can rely on, focus your information gathering on that which your system needs, be realistic about your own limitations - identify and overcome cognitive errors.

Understand yourself and how you tick.  Get in touch with who you are and work on overcoming whatever is holding you back.  There are some specialised trading coaches who can also help you focus on strengthening your thinking skills.  Remember, trading can potentially offer you freedom and wealth, so it is worth letting go of your old thought processes and moving to success!

(No Ratings Yet)

 Loading ...

Tags: trading psychology, Winning Mindset

This entry was posted on Sunday, April 13th, 2008 at 9:46 am and is filed under Winning Mindset. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.