Trading Psychology

Mitchell Brown at Enlightened Wallstreeter has compiled a list of useful articles on the psychology of trading.

Trading is divided into three decisions:

• Choosing - Deciding what position to enter.
• Sizing - Deciding how much money you want to risk on the position.
• Timing - Deciding when to enter and more important, when to exit.

If any advisor tries to tell you that there's an objective science for these decisions, run away. Each is mediated through the human brain, and each has strong elements of hope and fear. . . .

• Choosing. If I choose right, I'll be a winner and everyone will know how smart I am. But if I'm wrong, I'll lose money and I'll feel pretty dumb. 
• Sizing: If I just double the amount of money I put on this winning position, I'll come out rich. But what if the price moves the wrong direction?
• Timing: OK, I've done my analysis and I'm going to trade right now. Why wait? It might go up before I can get in. Well, OK, I bought it and it went down, but it'll go up again, right? I've just got to hang on for a little while.

We all hope fearfully and fear hopefully. That's our nature as a species. Sometimes it helps us avoid being eaten by tigers. Other times, it leads us to ride a stock all the way down to bankruptcy.

By understanding our hopes and fears, we become more aware of what influences our trading, and that brings greater likelihood of success.

So browse Enlightened Wallstreeter's list and click the links. Trading psychology is always worth reading and thinking about.