Psychology of trading: control your impulses

Think about the end of the matter, about getting out happily, not about getting in nicely. Vitelo

The most serious illness of many novice traders - lack of discipline. Instead of following a trade plan, many novices lose control. They impulsively abandon their plan, reaping the rewards in the form of erratic profits and, more often, serious losses. Psychologists refer to discipline as "impulse control." There are a number of classic studies that illustrate how people can strengthen their ability to control impulses. As a trader, you may find these strategies for increasing self-control interesting.

In the original impulsivity control study, Dr. Walter Mischel and colleagues examined children's ability to delay rewards. Like many children, participants were slightly hungry and were offered a snack of bagels. To get a bagel, all they had to do was push a bell button and a lab technician would bring the order. But there was a catch: If they had waited without giving in to the temptation to call, they could have gotten a whole bunch of bagels, a delayed but more desirable reward. What is interesting in this study are the situational and psychological factors of how long a child might have delayed receiving a reward. The first factor was the visibility of the reward, whether it was right in front of the child or hidden. As expected, it is difficult to delay a reward if the bagels are right in front of you. The kids couldn't wait. When the food was right in front of them, they preferred to eat one bagel immediately rather than wait for a bunch later. This finding is especially applicable to trading.

In trading, it is considered not too sensible to constantly monitor the progress of a trade on the screen. Some traders say that it is a lot like a slot machine. It just tempts you to play when in reality all you need to do is to wait for the exit signal. If you have a problem with impulse controlYou should avoid hypnotizing the screen when there is no pressing reason to control the transaction. To counter impulsive temptations, you can use automatic orders of your trading platform. Regardless of how you proceed, it is helpful to remember the natural human tendency to want to close a profitable trade immediately to avoid risk, instead of patiently waiting for a signal and exiting according to your trading plan.

To reinforce impulse control you can also use thinking strategies. For example, Dr. Mischel found that children could refrain from wanting to eat bagels if they changed their perspective on them. If they thought of bagels as food, they wanted to eat. But if they envisioned bagels as wooden or plastic wheels, it was much easier to resist. Similarly, if they pretended that there was a frame around the bagel and convinced themselves that they were seeing just a painted bagel, it was easier for them to put off the reward. This finding also lends itself to trading.

One of the main reasons that make novice traders abandon a trading plan is that they consider the capital invested in the transaction as real money. They think about what they could buy with this money and how nice it would be to spend it. Of course, it is just real money that is invested, but it is not worth considering it from this point of view. It is useful to treat capital as abstractly as possible. It is better to see it as percentages or only numbers that do not concern anything tangible. In this way it will be easier to maintain discipline. Just as children can refrain from bagels if they don't see them as food, traders can avoid acting under the influence of fear and greed if they don't see cars, luxury goods or houses hidden in capital. It may be an exercise for the mind, but it works. The stronger you abstracting the moneyThe more you invest in a particular transaction, the more logical and dispassionate you will act.

If impulse control is a problem for you, don't lose hope. There are trading strategiesthat you can use to boost your ability to stay disciplined: avoid looking at the screen too often and abstract yourself from the trade as much as possible. Never forget to follow a detailed trade plan; do not leave any eventuality unspecified or be tempted to abandon the plan, you will be able to trade more consistently and profitably, and achieve long-term success of a winning trader.