In cricket, viewers are treated to linguistic expressions that are reflective of the state of the mind of the player. For example, South African David Miller among many other statements is noted for ‘If it’s in the arc, it’s out of the park!’ and ‘If it’s in the V, it’s in the tree!’ which have now become frequently used terminology in cricket. One such cricketing phrase describing extraordinary feats of a cricketer is ‘Being in the zone’. The phrase signifies the purple patch of a batsman who sees the ball as big as a football and dispatches it to all corners of the park with no regard to the caliber of the opposition bowlers. While the phrase is widely used in sporting events, this article attempts to capture its significance in the trading world and the role of psychology in carving out success.
ROLE OF PSYCHOLOGY
The two most important disciplines to shift balance towards traders is the Fundamental and Technical Analysis. Yet, to be a successful trader, a third dimension is prevalent which has emerged as the important cog in the tale. Psychological trading is the most important skill in contemporary trading landscape as emotions have the biggest impact on results.
A successful trader will always proclaim that it is not down to one single trade but a number of trades using a tried and tested strategy. This means that a trader must be disciplined enough to stick to their strategy despite undergoing a losing streak. However as human beings, we more often base our behavior on logic but every now and then, emotions influence us and we act irrationally.
Emotions are inescapable aspects of a new and unskilled trader making him/her prone to commit mistakes. Learning how to control the emotional state of mind becomes paramount to becoming a successful trader.
IMPORTANCE OF PSYCHOLOGY
In a startling finding, Dr. Van Tharp, an investment expert, propounded that the trading process is broken down into three categories – Trading Strategy (10%), Money Management (30%) and Psychology (60%). From research, the psychological outlook and an individual’s way of thinking towards trading forms an important cog in the journey towards success.
EMOTIONS INFLUENCING TRADING
The following are examples of various emotions which can define a trader and how they can negatively affect trading results:
Fear of losing can lead to enhanced losses
A trader who fears losing will inevitably try to avoid such trading scenarios. This can actually increase losses. A trader will use fundamental and/or technical analysis to initiate a trade and place the stop loss accordingly to mitigate losses in a strategic manner. However, a trader enveloped by fear will eventually close the trade prematurely, simply because the trade temporarily will go against them. Also, a trader can close their trade as soon as it generates marginal profit out of fear that they can lose the generated profit. This behaviour will ultimately turn a profitable strategy into a losing one since the trader has reduced the amount of winning trades or reduces the profit overall because of the fear of losing.
Greed results in less profit
When a trader becomes greedy, he eventually attempts to go for too much profit thereby deviating from the strategy. A trader does not close the position in accordance with the strategy but try and go for more. Chances are that the trade can turn against them, and the trader will ultimately end up with less profit, or worse, a losing trade.
Egoistic trader will never admit they are wrong
A trader heavily influenced by his or her own ego will not admit that they are wrong. An example of this scenario is when a trade is not generating profit, instead of closing the position, the trader will carry on incurring a bigger loss with the preconceived notion that they are not wrong. Another example is when a trader takes a loss on a perfectly good trade, they do not go about changing the strategy but instead, continue with the same strategy because they believe they were right in the first place.
Revenge trading is a scenario when a trader chases the losses they have incurred and place trades on winning the money back. The traders are so focused that they fail to realise that they are not trading with a set of rules and each trades thereafter will end up in numerous losses.
OVERCOMING EMOTIONAL TRADING
Trade with a plan: A trader will remain calm under pressure if they have confidence in the trading plan. The tried and tested strategy will invariably prove to be the saving grace and will erase all doubts that could allow fear to overwhelm the trader.
Demo-account testing: Most exchange platforms have a demo (practice) account where strategies can be tried and tested in a simulated trading environment on a real time professional trading platform before entering live accounts. The strategies can be altered and modified in the demo platform without the fear of losing real money.
Risk Acceptance: While a trader wants a favourable trade, the chances of a strategy with a 100% winning ratio is unrealistic. A trader must be prepared to accept losses in the long run. An inexperienced trader is likely to experience a stronger emotional impact when a loss incurs. However, an experienced trader is abler to accept the losses as a part of the trading strategy and move on quickly to the next trade without allowing greed or fear to affect future trading decisions.
IN THE ZONE
When a trader is oblivious of the emotions and is transparent in his ability to think clearly, the trader is said to be in the zone. They are in control of their emotional state of mind and are able to follow a trading strategy in a logical and rational way. While the theory states that getting into the zone is the ultimate testament to a trader’s ability to not let negative forces control the mind, the practical side may paint a different picture. But all is not lost for those traders as they can learn to survive difficult moments and learn to control their emotional side and become emotionally detached from trading. Becoming master of one’s own emotions is key to step inside the purple patch of a trader and thereby be in the zone.
Vivek Risal is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at firstname.lastname@example.org