Trader Psychology: The Seven Deadly Sins ⚔️
Introduction
Beyond the scope of analyzing charts, quarter 3 earnings, and determining what option to blow your account on, decision-making is a very important skill to master when starting your trading journey.
As much as it’s concurrent in our day-to-day lives, decision-making is everywhere whether you realize it or not.
It influences what we do in the present, changes our future, and transforms our past.
It’s easy to be naive of psychology’s existence in trading and it’s also easy to be blinded by huge profits and a 30% gap ups every day.
However, the ability to be disciplined, stick to principles, and master your own psychology is one of the most important INVESTMENTS IN YOURSELF.
The Seven Deadly Sins 🩸
Using day trading as context, finding the right strategy, and executing orders compromise a minuscule percentage of trading as a whole.
Then suddenly the strategy doesn’t work and you end up blowing half your account despite previous success.
Having the right strategy, broker and information can only give you an “edge” but not a guarantee.
Below, I’ll be going over 7 ways emotions can jumble trading results.
1. FOMO (Fear of Missing Out) 😢
The fear of missing out is a social anxiety that most if not all people have at some point in their lives. FOMO usually takes place in the form of person-to-person interactions, but in this case, it’s a person-to-intangible possession relationship.
In trading, the fear of missing out on different trading opportunities may cloud judgment and reduce trading accuracy year over year.
For example, $BABA may have a 90 IV Rank and the premium may be super attractive, prompting traders to dive in on selling bullish positions because the trade is “worth it”.
However, there’s a meme stock popping off that you could get in on and potentially receive unlimited profits compared to the capped profit you receive from the BABA trade.
In this case, a trade rule was broken since you didn’t want to take the “semi-good” opportunity and instead wanted to bet it all on black hoping to strike it big.
These situations are very common and it’s important to always stick to a malleable routine and enter trades when most factors are in your favor.
There can be many exceptions, but it all comes down to reasonability ⚡️
2. Fear of Losing Profits 📉
Due to human nature, when we see things that are going our way, we tend to get tunnel-visioned and lose track of the bigger picture. Seeking confirmation bias is usually the first indicator of this natural phenomenon.
This ties nicely into trading as profits usually bring this same type of joy explained in the paragraph above. People tend to want to secure their profits too quickly as they get scared of future circumstances that “may” go the wrong way.
Using March 2020 as an example, the market rebounded from its lows and began climbing higher and higher even until now in Sept 2021.
If in March you were to purchase the SPY and proceed to sell after a 5% short-term gain because of market tensions, then you would be missing out on a 100% gain over the next year.
The moral of the story is to know your rules and know when to take profits and when not to take profits based on set boundaries that you have created.
Whether it be trading options that may be more technical or shares, the principle is the same.
3. Greedy Profit Taking 😈
Now the opposite occurs, you’re too greedy with each trade and believe that your positions will return 100x over a 1 month period of time.
Situations like Gamestop happen once in an Eon and you may not be in the right time or place to capture the volatility in the market or even have the exact positions needed to reap the gain.
This time instead of taking profits too early, you’re taking profits faster than I can take my hand out of burning lava.
Using GME as an example again, imagine you opened positions in GME when GME was on the rise near the $60 mark. In a matter of days, you would be up over 5x your initial investment on just shares alone.
However, you decide to hold on and let your emotions take hold of the steering wheel. Instead of using rationale and processing the ROI vs. TII, you’re convinced that it’ll hit $1000 because it can.
Then in the next few days, it’s back to $40 and you missed out on potentially life-changing money.
Similar to the lesson from #2, it’s important to know boundaries and stick to the same principles every trade you make. Stay emotionless and let facts determine your course of action.
4. Inflated Ego 😎
As you may know, trading is very skill-based and requires immense self-discipline.
After a few big winners, many tend to develop inflated egos that may hinder their future performances.
This was very evident after the GME squeeze which created thousands of god-sent “investors” overnight. They believed that because they hit it big, they were able to replicate the same success despite different conditions.
This led to many eventually blowing their accounts off positions that became instantaneous losers but were ridden to the bottom.
This ties into sin #3 as it’s important to stay a disciple of the craft and not be blinded by your own success. When rationality and logic are thrown out the window, that’s the time when you’re most vulnerable.
5. Trade Anxiety 😬
Trading involves a very sensitive material: money, something that everyone holds dear to their hearts.
So when you put money into something, it’s instinctive to not want to lose it. This is the same as putting on positions and investing to create a return.
Even though you run the risk of losing money, your overall goal is to ensure that you make a certain percentage of your original investment.
Trade anxiety is very real and may cause you to miss out on logical positions that you would’ve invested in if you didn’t have that anxiety.
It’s important to understand that everyone has their own risk tolerance and your portfolio should be tailored to what’s comfortable for you.
Whether it be 50 positions or 10 positions, as long as you’re investing intelligently, then most things will go your way.
However, if you want to work towards diversifying your portfolio, slowly work up towards that goal by either trimming half or slowly dollar-cost averaging each month/week.
6. Trying to Create Out of Thin Air ✈️
Sin #6 is the opposite; creating positions on every ticker you see and entering positions without proper risk management.
Opportunity is hard to come by and this concept definitely applies to trading.
It’s impossible to be able to time the market and capture the maximum returned percentage every day.
That’s why it's important to stay disciplined and not try to create positions out of thin air.
Rushing things won’t help your year-over-year average, mental health, or the inevitable loss that will definitely occur some point down the line.
Trade only the best setups and ensure that whatever position you’re starting, it has the best possible “edge” at winning.
7. Giving Up When things Get Difficult 😵
⭐️ TRADING IS HARD ⭐️
This is the reality of playing against the house, you’re destined to lose one way or another when playing short-term positions.
Taking losses back to back to back hurts and I’ve been in that same position before.
Whether it be earnings trades or random positions that I felt were reasonable, I’ve lost plenty of times before.
It’s important to understand that losses aren’t the end of the world. The $100 dollars you lost today won’t impact your future.
Instead, learn from these mistakes and analyze your decision-making; determine what you could have done better to ensure something like that doesn’t happen again.
Sharpen your skills so that every trade you make is near perfect.
Because in the end, making anything over 7% a year beats the market.
CONSISTENT PROFITABILITY IS THE LONG TERM GOAL
THANKS FOR READING⚡️
I will be writing more about my Instagram experience, financial freedom, and whatever I find interesting. Please let me know in the comments how I can improve my writing, and if you enjoyed please consider smashing that follow button!!
— Tristian Xu ⚡️
