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Treat your Trading like a Business & Trade Plan/Journaling
TRADING PSYCHOLOGY
FUNDAMENTAL ANALYSIS
Technical Analysis
Option Greeks
Spread Trading for Income
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Trading Psychology Part 2 Summary

Trade Psychology Part 2

10K hours principle

It takes time to become an expert, in anything you do, experience in as many situations as possible is key. How long? About 10K hours to roughly say you are an expert, however this does not mean you cannot be profitable before this. You must set time in a business plan to become an expert otherwise you will spend years to achieve this 10K hour principle. Writing a business plan to achieve a goal is key, defining your goal is imperative to leading your journey towards it. This principle outlines that the journey towards becoming an expert is long, tedious and difficult. Learning a concept is simple however mastering it in many many situations is key. You must have some level of perseverance during this process documenting your journey in your trade journal in order to analyze your statistics, choices and emotions. Another key during this 10K hour principle is restraint from “gambling” your whole account early on while you are documenting and learning during the early parts of the Dunning-Kruger curve. You MUST grow your competency at a slower pace than your confidence level.

A Pilgrim’s Progress

Your journey will encounter people who judge you, question you, and encourage you through this journey. If you have a plan this is key, a detailed, written, and consistently followed plan shows diligence to the journey. Gurus today flaunt money, wealth, and vanity in order to urge people into markets without a plan. As you go through the journey of the Dunning-Kruger curve and work through your 10,000 hours you start to go through a revelation that your competence becomes higher than your confidence and you are more comfortable with your plan. Maintain relationships with those who are farther along than you on the journey as well as peers on the same level of the journey as you. 

Types of Psychology in Trading

The three types of psychology in trading are learning psychology, market psychology and trading psychology. First we will delve into learning psychology:

Learning Psychology

Four Stages to Mastery

  1. Unconscious Incompetence: One is bad at trading but does not recognize it
  2. Conscious Incompetence: One is bad at trading and now recognizes that
  3. Conscious Competence: One is working on getting better at trading and is recognizing results
  4. Unconscious Competence: One is competent and does not recognize just how good they’ve become

Fixed vs Growth Mindsets

A fixed mindset is set in their ways and believes that skills, intellect and talents are set and unchangeable. A growth mindset believes that skills, intellect and talents can be developed through practice and perseverance. Mindsets are heavily influenced by those who you surround yourself with. 

Trading Psychology

Understanding your personality and how it affects your trading is imperative. If you can easily categorize typical traits that may impact your decision making you can build methods in advance to help keep you in accordance with your business plan. 

Some common types are those who are adrenaline junkies who take as many trades as possible and are high risk-high emotion traders. Others may be slow and steady traders who carry FOMO or cannot deploy capital at the right time, this may lead to overanalyzing trades to the point where it is unnecessary. Others may fear failure and never use stop losses or remove them “believing the trade will come back”. Accurately placing what type you are can help you set up a process to alleviate issues.

A fantastic way to recognize typical issues you may encounter are personality tests. These are outside tests that can give you more insight into your personality as well as categories and tips for your business plan. There are important things to note about these though: you may not perfectly fit any one test or category and all of these tests are subjective. No one test is perfect however they are valuable in giving key insights into your personality.

Top Models

Big 5: The big 5 model is one of the most widely accepted amongst academic circles. It has 5 main categories (OCEAN): openness, conscientiousness, extroversion, agreeableness, neuroticism.  

Myers Briggs (MBTI): For every reaction there is an equal and opposite reaction. Developed by Carl Yung that focuses on Dialectic / Modal philosophy. Myers / Briggs developed the 4 letters as a system to help people in WWII find the most effective jobs they were suited for. 

Market Psychology

In the market there are different traders in the market. There are retail trades who by themselves have little impact on the market but are able to get quickly in and out. However, Institutions can move the market however there are greater challenges to entering and exiting a position. They must secretly hide their plays in order to not tell their hand and need to minimize their fees costs. In the ocean, retail traders are the small fish who are able to move in and out of the market quickly; however a whale must move a bit slower as it affects the entire ocean as it tries to move around.