The fact is the majority of traders lose because they cannot control their emotions. Trading psychology is one of the keys to investment success.
A simple fact will illustrate the influence of trading psychology:
Why the majority of traders lose
There is one statistic that has remained constant since the beginning of investment records - the ratio of winners to losers has remained constant over time.
On reflection, this would seem a startling fact; despite the massive advance in communications and economic forecasting methods, the ratio remains the same.
The conclusion from the above is that the successful trading is dependant on something else. That something else is our trading psychology.
The influence Of Hope and Fear
In trading psychology, two emotions that are constantly to the fore are hope and fear. One of the traders who recognised this was the legendary trader W D Gann.
“Hope and fear: I have written about this often in my books and I feel I cannot repeat it too often. The average person buys commodities because they hope they will go up, or because someone advises them, they will go up. This is the most dangerous thing to do, never trade on hope. Hope wrecks more people’s lives than anything else. Face the facts, and when you trade, trade on the facts, eliminating hope”
“Fear causes many losses. People sell out because they fear commodities are going lower, but they often wait until the decline has run its course and sell near the bottom - never make a trade on fear”
Control Emotions and Become a Disciplined Trader
Gann, like all successful traders, realised that the only way to trade successfully was to remove emotions from trading, and trade on the facts and realised the significance of trading psychology on price movements.
To do this, he applied mathematical principles to investing that would give him the ability to trade without emotion, with discipline Gann was extremely successful, amassing a fortune of over $50 million in his trading career.
Human Nature Is Constant – Exploit It for Trading Success
It doesn’t matter what market you trade: commodities, stocks, currencies, or what type of trader you are, a day or position trader, the fact is, trading psychology influences the majority of traders. If you can control your emotions and trade with a disciplined plan you can gain a trading edge.
A Disciplined Plan for Big Profits
Gann was able to control his emotions by having a specific plan, which he followed, and the following three principles was the basis of his success:
1. He had a trading method, which relied on mathematical principles that he had proved over time would increase profit potential and reduce risk.
2. He traded on the facts as presented to him by his trading system and he never traded on his emotions
3. He used strict money management principles to run profitable trades and cut losses quickly
He realised that having the correct trading psychology was just as important as having a good trading method.
Essential Reading for Any Trader
After Gann’s death in 1955, there have been some excellent writers on trading psychology including Jake Bernstein, Larry Williams, Dr Van Tharpe and Jack Shwager. Gann’s works however, have stood the test of time proving him one of the most influential traders of all time.
Emotion is part of human nature. We cannot avoid it. All we can do is to:
“Act in a way to overcome the weak points that have caused the ruin of others”
This is what Gann set out to achieve.
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