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I have read dozens of trading books. Some helpful and some not so helpful. However, one common theme runs throughout all the books I've read on trading: Trading Psychology.
Some trading guru's say that trading psychology makes up 90% of your trading success whilst your system and rules and money management make up a mere 10%. Whilst this may be a bit drastic, I do believe that psychology is the area where traders struggle the most. Most beginner traders focus more on buy and sell signals and order execution, while experienced traders will suggest that trading psychology is the area that they should focus on in order to become consistent, profitable traders.
It’s so much harder to look inwards to improve your trading than to focus on external factors. Traders would rather search for that perfect indicator or that Holy Grail system than focus on their own weaknesses and psychological makeup because it’s difficult, really difficult.
As individual traders we have two ways of handling this. Firstly, we can try to overcome our the psychological issues that are holding back our trading or we can automate our trading so that psychology plays no part at all. It’s a choice between overcoming our weaknesses and eliminating them from our trading.
Overcoming psychological issues in trading is a long and hard process that one can improve and control but never eliminate entirely. You could seek the advice of a trading coach or take a course or read books, but ultimately learning to control your emotions and psychological state will be a life long journey of discovery. We are particularly susceptible to psychological weaknesses when we are tired or under stress. Trading under these conditions makes it even more challenging to deal with, however due to the nature of the market we often trade in these circumstances.
By building an automated trading system you eliminate human error and psychological issues from your trading. An automated trading system is one where you build and test your trading strategy and then instead of manually making the trading decisions based on your rules based system, you build a simple automated program to run your system automatically. This eliminates trading errors such as entering the incorrect lot size or limit price, forgetting to enter a stop loss or closing a trade too early. More importantly though, it eliminates the possibility for you to move your stop loss out, or enter a trade that has not been confirmed as an entry by your trading system. Worse still is riding a losing trade for fear of realising the loss. Traders can rationalise strange behaviour in the heat of the moment and easily sabotage their results by deviating from their rules based trading plan. Your auto trading program will never deviate from the rules that you set and never get fatigued. Your auto system doesn't get stressed, greedy or fearful.
If it is true that trading psychology makes up 90% of your trading success, then why not remove it from your trading by introducing automated trading software? This allows you to focus on the other 10%; the actual rules based trading system that every trader needs in order to be successful. This is the fun part! Traders enjoy building and testing trading and money management systems.
Focus your efforts on developing a water tight system that suits your needs and use automation to implement your plan. You'll reduce your error rate and improve your trading results. The fewer mistakes you make the better trader you will be.
Get a Life by Automating Your Trading
After analysing this period in my trading history I discovered that although I had been making more errors, the worst thing about being so tired and anxious was the marked reduction in my ability to remain disciplined in my trading. The more tired a trader is the more difficult it is to follow his trading plan.
Be Responsible for Your Own Trading Success
All traders are unique. There is no one size fits all automated trading system. Build your system based on your beliefs about the markets and according to your trading plan. It’s also easy for the seller of the system to create an unrealistic track record through over optimisation. The system may promise success but fail hopelessly in real world conditions. Blaming the system for your failures is too easy. Take responsibility and build it yourself.
What is the Future of the Markets and How Does Automated Trading Fit In?
Regulation of financial markets is increasing as they become more complex and computer driven. This is to the advantage of small investors who require legislation to protect them from unscrupulous operators and so called insiders. A more regulated environment means a better trading experience for automated forex traders.
