The psychological aspect Of Trade

Brett N. Stinberger - Doctor of Philosophy and Professor of Psychiatry at the Medical University in Syracuse, NY. New York. He is also an active trader and writes articles on market psychology. The author of the book "Psychology of Trade, 2003. Doctor Stinberger published over 50 articles on short-term approaches to behavioral change for traders.

If I had to give one piece of advice to most traders, who are struggling with their ratio of profits to losses, it would be to trade for a proven systems and models and sell them systematically. If you look at very successful companies, such as "McDonald's", "Dell", "Federal Express" or "Wall-Mart", then find a company that makes the same things and in the same way every day, with high degree of consistency. They invented the formula for victory, which is the key to success and they are doing this formula with high fidelity and regularity. That's exactly the way you have to sell.

Thus, this raises two important questions for any self-trader:

. Do I have a formula for victory, and whether I have checked to make sure it is successful and to have the necessary confidence in this?

. I sincerely follow his formula, and whether I track every transaction and know that I follow the formula and to have confidence in their ability to follow it?

A very large percentage of traders that have applied to me for help, they could not honestly answer these questions affirmatively. They want to get help for themselves, when what they need - is the need to consider their trade as a world-class business.

Trade and individuality
About three years ago, I along with Linda Raška examined a group of about 64 active traders. We wondered whether any particular individual and repetitive style that distinguished the more successful traders from the less successful. We received a large number of results that lead to think. For example, we found that successful traders have a lower level nevrotizma (negative emotional experience) than their less successful colleagues. They also used methods are more focused on problem-solving (developing strategies to deal with problem situations), as compared with the concentration on their emotions. Successful traders, as we found higher were evaluated on a scale of "good faith", reflecting the motivation to follow their plans and commitments. In general, these results confirm what many of us have seen in my career on the market: traders to temper their emotions and act on the basis of his plan, selling better than their more emotional and impulsive counterparts.

However, it was unexpected and a conclusion in our study, which was that a disproportionate number of successful traders - about half - said of the use of mechanical trading systems. Of the unsuccessful traders, no one has used a mechanical approach. When I later took an interview with successful traders, it turned out that even those who were not committed to trading systems that base their transactions on the models that they have carefully studied. On the contrary, almost all unsuccessful traders lacked such training in relation to the models and research.

In his recent book "The Psychology of trade" (2002), I describe these successful traders as the following rules. I am confident that the main reason why they were successful is that they use trade rules for the conduct of its trade, and to maintain a positive mental attitude. In this article, I would like to explore in detail why trade rules are one of the most powerful psychological strategies that can be used in active trade.

Psychology rules
What is a mechanical trading system? Basically, a set of trade rules. They perform several functions. The first of these functions - logic: the rules are designed to maximize profits by exploiting the anomalies that arise in the relatively efficient markets. Each set consists of trading strategies that the statistics referred to as rules of decision-making. That is, they set the terms - A, B,. n, that the market must comply with before traders come in long or short side or a closed position, etc. The idea is that, without these conditions, the likelihood that the open position will be determined by pure happenstance profitable. As soon as we upgrade this probability under certain conditions, greatly increasing the chances in favor of the trader. While any individual transaction may not prove beneficial, for a sufficient period of time and with sufficient number of transactions, the increase is likely to affect the curve of the trader's assets to the extent to which the decision rules were investigated. Is vital for any trader to know how the system has been developed. Has it been tested over a period of time, regardless of when it was developed? Is it work in real-time comparable to its historical performance? Is the built-in logic is obvious, or there are too many parameters, complicated logic or other signs of adapting the system under certain conditions?

Less well-valued function is that such rules have a second decision, psychological function. Body of trade to a set of rules, traders reduce its ambiguity so that it can operate on automatic mode. This allows precise control of the new trading opportunities in a way that improved their chances could ultimately work in favor of the trader. With the reduction of ambiguity, the rules make a significant contribution to the sense of mastery and reduce much of the stress associated with high activity of this kind of activity. Think how hard it would be to move in a lively city where there are no rules of the road! Almost exactly the same emotional state of many traders, who operate without any rules. The existence of trade rules provide the procedure, as opposed to chaotic process.

However, in order to serve the system of psychological help, it must comply with the identity of the trader. A study conducted by the London Business School, shows that there is another personal trait - extraversion, which shows a positive correlation with tolerance of risk. Some traders are far more inclined to take risks than others, simply because of their individual characteristics. It is essential that the system on which you sell, take this into account. Thus, the ratio of profits to losses of the system is only one parameter, which should be evaluated when searching for a better shopping method. Statistics of the recession and the percentage of winning / Losing transactions can be crucial for the psychological comfort of the trader. For instance, I discovered for myself that I was much more successful at short-selling within-day models, than on large fluctuations. With the average holding time positions less than 30 minutes, I can get a small profit with reasonable consistency, maintaining its concentration on trade and limiting its losses. While I theoretically possible, can make more money, in keeping with longer-term fluctuations, in practice this does not happen. Increased volatility of longer-term time period is in conflict with my emotional state, influencing the decision to turn my bargain for the one that does not correspond to a reasonable minimum wage!

Trade is indeed a highly activity. Like other high-level activities, it requires directed effort. The football team, which is a great game is a game plan, the army seeking to wage war, develops a plan of battle; psychotherapist holds sessions with a coherent strategy to help the patient. These plans are actually sets of mainstreaming rules that, in general, the artist focuses on the challenges faced by them. In the same way in which the singer had planned a tree of decisions in advance, quickly and decisively can be found responding to the evolving situation. In many areas, trade one of them, the difference between success and failure can be a matter of seconds or minutes. This makes the cognitive efficiency of the main component of highly active activities. Expression of many years of experience in several approvals, rules and plans that improves efficiency.

This brings us to another important psychological aspect of management - to improve efficiency in decision-making rules should be simple. That is, when all the rules set out in a coordinated manner, they are plans that are flexible guide traders to complex situations. In his own trading on the index, I, for example, share each day into four parts: a morning session, midday session, day and night session (Globex) session. Then I assess market trends and sub-trends, measure the degree of institutional purchases / sales and looking for testing and breakthroughs from one period to the next for the intra-day transactions. By combining simple rules of decision to segmentation trading day, I can come to each day with a flexible strategy that is not slaughters my head.

Regulation and function of the brain
Research in cognitive neuroscience also help illuminate the value in the management of the rules on the basis of performance. We know that the area was named predlobnoy cortex is largely responsible for what is known as "executive functions" of brain. They include planning, reasoning, decision problems, and many of the actions that allow us to engage in purposeful activity. When predlobnaya bark is damaged, the result will be a "disability syndrome" in which patients are unable to plan and carry out complex actions. They are easily distracted, reflecting the lack of memory and concentration. As a result, even the simplest coordinate concerted activities like visits to the food store, can cause trouble.

Recent theories of attention deficit and hyperactivity syndrome (DVSG) argue that the lack of predlobnoy cortex leads to a periodic absentmindedness with hyperactivity children. Indeed, studies have found a decrease of blood flow to predlobnym areas in these children. Interesting, but the same decrease in blood flow occurs in normal people during the high emotional stress or disorders. As an emotional experience is processed by the lower cerebral structures, located far from predlobnoy crust, the relative blood flow to the frontal area is a useful measure of executive abilities. When a person is highly upset, for example, deactivation of frontal cortex leaves him in a position where it is becoming like a child DVSG or incompetent patient. How many times have you looked at a losing deal, and wondered whether you were in his mind, when placed an order? According to brain research may not exist!

Traditional trading wisdom says that we need to manage their emotions, acknowledging that it was very emotional state make us more vulnerable to losses of concentration and impulse behavior. When we activate the wrong brain area, we can expect the adoption of the wrong trade decisions. The rules allow us to firmly adhere to the appropriate trading actions, regardless of the psychological and emotional state, which we feel at this time. Indeed, the full process of formulating, coordinating and following the rules will increase the executive functions necessary for proper trafficking. It is really that remain committed to the rules is a way to stay focused and rational. That is why, I believe, with Linda, we noticed that the successful traders tend to follow the rules and be systematic.

Conclusion
Habitually enough to hear, as traders argue that the emotional composure is the key to profits in the markets. This article suggests that the converse assertion is also true: Strict adherence to good trading rules and systems is one of the most powerful ways to maintain a positive emotional state in the trade. When we operate according to the rules, we are in a psychological state which allows for effective perception of decision problems and actions. Therefore, training to follow the rules during the rehearsals of trade is an effective strategy for the cultivation of the rules for trade in real terms.

Different systems of law can work in different ways for different traders, depending on the time period selected and traded market. For example, some rules will use statistics such as ticks and increasing and decreasing the number of shares during the day, which would not have to trade in agricultural contracts, but may be useful in intraday trading on stock index fluctuations. Other rules, such as trade practices in the breakthrough may be more widely applied in various markets and would allow to hold the position for a long period of time in order to maximize potential profits.

Ultimately, the rules and systems, which you follow, and their implementation in successive trading plans must be your identity, including your risk tolerance. The research work on your system - identifying its strengths and weaknesses, and the initial trade on it on a small position provides a great help in building your confidence to trade and to ensure that the rules work for you. If you believe many of the traders, who took the interview, Jack SCHWAGER, the key to success in trade is the commitment of its own study of the curve. Defining the systems that work for you, transforming them into coherent strategies and methods of trade and the detailed study of them in order to feel comfortable with them, is an important part of this process.