Hope and Fear: One psychology principle you have to know

How important is the psychology in trading? Psychologists will tell you it is the most important part in trading. That’s why we have so many “psychologist-turn-into-trading-experts”, and books about psychology in trading all over the bookshelves. They use terminology such as “fear of success” which I am unable to understand. When traders fail, they often say they are not discipline enough. They say engineers usually are bad traders, because they don’t know much psychology.

When you don’t have a reliable strategy or system, or you have doubts about your trading system, there is no way you can be discipline. If you have a good trading system with Edge, you can easily be discipline. That’s why I always believe “Method first, Psychology second”. Did you see these psychological market experts are constantly searching for “indicators” or “methods” in their articles or books?

That being said, I believe there is one psychology finding is very important:

“People become risk takers with losing positions, but people are risk aversion with winners.”
One research says once trading loss over 10%, people are not easily willing to take a loss. That’s why it is so important to make losing trade with 10% loss. Because once it is over 10%, your mind will not allow you to take it anymore.

“I make it a rule to never lose more than 7 percent on any stock I buy. If a stock drops 7 percent below my purchase price, I will automatically sell it at the market - no second-guessing, no hesitation”- William O'Neil


A deadly sin: “We HOPE our losing positions will come back to even, we FEAR that our winning positions will turn back to losing.”


"Two of the cardinal sins of trading - giving losses too much rope and taking profits prematurely - are both attempts to make current positions more likely to succeed, to the severe detriment of long-term performance. "-William Eckhardt
"Being wrong is OK in the market, staying with wrong is deadly"

“The spectator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day -- and you lose more than you should had you not listened to hope -- to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out -- to soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.”- Jesse Livermore