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Market Wizards - Interviews with Top Traders

The Psychology Of Trading



Dr. Van K. Tharp: The Psychology of Trading:


According to Dr Van, the 3 most important factors for investment success are psychological factor, management and discipline factor, and decision-making factor.


The psychological factor has 5 aspects: 

  • A positive attitude 
  • Good personal life 
  • Motivation to make money 
  • Lack of conflict
  • Responsibility for results

Decision-making comprises having a sound knowledge of technical factors in the market, an aptitude for making sound decisions without being biased, and the ability to think independently.


Management discipline means risk control and ability to be patient.


He believes that anyone can win if he wants to. He also admits that it is difficult to make money in day trading or trading in a short time frame, so he is skeptical about helping anyone to trade successfully.


What usually happens is that people approach the markets along with their personal problems.


The first problem being  how to deal with risk? The two primary rules of successful trading are cutting losses short and letting profits run. The rules of trading should be reviewed at the beginning of the day whereas the trades should be reviewed at the end of the day.


Second problem is how to deal with stress. Stress has 2 forms, biological fight and worry. If one’s mind is preoccupied with panic, it uses up the decision space, and doesn't let one perform effectively. A common mistake that people make under stress is they don’t make their own decisions. They tend to follow the crowd and that's a sure way of losing money in the market. 


He believes that winners typically differ from losers in terms of attitude about losses. Most people become anxious about losses, yet successful speculators have learnt that to lose money is absolutely ok for winning. 


The third problem is dealing with conflict. For example, someone might have a role to earn money, a role to protect him from failure, a role to make him feel good about himself, a role which looks after the well being of the family, etc. Now, once you establish these roles, it operates subconsciously.


Another problem is that many people control their trading through emotions. An easy method one can adopt is to control posture, breathing and muscle tension.


The last major problem is making decisions. The solution to this is to adopt a trading system that gives signals to act. But most people with a trading system continue to apply their normal method of decision making.


He reveals that top traders whom he worked with began their careers with an extensive study of the markets. They developed and refined trading models. They mentally rehearsed what they wanted to do until they believed that they would win.

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