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STOCK TRADING PSYCHOLOGY
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Your feelings have an immediate impact on your account equity. You may have a brilliant trading system, but if you feel frightened, arrogant, or upset, your account is sure to suffer. When you recognize that a gambler's high or fear is clouding your mind, stop trading. Your success or failure as a trader depends on controlling your emotions.

When you trade, you compete against the sharpest minds in the world. The field on which you compete has been slanted to ensure your failure. If you allow your emotions to interfere with your trading, the battle is over.

You are responsible for every trade that you make. A trade begins when you decide to enter the market and ends only when you decide to take yourself out. Having a good trading system is not enough. Most traders with good systems wash out of the markets because psychologically they are not prepared to win.

Bending the Rules

Markets offer enormous temptations, like walking through a gold vault or through a harem. Markets evoke powerful greed for more gains and a great fear of losing what we've got. Those feelings cloud our perceptions of opportunities and dangers.

Most amateurs feel like geniuses after a winning streak. It is exciting to believe that you are so good you can bend your own rules and succeed. That's when traders deviate from their rules and go into a self-destruct mode.

Traders gain some knowledge, they win, their emotions kick in, and they self-destruct. Most traders promptly give their "killings" back to the markets. The markets are full of rags to riches to rags stories. The hallmark of a successful trader is his ability to accumulate equity.

You need to make trading as objective as possible. Keep a diary of all your trades with "before and after" charts, keep a spreadsheet listing all your trades, including commissions and slippage, and maintain very strict money management rules. You may have to devote as much energy to analyzing yourself as you do to analyzing the markets.

When I was learning how to trade, I read every book on trading psychology I could find. Many writers offered sensible advice. Some stressed disci­pline: "You cannot let the markets sway you. Do not make decisions during trading hours. Plan a trade, and trade a plan." Others stressed flexibility: "Do not enter the market with any preconceived notions. Change your plans when markets change." Some experts suggested isolation —no business news, no Wall Street Journal, no listening to other traders, just you and the markets. Others advised being open-minded, keeping in touch with other traders and soaking up fresh ideas. Each piece of advice seemed to make sense but contradicted other equally sensible advice.

I kept reading, trading, and focusing on system development. I also continued to practice psychiatry. I never thought the two fields were connected—until I had a sudden insight. The idea that changed how I trade came from psychiatry.

The Insight That Changed My Trading

Like most psychiatrists, I always had some patients with alcohol problems. I also served as a consultant to a major drug rehabilitation program. It did not

take me long to realize that alcoholics and addicts were more likely to recover in self-help groups than in classical psychiatric settings.

Psychotherapy, medications, and expensive hospitals and clinics can sober up a drunk but seldom succeed in keeping him sober. Most addicts quickly relapse. They have a much better chance to recover if they become active in Alcoholics Anonymous (AA) or other self-help groups.

Once I realized that AA members were likely to stay sober and rebuild their lives, I became a big fan of Alcoholics Anonymous. I began sending patients with drinking problems to AA and related groups, such as ACOA (Adult Children of Alcoholics). Now, if an alcoholic comes to me for treatment, I insist that he also go to AA. I tell him that to do otherwise would mean wasting our time and his money.

One night, many years ago, I stopped by a friend's office on the way to a party at our department of psychiatry. We had two hours before the party, and my friend, who was a recovering alcoholic, said: "Do you want to take in a movie or go to an AA meeting?" I had sent many patients to AA but had never been to a meeting, since I have never had a drinking problem. I jumped at a chance to attend an AA meeting—it was a new experience.

The meeting was held at a local YMCA. A dozen men and a few women sat on folding chairs in a plain room. The meeting lasted an hour. I was amazed by what I heard —these people seemed to talk about my trading!

They talked about alcohol, but as long as I substituted the word "loss" for "alcohol," most of what they said applied to me! My account equity was still swinging up and down in those days. I left that YMCA room knowing that I had to handle my losses the way AA handles alcoholism.

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