Trading Psychology Explained - From a Traders Perspective

by AJ Monte CMT | 07/20/2018 12:50 PM
Trading Psychology Explained - From a Traders Perspective

If you’ve been trading the markets for any length of time, you will know the two main emotions which drive volatility are Fear & Greed. Greed motivates investors to move their money into the market, causing prices to move higher; and fear causes those very same investors to move out of the market, which results in lower price movements. However, when it comes time to buy or sell a stock, other conditions – both physical and mental – can affect the decision-making process. Let’s face it; most of us lead very busy lives. We have family members to care for, we work hard, and sometimes it seems as though there aren’t enough hours in a day to relax, let alone have time to look at the stock market. The business in our week tends to lead to stress, which in turn, leads to lack of sleep, which leads to fatigue, which leads to making very bad stock picks.

If you plan on taking trading seriously, you have to approach the market the way an athlete would approach their sport. As crazy as it sounds, you have to eat right, drink plenty of water, get lots of sleep, and exercise. If you don’t take care of yourself, the stress and fatigue will cause you to lose a lot of money in the market, and I’m living proof this is true.

Just before the crash of 1987, I took a fairly aggressive long position in the market. At the time, I was trading multiple positions in the Gold, Silver, Coffee, and Cocoa futures markets. The first market to move against me was silver (I was long the calls and the news was bearish). In an effort to hedge my position, I would stay awake most of the night to trade over the phone in the London Market. The next morning, I would catch the 5:10am train to Manhattan, which would take me exactly 2 hours and 20 minutes to get to the World Trade Center. I’d grab a quick ‘egg & cheese on a bun’ with lots of butter and bacon and head off to the trading floor. Without knowing where the market would open up, my palms would literally sweat from the stress. I still remember my hands shaking while I was on the elevator trying to push the button for the 8th floor, knowing full well it was going to be a bad day for me on the trading floor. At the time, we had no cell phones, no internet, and no computers to tell us what the futures markets were doing. The only way I was able to get market info was to call it up on the Reuters monitor, which was strategically placed in the middle of the trading pit.

I could easily place blame for my million-dollar losses on bad luck and timing. However, when I look back, I can honestly say that my losses were the result of my making bad trading decisions due to the stress, fatigue, anxiety, and poor diet, as well as my neglecting to put a good solid risk management plan in place.

While my message to you may seem more like an episode of “Dr. Phil’s interview with a stressed-out trader”, there is a very important lesson behind this story. Mainly…if trading stresses you out to the point where it’s costing you sleep at night, then…STOP TRADING! At least until you’ve learned how to remove the emotions associated with it. One solution would be to plug into my video library and start watching my “Market Shot” videos. These videos are short, 6-8 minute long lessons that cost you nothing but the time it takes to view them. This will help you learn how to read the buy/sell signals without allowing your emotions to get in the way of your trading. Another solution I’d like to suggest is going to and purchasing a book entitled, “Investment Psychology Explained” (1st Edition) by Martin Pring. This was one of the first books I read while I was studying to be a Market Technician and was required reading as a pre-requisite for those taking the Chartered Market Technician (CMT) exams. I consider myself to be an ‘Ambassador of Technical Analysis’, so I’m very happy to promote the work of other experts who I follow and respect. Martin not only digs into investor psychology, but he also offers some classic strategies to beat the markets in an easy to understand format.

Another suggestion I would make, with regard to taming your emotions for success, is to learn how to use trailing stops. With the added volatility we are seeing in today’s markets, it’s essential to use ‘stops’, not only to prevent a catastrophic loss, but also to protect your profits on the way up. Believe it or not, most investors and traders don’t know how to properly use stops because there are few experts who teach the practical application of stop loss orders. Brokers will show you how to enter a stop order, but the most important thing to know is where to place the stop and how to trail it as the stock moves higher. I will be publishing some instructional content in the near future, so stay connected to The Market Guys website for updates (

Above all, remember to Stay Calm and Stay Focused on the charts. If there’s ever a time when you’re feeling stressed about a bad position, just look at your charts and ask…If I didn’t have a position in this stock, are there enough technical signals giving me the go ahead to buy it right now at these levels? If the answer is NO…get out of the position and move to cash. Not only will you be able to sleep that night, but you will have preserved your buying power for another day of trading, when the signals eventually give you the green light to get in.

Happy Trading.

By AJ Monte CMT
Chief Market Strategist
The Market Guys, Inc.

If you would like to learn more, feel free to visit The Market Guys video library where you will find short educational videos called “Market Shots.”  The length of each video ranges between 6 to 8 minutes long, making it easy for you to fit these lessons into your busy schedule.

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