Psychological Pitfalls in Commodity & Equity Trading

Psychological Pitfalls in Commodity  & Equity Trading

By:

Vijay Sardana

It is said that greed, fear and hope drive the markets. It means human psychology plays an important role in market place. This is also the main reason when all facts are same, why different analysts offer different version of the story around the same facts. It very important for the traders to understand the fundamentals of the markets while working on technical charts. 

Pitfall 1: Very often people tend to follow the tips. It is important to know that the same tip is with everyone in the market and if information is same why people make losses. There is no reason to copy the approach adopted by others while taking trading decisions. 

Caution: Your requirements or positions may be different than other person. 

Pitfall 2: In order to be successful in commodity trading, one should be cautious of depending on others for your success. Most of the people are likely to trust insiders and known faces or people with connections. Please note many of them are probably not effective traders. There are exceptions, but these are not many. 

Caution: Depend on others only for discussions to clarify your doubts and not to outsource your own decision-making process. It is your money, take charge of decision making. 

Pitfall 3: No one can make profit every time and all the time in commodity trading. There will be ups and downs in prices in the market. Market reflects the collective will of all the traders participating at that given point. You may lose or make money depending upon your homework and understanding of the market. 

Caution: Don't blame others for your failures. This is an easy trap to fall into. No matter what happens, you put yourself into the situation. You are responsible for the ultimate result. Until you accept responsibility for everything, you will not be able to change your incorrect behavior. 

Pitfall 4: It is human tendency to get rich fast. In this greed there is a tendency to ignore the facts on ground and look for short-cuts. One of the shortcuts is over exposure and over leveraging in the market. Sometimes people borrow money to take over exposed position and try to play the market. They assume market will adjust to their style of functioning. This leads to fatal errors in hurry and very often it ruins the trader or investor.

Caution: It is not possible to make windfall gains every time. Stay long-term oriented. Don't adjust your approach based solely on short-term performance. If you market by short-term performance, you are working for brokers not for yourself. Whether you make or lose money, broker always make money. So, let brokers serve you as service provider, do not surrender to their pressure techniques in the influence of greed and fear.

Pitfall 4: Very often people enter into market for the excitement factor and soon becomes addicted to the market anxiety. Many feel market fluctuations are essential for adrenaline in the body. They sit in front of screen under compulsion and without understanding the market and facts affecting the market, starts trading. Very often, with initial success or under peer pressure, most traders have such an ego investment in their trading that they cannot handle losses. This causes them to evaluate trading methods and systems based on very-short-term performance. Several losses in a row are devastating. 

Caution: Please keep in mind no in market is God. No individual is bigger than market. Don't start trading in a particular manner based on only a few trades. Market is dynamic place and one must update himself regularly. Evaluate performance of any approach based on many trades and multi-year results. No individual can change the course of tide when collective wisdom is against the stated position of the individual position. The best way to handle is fix a limit for the trading and stick to the discipline, irrespective of your position. 

Pitfall 5: Very often people get emotional about trading. They make profit and loss in trading as point of personal emotion and feel their competency depends upon success and failure of their trade. This is a very dangerous self-made trap. In order to recover the losses, or to bear with loss, in place of taking pause, people start pouring more and more money into the trade. This is like throwing good money after bad money. 

Caution: It is advisable to keep trading in correct perspective and as part of a balanced life. Trading is emotionally intensive no matter whether you are doing well or not. It is easy to let the emotions of the moment lead you into strategic and tactical blunders and eventually loses. The best way to keep cool is don't become too excited and elated during successful periods. Such blunders or mistakes traders make is to increase their trading soon after an especially successful period. This is the worst thing you can do because good periods are invariably followed by awful periods. This is fact because commodity markets cannot keep moving in one direct. This is beyond the logic of fundamentals of the markets and economy at large. If you increase your trading just before the awful periods, you will lose money twice as fast as you made it. Knowing how to increase trading in a growing account is perhaps the most difficult problem for successful traders. 

What to do for successful trading?

• Be cautious in adding to your trading portfolio. The best times to add are after losses or drawdowns. Don't become too depressed during drawdowns. These are the best time to understand the strengths and weakness of the market because froth is out from the system.

• Stick to financial discipline and control your emotions. Keep remaining yourself not to fall into tarp. Stick to your discipline and your documented trading policy. When you are making money, you are thinking about how wonderful trading is and how to expand your trading to achieve immense wealth. When you are losing, you often think about giving up trading completely. With a little practice, you can control both emotional extremes. 

• You'll probably never control them completely, but at least don't let excitement and distress cause you to make unwarranted changes in your approach. Other common themes of good traders are self-understanding, balance and self-control. Before placing order on terminal, Let ask yourself are you taking decision under the influence of others and due to fear, greed or hope. If answer is yes, close the screen go for a walk. 

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