The Paradox Nature of Trading

If you have ever wondered why only a few are truly successful in trading and why most of them are considered losers according to societal norms then this article is for you.

Society has taught us specific and appropriate skills that should carry us through life especially achieving success in other occupations hence the majority of society’s brightest and most accomplished people tend to fail so miserably as traders. The reason is because trading requires thinking in probabilities, which means surrendering all those skills we have acquired to achieve in every other aspect of our lives.

In financial markets, core trading in securities is not only limited to fundamental analysis and technical analysis but the most overlooked important factor is mental analysis.

According to Douglas (2000), fundamental analysis attempts to take into consideration all the variables which affect the relative balance or imbalance between the supply of and the possible demand for any particular security. Applying mathematical models that weigh the significance of a variety of economic and financial factors, the analyst projects what the price should be at some point in the future.

The problem with these models is that they rarely, factor in other traders as variables. People, expressing their beliefs and expectations about the future, make prices move, and not models.

People develop behaviour patterns, and when interacting with one another regularly they form collective behaviour patterns. These behaviour patterns are observable and quantifiable, and recur with statistical reliability. Douglas (2000), further explains that technical analysis is a method that organizes this collective behaviour into identifiable patterns that can give a clear indication of when there is a greater probability of one thing happening over another.

Essentially, technical analysis allows traders to get into the mind of the market to anticipate what’s likely to happen next, based on the kind of patterns the market generated previously.

When you start understanding the analyses and discover limitless opportunities to make money. The hurdle is the dissatisfaction between what you perceive as the unlimited potential to make money and what you end up with on actual account.

This psychological gap is mainly caused by fear. Most people fear losing money and being wrong as much as death and public speaking, therefore they will do their best to try and avoid emotional pain. What the majority don’t realize is that fear tends to act against a person in such a way that it will cause the very thing they are afraid of to occur. Hence trading errors stem from people’s attitudes about being wrong, losing money, missing out, and leaving money on the table.

It’s no secret that trading is risky as outcomes are probable, in fact traders pride themselves in being a risk taker, however they hardly ever accept the risk. Accepting risk means putting on a trade without the slightest bit of hesitation or conflict, as well as freely admitting when it isn’t working. This level of assertiveness requires discipline, focus, and a sense of confidence.

That’s the paradox of trading, a mindset that allows a trader to remain disciplined, focused, and, above all, confident in spite of the adverse conditions of uncertainty. This attitude contradicts with the orthodox manner in which most people deal with uncertainty, by being over cautious, hysterical, reckless and paranoid.

Thus, what makes societal losers the best traders is that they are not afraid. They have publicly failed in many occasions that they have mastered dealing with the emotional pain of being wrong earlier on in life. Hence they have developed an attitude that gives them mental flexibility to accept market information as it is and not as an opportunity to prove their intelligence.

Understanding and controlling your perception of market information is important for achieving consistent results. If you don’t, it will feel like the market’s behaviour lack of consistency hence you can’t trust the markets; but in reality, you can’t trust yourself. Therefore to become a successful trader you need to expand, learn, and create a new way of expressing yourself.

References

Douglas, M.J.,(2000). Trading in the zone. Prentice Hall, New York.

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