Trading Psychology and Speculation

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This is an excerpt from the book Reminiscences of stock operator written by Edwin Lefèvre which is the thinly disguised biography of Jesse Lauriston Livermore.This excerpt fully summarizes the mistakes made by most traders, New market participants face this emotion everyday and each trader during his development phase goes through this at one point or another. Even we went through this when we first started out. We though this was a beautifully written article to share with everyone. We really do recommend this book. Not as a trading book but as a general novel to read and has some great elements on psychology.

“I sometimes think that speculation must be an unnatural sort of business, because i find that the average speculator has arrayed against him his own nature. The weakness that all men are prone to are fatal to success in speculation…

“The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation, when the market goes against you, you hope that every day will be the last day-and you lose more than you should had you not listened to hope-the same ally that is so potent a success-bringer to empire builders and pioneers, big and little.

“And when the market goes your way, you become fearful that the next day will take away your profit, and you get out too soon.

“Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping, he must fear; instead of fearing, he must hope. He must feat that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.”

—Reminiscences of a Stock Operator, pg.114

This totally sums up why you need a specific trading strategy and a trading plan which you should always follow to avoid the Idiot inside all of us who gets shaken out from emotions such as hope, fear and greed. We all have that Idiot and that voice inside us that tells us to sell before our target is reached, or average down when the stock is going against us or perhaps not adhere to the stops we set out initially etc. Overtime a trader will only become successful when he learns to take control of his emotions and not let that Idiot inside take control. So the take away from this is

A) Learn a proven strategy
B) Stick to that strategy no matter what
C) Control the idiot inside and take control of your emotions, let your trading plan work for you.

Good Luck and See you in the Trading Room