In case you hadn’t noticed, paddypowertrader have a competition running to find the dumbest trade ever.The prize isn’t bad - two tickets to Ireland vs England in the Six Nations, so check it out.

When it comes to dumb trades I can’t help but think that the worst are caused by excessive emotions.Books, fancy software, trading strategies, a hot news service and a dealing desk built by NASA. They don’t count for Jack if your head ain’t right. The key to a lifetime of rising profits is controlling the demons within.

In the old days of the Sex Pistols, telephone boxes and affordable petrol it was simply referred to as ‘Fear & Greed’. When it became fashionable to study ‘oligies’ at school this became ‘Investor Psychology’. Finally, in an attempt to make us all seem intelligent it became a science, the study of ‘Behavioural Finance’. But to you and me it’s simply about WHAT’S GOING ON IN YOUR HEAD?

Trust me on this one, there isn’t a Holy Grail trading strategy. The real secrets to staying in the game and making money over the long term are in the head. The first key area is risk management and we introduced this in the article Be safe, Be Sure And Always Use One Of These. The other key area to understand and deal with is the psychology of trading.

This is a brief introductory article about trading psychology, exploring some recurring themes and looking at why normal sensible people make totally irrational decisions once they’re behind a dealing screen. We’ll use me as an example! Over the next few weeks we’re looking to develop these themes and hopefully help with the trading. So check out the following and see how many you can put a tick next to.

Control Those Hormones
Advice from top traders is to trade like the Terminator (or act like Arnie) with no emotion. Studies show an inverse relationship between the level of emotion and the success of a trade. However, the problem is that trading is guaranteed to stimulate those emotional flows. What could be more emotion-invoking than watching your ability to make this month’s mortgage payment fluctuate with the trade price? So try and control the trade and have the share price hitting the highs and lows, not your emotions.

One of the reasons so many individual traders use Technical Analysis (TA) is that TA strategies are emotionless; the trade set-up is triggered by a couple of lines crossing over, or a chart pattern that looks like a couple spooning. It’s not about buying BP after queuing at your local petrol station or selling Google coz your son got a surprise when he typed in ‘Brazilian’ for his homework.

Before trading, use TA to plan the entry point and stop loss, but also make sure you have an exit strategy. Yeah I reckon the last one’s really tricky without a crystal ball, but decide if you’re going to target specific exit points or run a trailing stop. If you need a reminder on trailing stops check out Trailing Stop Losses. Like Female Bodyguards. If using a trailing stop plan whether to trail by a set percentage or a number of points.

All of the above helps to avoid making rash decisions once you’re in the game. There’s a traders’ saying, “Love yer losses” meaning accept them as a business expense and proof that you’re trading to a proper plan. I’ll be honest, when I started out it got right up my arse always loving my damned losses, mostly because I kept putting my stop loss in the wrong place. I wanted a go at the other saying, “run your profits”!

Another point, be happy with your bet size. This one crops up a lot, but it heightens emotions far more than alcohol. Yep, I’m holding my hand up here, I’d like to be rich, but I’ve consistently found myself stopping out trades where I didn’t like the losses racking up like Lewis Hamilton’s speedo. The same trades in smaller size were easier to live with and ultimately successful. I’ve found the way I can make money is to win small and often rather than lose my shirt (or worse).

And finally, ask yourself the question,”Are you sure?” Entering a trade that you’re not really sure about is doomed. Perhaps the uncertainty is justified because it doesn’t fit the plan. But sure as eggs is eggs the setback will confirm your earlier doubts and send you rushing to close the trade. This one is tricky because at the beginning it’s hard to be sure of anything. In that case the best thing is to demo-trade until you are at least fairly confident you have a trading plan.

Patience My Man
So, you’ve worked out your trade plan and you know where you want to enter the trade. There’s a great dealing parable about the deerhunter with only one bullet left. He spots the deer someway off, partly hidden by a tree. He can get a shot in, but unless it’s spot on he risks scaring the deer off. Alternatively if he waits then the deer might come close enough to give him a much better shot at it. That one struck home with me; be patient and wait for the high probability trades.

Of course, all of this is easier said than done. The thing guaranteed to get right under my skin is when patience is rewarded with a move that backs away from my entry point and never turns back. I wish I could spread bet the number of times I’ve waited for a pullback to confirm support, only to see the price exocet higher. It’s the same at the other end; don’t rush to get out of the trade. If it’s working trail your stop and run your profits. And when the price halts just before your exit level, does an about turn and hits your trailing stop then kick the cat and accept it as part of trading. Just think of your trading as like having sex. Plan your entry strategy then don’t rush it as it could end up in a messy loss, and once you’re in, if all’s going well don’t rush to get out again.

Don’t Be A Bunny Boiler
‘Revenge’ is definitely a dish best served cold. Get your revenge on the market through learning from the trade, taking the lessons on board and gradually winning back your losses over time. Yeah, life’s unfair (rich and ugly still pulls the birds). As an example a recent short bet of mine on FTSE was looking good until the Fed announced an emergency cut in rates. Then after I closed part of my short the market fell again. Boy was I p*ssed off. Luckily I’ve got a punchbag downstairs for such occasions.

Want more examples? Scroll down to the comments section of this post and see how Z and Garden Gnome managed to lose 3 grand each!

Remember, if you’ve made a loss the market’s just shown that your bet wasn’t the right one and, just like the casinos, it’s waiting for more. Take time out and ask if you still genuinely believe in the trade or whether you just want to make back the money you’ve just lost.

Revenge trading means jumping straight back into the market after a big loss, perhaps even doubling or trebling the bet size. The aim is to quickly regain previous losses but the chances are you’ll make things worse. SO DON’T DO IT!!!

Explore Your Inner Self
Yeah, I know most of the above looks ridiculous. And of course I’m talking about some other wally not you. However in a game of investors’ psychology bingo I reckon I’d have scored a full house by now. I’ve still got my favourite recurring ones and I’m sure most other experienced traders will have theirs too.

Writing a ‘dear diary’ helps but be honest with why a trade failed. Did it always follow 3 winning trades, were they trading on news headlines or did you have curry the night before? It also helps to run back over the month and see if there’s a pattern to failed trades. For example, I used to find that I made good money most months from forex and option trading, but would usually give some of it back through running FTSE positions with the stop too far away. Hmm, glad I’ve sorted that one out!

City banks reward their successful traders with sums that would give us wet dreams, but they also reduce their trading capital after a purple patch. These guys know that the winning run won’t last or that the dealer will get overconfident, so they reduce the risk-it’s a trick worth remembering.

Over the coming weeks we’re going to be delving into the grey matter and developing these themes to hopefully give a better understanding of the weakest link. We’ll also try to give you some strategies (or at least helpful hints) about coping with the emotions and developing a strong mentality.

Hopefully this will post will have stimulated some thoughts amongst the more experienced traders. So tell us all about your greatest psyhological trading blunder and you never know, you could win a pair of tickets to a Six Nations match.