Well, new traders can face several psychological challenges. Perhaps the biggest is the belief that there’s a holy grail kind of a trading methodology, this perfect combination of indicators, this perfect strategy, and we’ll always get people in at the bottom and get them out at the top. And then once they discover this holy grail and they start implementing this trading plan, the profits will just come rolling in and they can execute this from their sailboat in the Caribbean and life will be good. But the reality is that even if you could find a perfect combination of indicators, a perfect strategy for this environment, the character of the market always changes. And by that I mean volatility: Is it a relatively low volatility market or is it getting a little bit wilder? Is it a bull market or a bear market? So as you find a combination of indicators that might work very well for this environment that will change. Really, the solution is to develop a strategy, a collection of rules, how we find new ideas to consider, how we research them with both fundamental and technical analysis, how we plan and execute each individual trade, and then how we monitor those trades over time.
Another common psychological challenge is swinging for the fences, trying to hit home runs and make big profits, and, if you will, make a killing, when, really, developing that trading strategy is all about not getting killed. It’s about managing risk, small ball, if you will, staying alive, staying in the game.
And then a third thing would be revenge trades: ‘I lost money in XYZ and, by goodness, I’m going to get it back. And if not in XYZ, I’m going to get it back.’ And what we’re really doing is violating or abandoning our overall trading strategy, when, really, developing and implementing consistently that trading strategy is ultimately, I think, the secret to success.