Introduction

Trading psychology - the psychological basis of securities trading- generally isn't taken very seriously, even though experts maintain that your emotions and your mental state are actually what determine the success or failure of your trading business. Those in the know are clear on this point: Trading is 80 percent psychology and 20 percent methodology. Trading is fundamentally a matter of character.

Trading - the common term for the short-term trade in securities, currencies, and financial derivatives - has become increasingly popular recently. Discount brokers especially have been seeing record numbers since 2020. They promise they'll make stock market trading as easy as pie with the help of their various trading apps. This has a certain attraction for a younger, less experienced generation and encourages gambling. But a word to the wise: If you're looking for an adrenaline rush and you think that leveraged products will make you rich overnight, you're sure to hit the rocks sooner or later. Trading in financial instruments is a sophisticated business and requires not only lots of patience and discipline but a clear head as well. You don't stand a chance without a plan, a strategy, and processes you can rely on.

Regarding terminology, I'd like to make one thing clear from the start: When I say traders in this book, I'm referring to those private investors who independently invest their own money on the stock market at their own risk and on a short-term basis. The time period can be as short as a few minutes (scalping) or as long as a few weeks (position trading).

Fundamentally, trading in this sense is the opposite of a long-term investment. You're looking for calculated short-term profit. If you make regular contributions to a stock portfolio in order to prepare for retirement, you're a long-term investor, not a trader. Admittedly, you could turn a trading position into a long-term investment now and then, perhaps because you don't want to sustain a loss, so you use a bit of mental jujitsu on yourself and - voilà - your short-term investment is now presented as something you'd always intended as a long -term investment. (I talk more about this bias known as mental accounting later on in this book. I know: The suspense is killing you.)

The stock market is all about psychology, and trading places psychology under a magnifying glass. Limiting beliefs, self-doubt, a lack of self-control, unprocessed traumatic experiences from the past, those negative conversations you hold with yourself (self-talk, to use the current jargon), and harmful patterns of thought will all come to light sooner or later as you go about your work as a trader. As such, trading turns out to be quite an expensive way to work through your personality issues. After all, you're risking your own money on the markets - conceivably, money in the form of savings you worked very hard to accrue. And the numbers are against you because (according to statistics) over 90 percent of all private traders on the stock exchange don't earn any money. The vast majority close their trading account within a few months, feeling frustrated - often, after suffering a total loss. The success rate is particularly low for those operating in the short-term arena.

An old stock market proverb puts it well: If you don't know yourself, the stock market is an expensive place to figure out who you are. The traders who are successful have not only often learned some quite expensive lessons but have also experienced quite the emotional roller-coaster ride. However, they have moved beyond themselves, overcoming that which initially limited them. It's worth the effort, as experienced traders will readily acknowledge. Having finally obtained their financial freedom, independence, and self-determination, they'll refuse to give up such hard-earned gains voluntarily.

When you have dealt with the trading business long enough, you discover that it's always the very same problems that continue to drive you up the wall - coping with loss, your fear, your own greed, your lack of discipline, the loss of control, stress, being overburdened, or overconfidence. All such ills are direct consequences of the special features of financial markets you have to contend with - namely, uncertainty, volatility, hyperbolic situations, barely visible actors, and, to top it all off, automated programs and algorithms that don't care a fig whether you win or lose. Price movements are neither as predictable nor as controllable as you think, and they happen to be more random.

You won't move the markets as an individual trader. You have no influence on what is happening in the market. What you can do is you can work with probabilities and patterns, and you can also change your perception of the markets - your attitude and point of view, in other words. You control those things that are within your power to control: yourself. You keep a clear head. This is how mental strength is created.

Never let the markets take control of you and your trader psyche. A successful process orientation and a fixed set of rules protect you from losing control. Protecting your portfolio is your top priority.

Our evolutionary heritage weighs heavily; we are not naturally suited to trading. The human brain isn't designed to operate successfully on financial markets. The way the stock market works contradicts our naturally acquired ways of thinking and behavior. Therefore, it's even more important to internalize fixed routines and to systematize your trading so that you can protect yourself.

You'll develop as a trader when you find out what you can control, what you can change, and why. What are your trading goals? What are your expectations? What trading style matches your personality? Only then can you address the question of a) how you want to proceed and b) which methods you want to use. The challenge with trading is a psychological challenge. Trading platforms and systems are important but do not determine your success. You alone are responsible for what you earn with your trading - not the technology, not the systems, and not the markets, either.

About This Book

This book about trading psychology isn't one of those heavy theoretical tomes - I wanted it to be a practical book where I can offer advice. The idea is to provide you with multiple examples, practical tasks, and useful exercises designed to build the psychological foundations you need in order to prepare yourself for the specific requirements of trading. Beginners, in particular, underestimate the psychological stress factors involved in trading. Getting rich quick on the stock exchange is a tempting proposition but not at all realistic, as the statistics confirm. This book will save you from many painful and expensive experiences. I'll provide you with the mental armor you'll need in order to trade in a successful, brain-compatible manner.

Trading is a hard-core business that punishes mistakes and weaknesses immediately. You're playing with the top echelon right from the start. Whether you're a professional or an amateur, you're all competing in the same markets. Regardless of which market you choose to be active in, you'll be unable to move it one way or another. It's the other ones, the big professional actors, who move the markets. Let this fact teach you to be humble, but don't let it intimidate you too much. Your status as a small fish means that you're flexible; you're not subject to investment guidelines or other practical constraints. Your niche isn't competing with anyone. You're trading under the radar of the big fish, and you can profit from that fact.

This book is addressed to all market participants. Whether you're a short-term trader or a long-term investor, the psychological effects apply to you all, albeit to different extents. You'll be sure to profit when you understand how the distorted and biased way you make financial decisions affects your portfolio. Neither will it hurt to see to what extent your trading performance depends on your emotional state.

If you read this book from start to finish, you will

• Be in a better position to know whether trading really and truly is something for you
• Find out which character traits and core competencies are needed for trading
• Familiarize yourself with mental self-coaching techniques and understand how to develop psychological resilience and mental strength
• Understand that developing as a trader involves psychological development

Conventions Used in This Book

This book is written in the most practical and realistic manner possible, regarding the topic of trading psychology. I avoid complicated and extensive scientific explanations. I hope you can forgive me that my explanations about exciting discoveries in modern brain research tend to be a tad theoretical. After all, neurofinance is my passion. (If you're keeping track, most of the more theoretical paragraphs in this book sport the Technical Stuff icon.)

I am looking forward to your feedback and your opinions. I am grateful for any suggestions and corrections. Please share your experience. That will provide material for any revised editions. If the topics in this book speak to you or you realize with some embarrassment that you're not familiar with one particular corner of the trading world and you want to inform...