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Psychology of Trading

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Excerpt from: “Crystal Ball for Investing and Trading” Book

The art of trading is like the art of dancing. We dance in tune with the music. Rhythm and timing are essential. Trading is the same. It is a dance to the tune of the VIX index. The aggregate sentiments of investing and trading crowd play the music. How do we recognize the song and its rhythm? The wave pattern is the song and the wave count, the rhythm.
You can learn Money Printing Strategy and its two main components in more or less time depending on your level of motivation and experience. This is like learning various steps and mechanics of any dance. Computers could execute MPS successfully with predictable results. However, traders are human beings whose decisions and actions depend on their state of mind, driven by forces of fear and greed. This is why the ultimate traders' success or failure depends on their ability to master their emotions. In particular, traders tend to react emotionally when (1) they place real-time market orders to open new positions, (2) while they have open positions, and (3) when they place real-time market orders to close positions. Utilization of limit order is less subject to emotional decisions and actions. This is why Money Printing Strategy uses exclusively limit orders. In case you have already done any trading, you may have experienced the intense level of emotions until you have finally closed the position and started literally to relax again and breathe normally. It is commonly said that 80 percent of trading is based on psychology and only 20 percent on technical knowledge. Your success and failure using MPS will ultimately depend on your ability to control your emotions. You must be able to control your feelings of hope, fear, ego, and greed. You have to forbid yourself to modify the original strategy for open positions on-the-fly. Consistent success will come with the ability to apply MPS accurately as described in this book and to resist temptation of emotional trading. The VIX index measures the importance of psychology when it comes to trading. We already know that the VIX is a gauge of investors’ sentiments, the driving force behind market trends. This is to say that market trends are basically, the result of aggregated perceptions and interpretations of fearful and greedy investors who take subjective and irrational decisions and actions mostly in real-time and under stress. VIX reflects the implied psychology of investors who trade the S&P-500 Call and Put options. Exhibition of herding behavior means abandoning part of one’s identity, personality, and individuality under stress in favor of crowd. When trading, it is essential to know in advance where we currently stand and where we want to go independent of others. We can do it only if we have a disciplined psychology. This is the reason why Loss-Parking Strategy, explained later, is an excellent way of staying in control and riding market waves swiftly, even when trend temporarily goes against our open positions. We know that when market goes against our open positions, we no longer need to sit passively, hope, and pray but can temporarily park losses. This enables us to sit behind the steering of market trends and ride the waves even when they temporarily don't go in line with the predicted direction. The sole recognition, assimilation, and application of this simple flexible mental attitude may be more important than all the rest of insights and distinction in this book. "The trend is your friend" whether it goes along or against our open positions. This flexible mental attitude strategy makes of us a master of waves, but also of our ego, fear, and greed. The slight risk of applying Loss-Parking Strategy stems from potential over-trading of tiny back-and-forth bouncing waves. The associated commission fees could then become an issue. However, validation of Reward-Risk Ratio would signal a clear "no-go" for such tiny trades. Flexible mental attitude is an invaluable asset when trading. Whenever you catch yourself behaving differently, stop trading immediately, relax, start breathing again normally, refresh, and re-exercise the basics. Trading is like a dance. You do it in harmony with the rhythm of music! Going too fast is certainly harmful to your wallet; it is the same when you go too slowly. Strategies in this book dictate that we should never be stubborn and try to beat the market by ceding to irrational feelings of hope, fear, ego, and greed. Always remember: The investing crowd plays the music. Therefore, whenever you catch yourself indulging in feelings of hope, fear, ego, or greed, this could mean that you are ignoring this knowledge, and you wanting to play the music and wanting the crowd to dance to the tune of your music. This would be nice, but market's natural forces will teach you in hard ways as to who are the musicians and who, the dancers. The ones who have tried it before have experienced bitter failures. Even when you dance to the tune of crowd’s music, but with a slightly different rhythm, a little faster or slower, you may still suffer substantial losses. Traders tend to determine market trends more accurately when they have no open position than when they do. Their perception seems to become altered with open positions. Consequently, their appreciation of Reward-Risk Ratio may become biased. In such a mental state, they may also ignore and discard screaming violating signals from the TSV, MS, and the VIX, which would all call for immediate and appropriate corrective actions. As a result, they sometimes change their original strategy and cede to temptation of making a closing price a moving target. Such behaviors of hoping and waiting for better times are a perfect recipe for a long-term disaster. Money Printing Strategy makes it easier for traders to harness their feelings. It allows them to determine prices for the Open, Close, and Loss-Parking orders in advance. These are per-requisites for calculation of RRR before placing any order. Therefore, the chief trader's challenge would consist of ensuring that they stick to original strategy and avoid changing things on-the-fly based on irrational emotions. Mastering one’s psychology in terms of ability to stick to predefined strategy will ultimately determine success or failure in trading. As was previously stated, the most important element of success in trading is precise determination of prices for the Open, Close, and Loss-Parking orders in advance. At the same time, when a position is open, it is importance to take actions according to TPS and OMS signals in a timely manner. Ultimately, successful trading is a matter of correct and precise timing, not of correct and precise pricing. Therefore, waiting for better times instead of taking immediate actions, may potentially allow a single losing trade to end with total loss of investing capital. Purpose of trading is to make money, not being right or wrong. By taking losses now and then because waves occasionally trend against your position, is certainly not a matter of losing family honor, humiliation, or personal failure. It is just part of the game. Losses occur in all kind of businesses, whether big or small. Here, adhering to and obeying the flexible mental attitude is worth gold. We achieve ultimate mental flexibility once we are able ensuring that open positions are consistently in line with signals of TSV, MS, and VIX in a timely manner. Losing a certain number of trades is an integral part of MPS. The ability to accepting this fact and taking timely action by placing Loss-Parking orders in advance will ultimately determine your long-term success. MPS uses techniques that allow keeping and containing the level of emotional trading purposely low. To achieve it, it uses exclusively limit orders, which are placed well in advance and uses market orders only in rare and exceptional cases.
Become your own financial adviser and trade based on your own independent trend predictions and trading strategy - 
not on untrustworthy, unreliable, and costly external advice.
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