Why Traders Fail? Psychology.

If you have read Jack D. Schwagers book Market Wizards, a collection of interviews
that he had conducted with many successful traders and money mangers at the time,
such as Jim Rogers, Paul Tudor Jones, and Michael Marcus, you would have come
across this chapter quoting Seykota, The goal for the trader is to develop a
system with which he is compatible - that is, a harmony between the traders
emotional constitution and trading technique.
Throughout my two years in trading the currency market, it is certain that trading
psychology plays a vital role. Unfortunately, most aspirating traders find out far too
late that the act of trading is only about 20% intellectual, but 80% psychological.
When we start out as a trader, we often want to learn and trade a system - following
a set of rules, what to buy, how much of it to own, when to get in, and when to get
out, either to take a loss or to collect profits. These rules are in fact intellectual in
nature, and why most of us reach for these while we are learning the craft of trading
is simply because we have had that approach ingrained in us since our kindergarten
years.
When we adopt a trading system just by knowing the rules from a technical and
intellectual standpoint, but not from a psychological or self-awareness one, there will
be bound to be incompatibility between us and the system. This is the single
greatest reason why most traders do not succeed, regardless of trading style.
If you traded the markets, I am certain that you have asked yourself more than one of
these questions:
- Should I get in at this price?
- Should I buy some of this stock?
- Should I get out here and take a loss, or should I wait for it to come back?
To me, these are not intellectual questions; they are emotional. Trading rules are
proactive and evocative, pushing and pulling you emotionally. What you are feeling at
that time evokes these questions.
Question: Should I get in at this price? Is now a good time to buy?
Emotional translation: I have no idea what Im doing, but Im going to do it
anyway.
Question: Should I buy some of this stock?
Emotional translation: I want in on the action. Just tell me what to do, and Ill do it.
Question: Should I take the loss now, or wait for it to come back?
Emotional translation: What will everyone think? My self-esteem is invested in
how smart I think I am. I am not willing to risk this. This is who I am. If I wait, Im
technically not wrong. I can defer my incorrectness and maintain my self-esteem
today.
The trouble comes when the self-awareness part of us betrays the how to part
because we do not have the skill to feel the emotions and understand what they are
saying to us. The how to part in trading is the easy part; the difficult part is the
psychology behind us!

Trading is a journey that involves getting to know yourself and increasing your
level of self-awareness. How much you learn about yourself is limited only by which
feelings you are not willing to feel.
Having said that, the longer you attended school, the more ingrained the how to
approach is in your learning model and your accuracy model of keeping score. You
might be having the belief that If I get 90% of the questions correct, I will get an A in
the exam. If I do that several times in a row, I will get an A for the class. Accuracy
and correctness become your goals. However, nowhere is the concept of selfawareness being addressed verbally or literally.
This situation applies in your trading as well. You may have gone through college or
university, or you may have opted to achieve one of the most difficult professional
designations. You clearly have more education than most of your peers and most of
the world. But despite all your demonstrable intelligence and wisdom, you are still
having trouble in trading. This is why: You do not like to be wrong. You have built
your life on living the life of success. As a trader, you would rather stay in a losing
position and wait for the market to prove your thesis correct than taking a small loss.
Social mores affect you too. They create psychological conflict between trading
profitably and your tendency to desire accuracy in all your endeavours. It feels better
to strive to be correct than to face defeat.
At the end, it is not that you do not get all of these, but you are simply not emotionally
able to reconcile how smart you are with the emotional-based behaviour that you
think you must execute in trading. It is not about making gains alone (pure accuracy),
but it is about consistently making less frequent gains that are bigger than the losses
(mathematical expectation).
To develop your emotional psychology, explore your feelings about frustration or
despondency and listen to what they tell you. Your feelings are the true components
of your trading rules and methodology. All the technical indicators you employ are
more of emotional validators than technical indicators themselves.
Afterall, the outcome we seek in trading is to make money, and that is the A, even if
you are incorrect on your traders more than 50% of the time. It is similar in that can
you endure getting 5% to 10% of the questions wrong on your exam, and still get an
A for it overall?
If you want to get a head start in developing your emotional psychology, start by
writing down a journal of all the feelings that surface during your trading. You
will need insight about yourself to develop yourself. Self-knowledge and selfawareness are your most important assets as a trader, more than any technical skills
that you can learn easily. Get to know your feelings, because they are likely to
resurface in other areas of your life as well. Feelings that you do not want have as
much power over you in your life and trading as the ones you do want.
If there is an analogy to this in the world of trading, a trader is someone who has let
go of the emotional need to be right all the time and has learned to love taking
consistent small losses the majority of the time. He does not seek validation from his
trades. He does not need advice from others, and he enjoys a personal discipline

that very few have. He has married his technical knowledge with his feelings, and the
resulting inner voice is his greatest asset and ally.