The market is not a reflection of the real world; it is shaped by the collective mindset of all participants, with investors entering the market with biases.
The Power of Bias in the Market
The market is not a reflection of reality but rather a construct of the collective mindset of its participants. Investors enter the market with biases, and when these biases interact and influence the investor community, it creates a herd mentality. The market is an outcome that surpasses individual comprehension, and no one can accurately predict its movements.
Bias is the driving force behind the market. Without bullish or bearish sentiments, how could we have the daily fluctuations in the market? In essence, there would be no market at all. Therefore, bias (human emotions) is not only the driving force of the market but also its fundamental existence.
With this understanding, it becomes clear that the market is a battleground between the bulls and the bears. Regardless of the system in place, profitable individuals will always coexist with those who incur losses.
The outcome of this battle is unpredictable. The balance of power between the bulls and the bears is constantly shifting, resulting in instances where the bulls harm each other and the bears harm each other. However, the inability to predict does not mean that we cannot grasp the present moment. Otherwise, we would not be able to engage in rational trading.
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Subjective Emotional Disturbance as the Root Cause of Losses
To achieve rational trading, one must detach oneself from the ongoing struggle between the bulls and the bears and maintain a certain distance. This allows for a clear assessment of the prevailing forces and the ability to align with the stronger side for profitable outcomes.
Many experts emphasize the importance of patience in trading, and perhaps they are right. Patience involves waiting for opportunities to arise. However, patience is a restrictive emotion. In trading, “peace of mind” is even more crucial. It is an emotion, but it is also a state of mind, one that arises naturally and without constraints.
The reason why most people struggle to maintain peace of mind in trading is their inability to predict the future trends of their trading assets, the uncertainty (risk) associated with the future. This uncertainty gives rise to subjective emotions such as fear, greed, and hope.
Under the domination and disruption of these subjective emotions, trading becomes chaotic and loses its structure. This is the fundamental reason for losses.
If we could accurately gauge the future risks in trading operations, most people would be able to maintain a state of peace while trading. For example, if I guaranteed someone that I would cover their losses, they would trade with confidence.
Learning to Let Profits “Fly for a While”
Many investors approach trading with the extreme mindset of expecting immediate or quick profits from one or a few trades. However, such expectations are rarely realistic.
The volatility of the market rarely allows investors to make significant profits without incurring losses. Therefore, it is crucial not to rush profits.
Allowing profits to “fly for a while” is another key factor in winning trades. It is through small losses and big gains that we can truly make money. However, it should not be taken to an extreme, as even with small losses, if we fail to achieve significant gains, we will still incur losses.
The continuation of a trend is never smooth sailing; it involves waves and cycles. Many investors often get shaken out by market volatility before a trend completes.
Whether in the short term or long term, one should allow winning positions to remain open as long as the trend remains intact or does not undergo a significant reversal. Unless the trend changes, one should not be influenced by market fluctuations and should let profits “fly for a while.”
Seizing Bargains in Turbulent Times
A renowned investor once said that financial markets are inherently unstable, especially the international financial markets, where capital flows fluctuate, and both bull and bear markets exist. Wherever there is chaos in the market, there is an opportunity to make money. Recognizing chaos can lead to wealth accumulation, and the most daring and meticulous investors shine in the most chaotic situations.
The worse the situation becomes, the higher it can rebound; the deeper the fall, the more likely significant market movements will occur amid the chaos.
In many cases, when the market is chaotic, investors also become chaotic. Therefore, it is common to see panic selling and news headlines about investors bravely chasing highs.
For calm and objective investors, chaos presents a golden opportunity because it can be a time to seize bargains and redistribute wealth.
Psychological Traits of Failed Traders
“Unable to cope with high levels of stress, holding a negative outlook on life, having inner conflicts, and always blaming others when things go wrong.”
These individuals do not adhere to certain principles as their operational norms and are more likely to follow the crowd.
In addition, failed traders tend to lack organizational skills and patience. Of course, this does not mean that all failed traders possess all of the mentioned characteristics, but rather that they have some of them. Most people are often not psychologically prepared before entering the financial market.
The financial market is a place that tests individual psychological barriers. Most people eventually distance themselves from the financial market, and only a few remain determined to find effective trading methods. These individuals eventually shift their focus from the market itself to finding systematic operational approaches.
The fundamental psychological barrier for traders is how to manage risk. For example, the two most basic rules for successful trading are to set stop losses and to hold positions for the long term. However, you may be unwilling to exit with a small loss, leading to turning a small loss into a larger one and ultimately a significant loss. In this situation, you end up accepting defeat.
Conversely, if you have made profits, you may want to immediately realize those gains due to the fear of losing the money in your pocket. This means that you end up making small gains but incurring significant losses.
If you view financial trading as merely a game and consider deviating from the two rules mentioned above as a violation, then you will naturally act accordingly.”