Thursday, April 9, 2009

Investors - What Separates the Good Traders from the Bad Traders?

Outlined in this article, are the key trading actions that ultimately separtates the winners from the losers. This component is so simple to master, yet difficult to experience. Rarely do traders realize the importance of this powerful problem solving devise. This information ends with an open-ended comment with the intention of leading the reader into suspense. You can use my follow up article as the conclusion. How to Reduce the Negative Effects of Psychology Pertaining to Trading.

There are many forms of investing online. While I can give you a list that is a mile long, these are the most common forms of successful investments. Some of the following know how to invest terms are:

1. Option trading

2. Future trading

3. Currency trading

4. Stock trading

5. Future trading

6. Forex trading (Foreign Exchange Trading)

I want to start this investing online critique out with a story... On a beautiful late spring afternoon, twenty-five years ago, two young men graduated from the same college. These men were very much alike. Both, better than average students, were personable and filled with ambitious dreams for the future.

For the sake of my example, I will set both college graduates off online trading using a day trading plat form. Through a gift, both start with the same online investing investment risk capital the same daytrading plat form, and the same trading system with precise rules for entry and exits.

Shockingly, there is a difference. After one month, one day-trader went broke / bust, while the other day trader returned a 20% profit.

Have you ever wondered, as I have, what makes this kind of difference in people\'s trading? It is not always a native intelligence, talent or dedication. It is not that one person wants success and the other does not.

The difference lies within the psychology of the brain. Your psychological mind set is likely to play a larger role in your trading online career than your chosen technique or any other details associated with your day-to-day practice.

Here are some good examples:

1. One person looks at a glass ? empty, while the other personality looks at that same cup as ? full. 2. Someone may look at problems and call them stress, while another individual looks at troubles as challenges.3. Another one may look at a ship in a storm as an adventurous roller coaster ride, while another human being sees the same situation as a hurricane that has a death call.

I am not the only one to discover this

In his book, Trade Your Way to Financial Freedom, the renowned American psychologist Dr. Van Tharp discusses the role psychology plays in trading success. He divides trading into three Ingredients.

In his pie chart:

-- System is 10%-- Money Management Success is 30%, and -- 60% pertains to the psychology of thought and emotion.

Tharp discovered that the trader\'s psychology make up of the mind has more to do with his success than anything else does.

However, what exactly is the psychology of the mind?

In short, the psychology of the mind refers to your thinking and emotional actions and responses to any given situation In trading, fear, greed, vanity, pride, hope, jealousy, denial - all these can affect investment decisions. Although, your aim in the market is to maximize your profit and minimize your risk, thinking and emotions often make this easier said than done.

FOR EXAMPLE - Traders, who cannot control the psychological process of thought and emotion, make the wrong decision - such as the common amateur mistake of holding a losing position in the belief that someday it will become a winner.

Loss aversion is a classic mistake. By nature, humans value a loss. Therefore, you suffer almost twice as much pain losing $1 as you would in gaining $1. Loss aversion compels most traders to hold a losing stock while it plummets downward. This clouded judgment clearly contradicts the trading adage: cut your losses and let your profits run.

Emotional investors hold losing positions because they view paper losses differently from realized losses. An investor also engages in other forms of irrational behavior.

EXAMPLES are attributing success as natural and losses to bad luck.

This is just the tip of the iceberg. When talking about the other devastating effects of trading, if you do not have the psychology of your thought and emotions in the proper prospective the consequences can be devastating.

This is what opens up problems for new traders, and then they lose manage money very quickly in the markets. Most people completely wiped out their finances within the first year of trading. So, as you can see, your thinking and emotions play a big part in determining whether you fail or succeed, but did you know that thought and emotion make up two different spheres pertaining to trading success?