Psychology of trading: how to overcome yourself and achieve success (Part 2)

The importance of psychology in trading.

A simple example

Do you know about the famous Stanford marshmallow experiment?

Children were left alone in a room with a marshmallow, but there was a condition - if you don't eat a marshmallow, you will get another one later.

Most participants in the experiment gave in to temptation and ate the marshmallow.

This has direct relevance to trading, as beginners tend to give in to temptation and take profit as soon as it appears. Usually, novice traders do not wait until the price reaches the target level. They act like the kids in the experiment.

The opposite pattern appears when a floating loss is generated. Beginners hope that the price will turn in their direction, but the loss (as if by chance!) increases to a critical size. The well-known trader's wisdom "Cut losses, let profits grow" says just about this.

The described experiment suggests that to be successful in trading you must act against your will, emotions, and inborn thinking patterns.

In what follows we will look at three important topics that reveal the essence of psychological problems in trading.

• Fear and greed
• Bias
• Behavioral finance

Perhaps the structure of the list is controversial because everything in psychology is highly interconnected. But the list is easy to understand, in our opinion, and fully covers the importance of psychological problems in the work of a trader.

In the next article, we will look at greed and fears, and more live examples of how it has affected profits or losses in specific situations.
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Follow our updates for useful information in our series of articles. You can also visit our previous article to better understand this topic.