In trading, it is a commonly held rule that to succeed requires 10% Technical Knowledge, 10% Fundamental Knowledge, and the remaining 80% is entirely psychological. This rule doesn’t just apply to trading, it can equally refer to entrepreneurs and anyone starting a new business, but what does it mean in practice?
Some think the answer is obvious, spend all your time learning about technical analysis and the fundamentals of economic influence, business techniques and so on, because the rest is psychological, and you already have that mastered, right? The people who say this are normally the people with a failed business or shrinking trading account. Convincing yourself you have the psychological skills mastered is the surest way to not mastering the psychology of business or trading, and that means failure. So how do you deal with it?
It’s All in your Head: How does Psychology Affect You?
If you want to learn the technical aspects of trading or running a business, you can pick up a book and start learning. It’s the same with fundamentals, but what is psychology, how does it impact performance and what do you need to learn?
There are two key emotional drivers in trading, and they also apply in business too. Fear and Greed.
Both can cause you to be reckless, to miss an opportunity or to stay too long when things go against you. They are driven by both your own internal psychology as well as the larger group, be that the markets in trading, or your team in business.
Fear and Greed
If we look at trading, and mention fear, most people would think it is just about the fear of a losing trade. The worst that it could do is to make you afraid to open a trade to begin with perhaps. But fear invades everything. When the market goes against you, fear can prevent you from exiting early to minimize losses, instead hoping the market will turn and work for you. The most likely outcome being even bigger losses. Sometimes, things do not go your way, and the quicker you can see it, the less harmful to your trading account it will be.
Fear of losing can also mean missing out on profits. Have you ever been in a trade and moved stops too close to the price movement, leaving you stopped out as the price moves on to reach your profit targets without you? Most of us have. Fear does that.
It is the same with greed. It can cause you to hang on too long in a trade, seeking out every last cent of profit, only to see it disappear in an abrupt market turn. It can also mean taking trades that don’t fit your risk profile or established strategy, simply because greed drives the need for profit.
Each of these scenarios apply to business too. These are the drivers of our behaviour, and understanding psychology is learning to understand why these things affect us, and how to overcome them.
Internal and External Influence
While Greed and Fear are the primary emotional motivators, although others play their part too, we are influenced not just by our own internal greed and fears, but by wider society too. In trading, this is market sentiment, in business it can be any number of things.
A great example of external pressure affecting people psychologically in very recent times is the NFT markets. Non-Fungible Tokens are based upon Blockchain technology, and there is nothing inherently wrong with them, but tying them to a piece of art that can be easily copied and suggesting that this is a viable investment vehicle was always a solution looking for a problem.
NFTs may well prove to be everything people hoped they would be eventually, but they are not now. Yet all over the world, prominent celebrities and investors were falling over each other to get involved. Even those who knew very little about it flocked to put money in, primarily because everywhere you looked, news stories, leaders and prominent wealthy individuals were getting involved.
The fear of missing out on what was being described as an unmissable opportunity, and the greed of wanting to make a lot of money quickly, came together in a perfect storm. Driven by external psychological influence to begin with, but with internal pressures keeping many people involved even as the markets collapsed around them.
Study Everything
That is why, when we look at the 80% psychological nature of business, entrepreneurship and trading, it is something to study and understand, not ignore. Yes, you always need to educate yourself on the technical and fundamental aspects of any activity, but you must also train yourself to ignore the psychological influence, work from logic and your proven strategy to achieve your goals, even when your inner voice is telling you to do the opposite.
Without understanding how the psychology of the pressures and emotions involved in what you are doing, and the way the markets and people around you can influence that, then you will inevitably run into difficulties. Think about the time you invest in building a trading strategy, a launch strategy for a business, an investment strategy as an entrepreneur. If you allow the psychological influences around you to shape your actions, then that is all wasted time.
Planning in detail is essential, but it is only worthwhile if you follow through on that planning. Unless you master the psychology of the process, you simply will not do that. When that happens, rather than a strategy, you are leaving your success to chance.
Make the study of psychology an integral part of your day, as natural as it is to study technical aspects of your business, trading strategy and so on. By understanding how you are influenced, you can avoid that influence and operate more effectively in anything you do.
#psychology #fomo #greed #fear #trading #forex
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