Psychology and Trading | Podcast

January 26, 2019

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Key points covered in this podcast

Emotional control is an important characteristic of a good trader
Poker and trading are similar in psychology
The movie Rounders identifies key personality types to be aware of
You should hone your skills on demo accounts and aim for break even when starting out

Psychology and trading go hand in hand. It’s crucial to maintain a strong emotional resolve when you open and close positions in order to maximize your decision-making and be the best trader possible.

In the latest instalment of our DailyFX podcast, Trading Global Markets Decoded, our Currency Strategist James Stanley dissects the psychology of trading. He covers what it takes to have the correct mindset to succeed, contrasting aggressive new retail traders with ‘grinders’ seeking more steady gains, revealing how he eased his obsession with P&L, and using the analogy of poker to demonstrate the importance of self-control.

Moving Past a Super-Aggressive Approach to Trading

Like many first-time traders eager to make a quick buck, James jumped into trading very young with a super-aggressive approach. Lacking fundamentals, he looked solely for short-term momentum with technical analysis plays, leading to him ‘blowing up’ a few accounts. While he still employs aspects of his old technical strategy today, he has grown into a more complete trader, a process achieved through gaining a more comprehensive understanding of the market factors pushing prices, as well as better emotional control.

One of the reasons trading is so challenging for some is that it requires a delicate balance of ego and humility, James says, and a lack of either can spell trouble. ‘If you don’t have any ego, it’ll be hard to pick yourself up when you get beat down, and make those small improvements when necessary,’ he explains. ‘And if you lack humility, you won’t be able to cut bait when you have to.’

Many have a difficult time finding the balance. For James, it was ‘getting my butt kicked enough in the markets, to the point where I learnt what I needed to come back every day with a desire to be a little better’ . In other words, he gained enough confidence to concede a battle to win a war.

Poker vs Trading and Lessons to Learn

There are many similarities between the mindsets and skills required in poker and trading, and many traders began their careers from an initial start in poker. Calculating odds, evaluating the math required to make effective decisions, and risk management strategies are all common themes shared between poker and trading. However, perhaps the biggest commonality is the importance of emotional control.

The considerable monetary swings experienced in both pursuits can affect your mindset, leading to suboptimal decisions that can quickly wipe out any gains made previously. As a trader, managing your losses well through being composed can lead to some of your best trades, while in poker a downswing can be salvaged if a player deals with the volatility, or ‘variance’, in the right way.

The Personality Types in Trading and Poker

In the podcast, James discusses how the poker movie Rounders reveals the personality types present in both trading and poker. Edward Norton’s character, Lester Murphy, is a new retail trader with a super-aggressive style, while John Turturro plays ‘grinder’ Joey Knish, who sits in smaller games with lower risk.

James says that grinders like Knish often know they might be able to make more if they upped the risk, but the odds of that working are so low that its simply not worth it. ‘So it’s better for a lot of traders to just grind on the chart and make these small moves that may go better,’ he explains.

On the flip side, Murphy almost always ends up washing out. ‘Even if he can be up for a while, with the big risks he’s taking, he’s going to get caught in the end,’ James says. When all’s said and done, it’s Matt Damon’s protagonist Mike McDermott who wins out due to his more balanced style.

Use a Demo Account to Begin

People new to trading often think they can come in and make 300 or 400% a year, but a more realistic outlook is necessary for traders to keep a level head as they learn the ropes. ‘It’ll take time and effort, so a good goal for a trader is to get to breakeven,’ James says. ‘Try not to lose money first of all. Get trading on the demo account until you get the mechanics down of running a strategy.’