Trading Rules & Psychology


Picture of Rules on Desktop

Attached above are a set of rules and principals for trading that were handed down to me in Superman’s Bootcamp/Trading Service. If you follow these rules and you have your own trade plan, you can compound wealth. A lot of times, when newbies get into the stock market, we tend to over position size, never cut loses quickly and HOPE, way to much. This is the downfall of most traders. However, if you train yourself not to be like this and follow a set of rules you will find that you will do much better in the long run. Remember, no one is 100% accurate. Not Superman, not Tim Sykes, no one. It is hard sometimes to follow these rules, but when you break these sets of rules you will lose a lot. To achieve success in the stock market it is about minimizing your loses and maximizing your gains, to compound wealth.

From my own experience, outside of following these rules, I think another important aspect to the stock market, is stock market psychology. In the psychological world, this is something that is rarely talked about. In essence, stock trading is a form of gambling, to those who do not have rules and discipline. It can have very addictive qualities and often times can take people to the cleaners if they are not careful. To illustrate this point, below is comprehensive synopsis of trading psychology and charting on swing trading.

The psychology behind trading stocks is the force that moves the stock market. A stock chart is nothing more than a picture of human emotions. Painted on that canvas are the emotions of greed, fear, hope, and euphoria. As a disciplined trader, you capitalize on the psychological thoughts that plague other traders.

  1. Should I buy?

  2. Should I sell?

  3. Should I take profits?

  4. Should I take a loss?

These are some of the questions that destroy trading accounts because novice traders asking these questions do not have a plan. If you asked a professional trader one of these questions he or she would say, “I don’t know. What does your plan tell you to do.”(Superman lol)

So what ends up happening? They get excited and buy at the worst possible time. Then the stock reverses. Fear creeps in and then the stock goes lower… and lower… and lower. Finally the pain becomes too much to bear so they sell taking a huge loss.

You cannot take big losses and expect to be a profitable swing trader.

Now let’s look at the psychology behind what happens when a stock does go in the desired direction:

There is a sense of Excitement! Euphoria! Yeah, I’m making money! “I had better sell to lock in these profits since I have had several losing trades in a row.” The trader then ends up selling too soon!

Look at what just happened in the above example. The un-disciplined trader has just done the opposite! They have let their losses get big and they have limited their winners!

All of this mental anguish can be eliminated by having a decent trading strategy and the mental discipline to stick with it. Write down a plan for the trade before you trade the stock. Then trade it according to the plan that YOU have written. Remember that you have devised a plan before you got into the trade when your emotions were stable. Now you can trade your plan with confidence.

For most novice traders, it is not their strategy that is causing them to lose money. It is themselves that is their biggest enemy.

Traders psychology on a stock chart

Learning to trade stocks and applying technical analysis to charts is mostly about human psychology – not chart patterns and candlestick patterns themselves. You have to understand the psychology behind these patterns. Take a look at the following chart:

psychology-stock-chart

Here is a breakdown of what happens:

Breakout Traders – These traders bought the breakout. They operate under the “greater fool theory”. They are just praying that other traders come along and buy higher than they did.

Novice Traders – These traders just have no idea what they are doing. There are buying shares of stock that the breakout traders are now selling to them.

Momentum Traders – These traders are buying the pullback and tend to buy near the 10 MA. They are likely going to put their stop below the low of the hammer.

Swing Traders – This is where we come in. The stock falls below that hammer and the momentum traders get stopped out. By now most of the novice traders and momentum traders have sold. See how the volume has tapered off? Previous resistance now becomes support.

Novice Traders – Once again, the novice traders are buying at the worst possible time. We need these traders so that we can sell our shares to them and make a profit.

Although this is all just speculation, the idea of this passage is to give you an example of the psychology behind each traders mind set. If you can learn this and follow rules, you will be able to better predict what other traders are thinking and adjust accordingly. If you have any questions comments or concerns, please let me know.

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7 Comments

Hamza Akbar
Reply July 8, 2015

Hello, Matthew. First, I'd like to say that you are a great inspiration for me and I it is my goal to be in the same league as you and Timothy. I have bought about 9 of Tim's dvds and been studying them religiously. As for your explanation of the underlying psychology in the chart above, how does a person know what psychological changes a stock is undergoing on the part of the people trading it? How does a person know as a stock is falling and rising?

Josh Brown
Reply February 19, 2016

Great article! Thanks for sharing. Just finished reading the book "Trading In The Zone" by Mark Douglas like you had mentioned you had in your interviews. It definitely goes into great detail about the underlying psychology traders must learn to manage.

Ian Brown
Reply March 23, 2016

I have actually lost money due to jumping out too soon. I have been using a swing trading strategy for day trading on a daily chart. I now take a look at the bigger picture and incorporate volume analysis. Until now, my success has been 50% due to jumping out of a stock too soon (fear). This leaves me at an almost "break even" win/loss. I must say, "I have a $10,000 account that I have had to maintain with outside money due to the small, but accumulative losses over the last 3 months". I am chaulking my losses up to the "cost of education"... so far it's about $1000, lol. I made $185 yesterday. I got into ACOR today at the bottom of a down trend. The chart looks good; we'll see if this is another educational fee or not. lol

Lorraine
Reply July 27, 2016

Hey, sultbe must be your middle name. Great post!

Jimbo
Reply July 27, 2016

This is both street smart and inttnligele.

Gert
Reply July 27, 2016

Never seen a beettr post! ICOCBW

Marylouise
Reply July 27, 2016

Exetemrly helpful article, please write more.

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