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Psychology Of A Market Participant

"Life will have terrible blows in it, horrible blows, unfair blows. It doesn't matter. And some people recover and others don't. And there I think the attitude of Epictetus is the best. He thought that every missed chance in life was an opportunity to behave well, every missed chance in life was an opportunity to learn something, and that your duty was not to be submerged in self-pity, but to utilize the terrible blow in constructive fashion. That is a very good idea." C. Munger

Throughout our trading careers, both Rich and I have taught dozens upon dozens of people how to trade. Many students have become successful to very successful traders, while other students have not become successful traders. Rich and I truly believe that most people are capable of becoming successful traders, given an experienced teacher who is also a successful trader. However, one of the significant variables that, in our opinion, separates a successful trader from an unsuccessful trader, is the ability to remain unemotional and detached from trading.

Emotions such as fear, greed, frustration and self-pity are among the most corrosive psychological traits that a beginning trader (or anyone) can have. The thought that the market is working against you personally, with the subsequent thought that you will never become a solid, consistent and therefore, successful trader is absolutely incorrect. The sooner a trader can learn to control these negative emotions, the more in control of his trades he will be and the quicker he will progress as a trader.

Fear causes traders to either not take every high probability entry, or to take a few high probability entries, but cut his profits far too quickly. Trading is a game that requires us to take every high probability entry that we see and subsequently let our winners run. Conversely, greed is just as dangerous as fear, as we end up chasing entries and letting profits run too far. Thus, greed causes us to risk too much at the outset of the trade, and causes us to risk the entire trade for another few cents per share.

Commencing with the most obvious counter-argument, the market does not care who you are, how much you are worth, your skill level, experience, intelligence, educational attainment or any other factor. The market is simply a collection of millions of participants, acting to and towards their individual self-interest. It does not matter if you are Buffett, Munger, Icahn, Ackman, Loeb or a guy in Iowa with $1000 in his account. Everyone in the market will lose money on a regular basis. It is how you react to those losses, setbacks and bad days that will determine whether you are successful or not. No one can, in reality, control the market. The market will do what it will do and we must constantly adapt to the market.

Rich and I started our trading careers as fairly inexperienced beginner traders. As such, we both took more than our fair shares of losses. However, one of the variables that separated us from the other traders who quit was our willingness to unemotionally and dispassionately learn from our mistakes. We both internalized the fact that the market is simply a game. Indeed, Buffett has noted that, “Mr. Market, he's kind of a drunken psycho. Some days he gets very enthused, some days he gets very depressed. And when he gets really enthused, you sell to him and if he gets depressed you buy from him. There's no moral taint attached to that.” If you can see the market as thus, the entire endeavor of trading, investing and/or trading options, becomes a game. Our job, simply put, is to adapt to the market, every single day without any emotion, whatsoever.

We will leave you with one final quote, from Mr. Buffett again, who once stated, “[o]bviously if you want to get good at something which is competitive, you have to think about it and practice a lot. You have to keep learning because [the] world keeps changing and competitors keep learning. You have to go to bed wiser than you got up. As you try to master what you are trying to do — people who do that almost never fail utterly. Very few have ever failed with that approach. You may rise slowly, but you are sure to rise.” We could not agree with the Oracle more.

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