I have not written about the psychology of trading for some time, so I thought I would write another posting. In my previous posting on trading psychology I introduced the basics of trading psychology. Most trading books talk about fear, greed or trading in the “zone”. While all of this is useful, it does not really get to the heart of the issue: money. How you relate to money can have profound effects on your trading. If your perception of money is distorted, no matter how good your trading system is, you will never follow the rules and whatever edge you had is gone.

How money affects us is a force that you can never underestimate in your trading. George Bernard Shaw once wrote that the “lack of money is the root of all evil”. Money problems causes so much misery. Lack of money causes us to do things we don’t like, like doing jobs we hate or working for people we don’t like. It creates strains on relationships and is the number one reason for divorces.

Lack of money also affects our trading. Many of us look at trading as a way of achieving financial freedom so we can escape our money problems. We all dream of the day when we can pay off our debts and tell our bosses “I quit”. However, once you start trading, you soon realize that trading is harder than you ever thought and pretty soon find that your mood becomes dictated by every wiggle of your equity curve. For many of us, every up tick on the curve makes you feel freedom is closer and you become happy and every down tick on the curve and financial freedom is farther away and you become unhappy. Our mood then affects how we think about trading which creates a viscous cycle where our mood and equity curve spiral out of control until we eventually abandon all hope and trading.

The first step towards better a trading psychology always starts with self observation. You need to find those common patterns of belief you have about money. Once you do that you can then work on the next step of unraveling counter productive perceptions that are holding you back in trading.

There are two places you should look at when observing yourself: everyday life and moments of pressure involving money. Some questions you might ask yourself include:

•Do you pinch every penny? or do you spend money faster than you receive it?

•Do you make impulse purchases? or do you research every product you buy to the nth degree?

•Do you pay off your credit card quickly or do you carry over your debts?

•Do you buy lottery tickets? or Do you never gamble?

•If you go to the casino do you like the slots or do you like black jack?

•What about when you bid on ebay? are you determined to win every auction no matter the price or do you bug out early? do you know what you could resell items for? do you not trust others on ebay and never use it?

•When you buy a TV or a computer or a car do you take the asking price or do you haggle?

•When you bought your house did you go to an auction or did you place an offer with the agent?

•Would you ever take out an investment loan?

•Have you ever lost or made a large sum of money? how did it affect you now?

In looking at all these questions, you are hoping to see a common pattern emerge as most of our money problems are usually one thing that is expressed in many different ways in our every day lives, in high pressure situations and in our trading. For example:

•Someone who is a penny pincher, doesn’t have a credit card, never buys a lottery ticket and never bids on ebay, could be afraid of making a mistake and loosing large amounts of cash. Such people usually have extreme trouble pulling the trigger on any trade.

•Yet another penny pincher, who is addicted to bargain hunting on on ebay, when they come to trading, where value is far more subjective is likely to chew their account up trying to buy the bottom.

•Someone who is not afraid to use their credit card to shop impulsively and buys lottery tickets, when they come to trading they will make many impulsive lottery ticket style trades.

Once you are able to understand your inherent nature, you are better armed to know where your trading plan is going to become unstuck. Unfortunately, there is no magic pill here for moving past old bad habits around money. The only thing you can do is practice practice practice new habits. This means knuckling down and following your trading plan and every time your money related tendencies come into play, you have to work through them and execute the plan. The more you do this, the more consistent your trading will become. In time you will find that your perspective on money will mature and this will flow through to the rest of your life. Finally, even if you don’t make it as a trader, you will at least argue less with your wife about money …….