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2024/05
5 key lessons on trading psychology from Japan's top trader
If your trading decisions involve real money, you know how challenging it can be. Our brains aren’t wired for trading because it involves many counterintuitive ideas that can easily lead to mistakes and trading failures.
In this article, veteran Japanese trader Akio Tanaka reviews five common psychological pitfalls based on his trading experiences. Mastering these can give you a significant edge in trading!
1. Always Thinking You're Right
The first thing to remember in trading is that the market is always right. This doesn’t mean we’re wrong, but we should never fight the market when it matters. Tanaka believes that if the market doesn’t go as expected, we should cancel the trade and accept the loss within our parameters. This allows us to focus on another trade and another opportunity to make money.
2. Linking Every Trade Order
This is a simple cognitive trap because we learn mainly from experience. Our brains try to find patterns in everything we do and everything happening around us. Our brain knows that after the sun sets, night follows, and the same will happen today. This essential survival skill could be more useful in trading.
You might know you could have made profits in many trades but didn’t because past failures made you “stressed.” Conversely, you might make trades you shouldn’t because you got “lost” in a series of successful trades. Next time you trade, try to forget your previous trade and approach each one.
3. Trading with High Excitement
Our emotions dictate that what we should do in trading is often the opposite of what we feel. So, it’s best to stay calm and trade professionally, avoiding emotional reactions as much as possible.
Tanaka explains that he was enthusiastic when he started learning to trade with his mentor and often made hasty decisions. Later, he learned to follow strategies and became “numb” to the emotions trading evoked. To Tanaka, this numbness is an extreme form of trading psychology, where he only cares about the profit/loss and not how the trading results affect his emotions.
4. The More Effort, the Better the Results
This is another classic mistake in trading psychology. More trades mean more profit but usually more losses and less profit. Forcing our brains to look for meaningless trades leads to breaking the rules and falling into the common trap of overtrading, which can be costly.
Tanaka uses his example to explain this: When he first started scalping, his performance could have been better for the first few weeks, showing only small losses or break-even, according to his trading logs.
However, he found a significant expense in his account, which puzzled him. Upon checking the statements, Tanaka realized he made 5-10 scalping trades daily, resulting in high commissions that far exceeded his profits.
5. Trading Is Very Complex
Making money is often a complex task. We must perform jobs requiring our skills, abilities, and physical strength. We might have to study for years, get up early, or endure a demanding boss. Overall, it’s not easy.
However, Tanaka believes trading is simple. Your goal and actions are singular: to enter the market and make money. The market behaves the same whether you trade a position of 1,000 or 1,000,000. Investing $1,000,000 can earn you 1,000 times more than investing $1,000, but the effort is almost the same: minimal. Our brains tend to complicate things unnecessarily.
Due to this inclination to complicate trading, many people have extensive criteria for choosing trading strategies. Remember, trading isn’t our game but the market’s game. Therefore, trading strategies can be simple.
