There is no feeling quite like that of success in trading. To take the time to perform analysis on a name, establish a trading plan and then profit from your hard work is an awesome feeling. Putting a string of winning trades together like that is priceless. However, the chance of overconfidence or believing that you can only win can become an issue (especially if you are new to trading).

I’ve written about overconfidence before and there’s plenty of research out there regarding the topic. I wanted to touch on one other reason why overconfidence has a tendency to lead to over-trading. In a word, control.

The more people participate in a task, the greater their feeling of being in control. What better example is there than the active markets we all participate in on a daily basis? The technology boom over the last decade allows me to sit in my home office and trade any asset class I want. Instant news, inexpensive streaming data, discount brokers, all products of the technology boom over the last decade and all contribute to the illusion of knowledge and control.

Research suggests that we have a deeply rooted desire to master our domain, to strive for perfection. In fact, the very thought of not being able to control what goes in our environment is distasteful. This is especially true when the environment consists of skill and chance, like the markets. Hard to believe that one might find control issues in the markets, I know.

The question to ask yourself is whether or not you are indeed “in control” or can your success be attributed to some other factor (perhaps even a small portion). Find out! Summer is a great time to reflect on your prior trades, conduct research, and prepare for the Fall when trading volume picks back up. I can’t imagine going into the markets in September without a thorough review of my trading thus far and a method to approach the remainder of the year.

I'm presenting a psychology of trading webinar for free with the good folks at TradeKing. The webinar will be Tuesday, August 24th at 5pm ET

If you're interested, click the logo below to be taken to the page to register. I hope you'll find the time to attend.

It seems so easy to focus on the things we do wrong. I can name hundreds of mistakes I’ve made in my life. I choose not to focus on what went wrong, but rather on how I can improve my standing and learn from my mistakes. I found one of the most frustrating aspects of being a therapist was the client who came in for a session and wanted to focus on the negative aspects of their life. The goal was usually to try and find fault or pass blame to someone or something.

I got to the point as a therapist when a client would start the blame game I’d cut them off. I’d hand them a notepad and pen and ask them to write down five things that have gone reasonably well for them lately. Depending upon the speed at which the client could create the list gave me an idea of how difficult it would be to work with them. Those that were quick to create the list were also those that took back control of their emotions and life with greater ease.

Can the same can be said of trading? How many poorly taken trades can you recall from your history? Thumb through your trading journal and see what stands out. How many negative references are in there? How many positive references? If there are more negative than positive entries I’d suggest that you focus more on the latter.

We all know that very few who embark on a career as a trader make it. We also know that nearly everyone we talk to is a profitable trader, right? How can that be? WHO CARES!?! Be honest with yourself and learn from your mistakes. Exploit the things you do correctly in the market and turn a profit. At the end of the day it’s just you and your equity curve. You can choose to BS your buddies and tell them what a great trader you are (knowing that you’re more than likely break-even or negative) or strive to become a profitable trader and grow.

Trading is a business, not some fantasy league or hobby that we throw money at purely for entertainment. Treat it as such and keep the expenses low while looking for ways to increase revenue. To focus on losing trades while attempting to pass blame is pointless and the easy way out. There’s a reason the trade went against you, find out why. Understand that trades can and do go against you so manage risk before the trade is entered to minimize the loss, both financially and psychologically.

When you blame others, you give up your power to change.
-Dr. Robert Anthony

Below are charts that show the number of stocks in each index and sector that are trading above the 200 SMA. This simple moving average is a very important moving average for many types of market participants. These are the major indices and sectors that I watch each week in my trading. Let me know if you have other sectors that you'd like to have the breadth tracked.

A less than favorable week for the bulls as $SPX and $INDU gave up the 200 SMA while the $RUT and $NDX held that level after testing for support.I'll be keeping an eye on the $RUT and $NDX and how they trade relative to their 200 day simple moving averages. We are entering the end of the quarter so historical data suggests a slight advantage to the bulls.

One of the five factors the Market Awareness Profile (MAP) measures is conscientiousness– the way in which we control, regulate, and direct our impulses. Impulses are not inherently bad; occasionally time constraints require a snap decision, and acting on an initial impulse can be an effective response. Nonetheless, acting on impulse can lead to trouble in a number of ways. Acting impulsively disallows contemplating alternative courses of action, some of which would have been wiser than the impulsive choice. This can be especially true when referring to trades taken (or not taken) which can lead to regret.

High scorers tend to be more organized and less cluttered in their trading space. They tend to avoid trouble and achieve high levels of success in the markets through purposeful planning and persistence (discipline). On the other hand, they can be compulsive perfectionists and miss some opportunities. In doing so,counterfactual thinking can consume the thought process and lead to a false sense of self-efficacy.

Low scorers may be considered unreliable, lack ambition, are easily distracted, and less likely to adhere to trading rules. Trading plans may be thrown aside for gut feelings and, at times, this may be beneficial as the ability to recognize trouble early could minimize losses. However, trading plans work and work best when strictly adhered to which would suggest low conscientiousness traders tend to favor a discretionary trading style. Unfortunately, a majority of discretionary traders fail to become a market master simply because of the lower odds of success, especially when compared to a more mechanical system.

High scores on conscientiousness are desirable and work well for mechanical systems and a hybrid system with both mechanical and discretionary aspects. A low score on conscientiousness does not mean you will be a failure at trading, but your equity curve may not be enough to sustain a period of consistent profitability. This is mainly due to the inability to remain focused and control impulses which hinder success as time is spent focusing on the self (what you think should happen) and not the markets (actual price action).

To better understand conscientiousness, let’s take a look at the six facets that make it up:

• Self-Efficacy. Self-Efficacy describes confidence in one’s ability to accomplish things. High scorers believe they have the intelligence (common sense), drive, and self-control necessary for achieving success in trading. Low scorers do not feel effective, and may have a sense that they are not in control of their trading. However, consideration needs to be given to motivation for success as complacency with the way things are may be the reason for a low score.
• Orderliness. Traders with high scores on orderliness are well-organized and stick to routines and schedules. They tend to make trading plans and use them. Low scorers tend to be disorganized and scattered. Trading plans are viewed as not being important as rules are too confining.
• Dutifulness. This scale reflects the strength of a person’s ability to stick to a trading plan. Those who score high on this scale have a strong sense of moral obligation. Low scorers find trading plans overly confining and thus less likely to follow or even create one. Perhaps trading is seen as more of a “hobby” or just for “fun.”
• Achievement-Striving. Individuals who score high on this scale strive hard to achieve excellence. Their drive to be recognized as successful keeps them on track toward their goals. Low scorers are content to get by with a minimal amount of work, and might be seen by others as lazy.
• Self-Discipline. One of the largest contributors to success as a trader is self-discipline. High scorers are able to strictly adhere to a trading plan and stay on track despite distractions. Low scorers procrastinate, are easily discouraged and show poor follow-through. The lack of self-discipline will make your trading career rather short lived.
• Cautiousness. Cautiousness describes the disposition to think through possibilities before acting. High scorers on the Cautiousness scale take their time when making trading decisions and manage risk well. Low scorers often trade without deliberating alternatives and the probable consequences of those alternatives. Scoring too high on this scale can have its downside as trading opportunities may be missed for the discretionary trader. The more mechanical systems trader will account for this through their strategy.

Personality traits describe, relative to other people, the frequency or intensity of a person’s feelings, thoughts, or behaviors. Possession of a trait is therefore a matter of degree. Please keep in mind that “low,” “average,” and “high” scores on a personality test are neither absolutely good nor bad. As with any personality inventory, scores and descriptions can only approximate an individual’s actual personality. However, the real value of the results can be seen as you focus on areas of improvement when processing closed trades. In addition, how you present yourself outside of trading (I’d include how you see yourself) can be vastly different once money is involved.

Stress comes from both external and internal forces with the latter being the only one we can control. As a market participant, there are stressors you can control but overall the profession is stressful. In other words, control what you can and accept the fact that trading is stressful.

A few common examples of stress that I’ve seen are the stress of anticipated failure, where there’s a lack of self-confidence and trading becomes wildly inconsistent, and the stress of unpreparedness, where the lack of preparedness lowers the probability of success. Both of these examples are ones in which we have control over and thus can be managed.

Managing stress is not rocket science yet so many fall victim. There are numerous ways to manage stress, the trick is finding the motivation and the sustainability needed to be successful. Here are a few items that should get you started:

• Caffeine-a crutch, becomes a need to “focus” or “get centered” when in fact it’s not
• Diet-weight gain is common in high stress. Have a balanced diet
• Exercise-research is rampant on the impact exercise has on stress…do it
• Sleep-the body needs to rejuvenate as well as the mind. Sleep is fuel for body and mind
• Outside market activities-get a hobby or something that allows your creativity to grow

For those external forces of stress that we have no control over we are not helpless. What I mean by that is that the way in which we react to stressful situations is still a choice. We may not choose to be in a bad trade but the way we manage the trade is still our choice. Keep a cool head and don’t become frustrated.

Frustration is a direct result of how we react to the event that’s causing the stress. Frustrating a particular learned behavior causes us to revert to an earlier learned behavior. In trading this can be a severe roadblock to success as it stymies growth. So the trade sucks and you were wrong. You did have an exit strategy, right? If not, then the stress of unpreparedness has paid out in spades.

The old saying “the trend is your friend” is easily one of the most widely used and accepted aphorisms of the markets. Looking back at what the market has done since March of 2009 it is easy to see why the trend is indeed your friend. It’s also easy to see why so many market participants, even seasoned ones, are in disbelief of the move. Obviously we all can’t be on the same side of the trade as we wouldn’t have a market.  However, digging a bit deeper than that is a common pitfall experienced by many traders.

Cognitive dissonance is the mental conflict that people experience when they are presented with evidence that their beliefs or assumptions are wrong. Humans have the tendency to go to extreme measures in order to protect their belief structure. This type of protectionism manifests itself in the market through “doubling down” or “dollar cost averaging” a position.

An example where traders experience dissonance is when the self-concept is attacked. For instance, the self-concept of being a good/smart/profitable trader might be under attack. A trade was placed, maybe hastily, and now it’s under water. The anxiety that comes with the possibility of having made a bad decision leads to rationalization, then the doubling down, etc. begins. This is low probable trading and can lead to large losses.

Over the years I’ve worked with some great people yet they were horrible traders. They were too stuck on the fact that they needed to be right, regardless of the cost. The market doesn’t care who you are, how much money you make, or how many degrees you have. I can’t stress enough the importance of a trading plan—at a minimum you should know the target and the stop. Traders are proven wrong every day in the market and it’s those that take expected losses and move on that survive.

One of the six facets in the Neuroticism trait of the MAP is Self-consciousness. Self-conscious traders second guess discretionary trading decision and should consider a more mechanical method. Low scorers, in contrast, feel confident they’ve made a good decision and can be successful as picking stocks. However, where poor trading may occur is a low score on this facet and a low score on the Dutifulness facet of the Conscientiousness trait. Add to the mix a high score on the Assertiveness facet of the Extraversion trait and a potion for disastrous trading can ensue.

Stock market bubbles exist when stocks are overvalued but can be difficult to truly measure as” value” is a subjective metric. Bubbles are easily seen in hindsight as the warning signs that may have suggested the bubble tend to glare; this is known as hindsight bias. However, the issue I have with hindsight bias is that it encourages a view of the bubble as being more predictable than it really was.

As an example, one needs to look no further than the sub-prime mortgage mess we are still dealing with today. Yeah, it seems obvious now to look back and see the proverbial writing on the wall, but why wasn’t it so easy to see back then? Don’t know and don’t care as that’s not what this post is about.

This post is about the bubbles that we can create in our own trading. I’m referring to the overconfidence that many experience at some point in a trading career. Don’t get me wrong, confidence is needed in yourself, your system, and the market as a whole in order for trading to work. However, overconfidence in any of these areas can lead to low probable trading as over-trading occurs. It’s easy to become overconfident after a string of wins and many traders fall victim, especially males.

Researchers Barber and Odean looked at 35,000 trading accounts over a period of six years to see if overconfident investors trade excessively. The results should not be too surprising, but this is what they found. Single men trade 67 percent more than single women. In addition, this over-trading reduced the male’s returns by 1.44 percentage points per year more than the single women.

Bottom line is that overconfidence can lead to over-trading which leads to diminished returns, regardless of gender. A lack of preparation can often be blamed for the overconfidence as one “trades from the hip” versus planning and preparing for each day. Trading is a difficult and like any other business it demands hard work (effort) on the participant’s part. Despite what the “gurus” tell you, it’s not that easy to make it as a trader; it’s not impossible either.

Trading is no different than anything else in life in that you get out of it what you put into it. That doesn’t mean that if you dive into everything trading and start reading books, posts, tweets, etc. that you’ll be successful. There has to be a method to your research, a pattern if you will. Look at what others do, ask questions, and form your own routine and give it a test drive.

Personality can be defined as a dynamic and organized set of characteristics possessed by a person that uniquely influences his or her cognitions, motivations, and behaviors in various situations. One such situation is trading and the basis for the personality assessment that I created called the MAP (Market Awareness Profile).

The Big Five factors of personality are broad dimensions of personality and have been a staple in personality theory since the 1960s. I chose to use this model for the MAP for the same reasons I chose it when doing my doctoral dissertation—reliability. The five broad domains discussed in the model are:

• Openness to change
• Conscientiousness
• Extroversion
• Agreeableness
• Neuroticism

In a series of posts over the next few months I’m going to discuss not only these broad dimensions, but the six facets that accompany each of the dimensions. For this post I’ve decided to start with extroversion as most people are familiar with it and have probably believe they are or have been called either an extrovert or introvert.

Extroversion and introversion are most typically viewed as being on a continuum and that each of us reside there, somewhere. The important thing to remember though is that we can fluctuate during different periods of our lives. As an example, I may be an extrovert when trading and an introvert while riding on the train to work. Introversion is not the same as being shy. It is more of a choice than a fear of social encounters. I may choose to be alone on the train so that I can focus on a task versus being alone because I lack self-confidence and a belief that I could contribute at a social level.

In trading, an extrovert may be more inclined to take risks and thrive off trading with “an edge” whereas an introvert may be more prone to an aversion of risk. Both can be debilitating to trading success if not kept in check. This task is often hard to do alone and one of the reasons why traders who are held accountable by a “boss” are more likely to be successful versus going it alone and unchecked.

One of the more defined facets of the extroversion scale is assertiveness. High scorers on this facet are more likely to approach trading with confidence, as they do life. The key is to not let this turn into over confidence as the market has a way of humbling those that do. Odds are good that these traders will attempt to buy bottoms and sell tops. They are less inclined to have a trend following system or strategy which would require patience.

Low scorers tend to not fight the tape and trade with the flow and follow trends. They are more likely to use a conservative system or strategy that buys/sells only after confirmation of a break of resistance/support. Odds are good that fundamental analysis is a part of their system as well and that price action is typically left for larger time-frames such as daily and weekly periods.

Obviously, as stated earlier, we will find ourselves employing a strategy or following a system akin to those just mentioned. We may also have experienced several different strategies and systems and still feel as though the holy grail is out of reach. On the other hand, perhaps we've found a system or strategy that fits our personality and the marriage is one of success. If you are at that point, congratulations! If you are not quite there, patience, perseverance and the insight gained from a personality profile could lend itself nicely to the journey.

Now if you read this post and think it’s a bunch of crap, I offer this. Hundreds of thousands, if not millions of people are aware of moving averages and have heard and/or tried a system based upon a cross of the moving averages. In fact, there are some well known systems that are out there for anyone to use and some traders have proven to be quite successful using them. Why then is it that so many people fail at being a successful trader with all these proven systems out there? I’d argue that a big piece of that puzzle is the baggage (personality) that we each bring to the market.

I'd further argue that if you've been lucky enough to weather the markets for a period of time that you have tried several strategies and systems. Perhaps you've found one that fits your personality and you've found success. How much time, money, effort and other resources were spent to get to where you are now? If you'd only known then what you knew now, you could have saved so much. That is why I believe having a good idea of what you're wired for in life can and does impact your trading. With that knowledge, you can save valuable resources and get to where you want to be more efficiently.

I grew up in the Northwest corner of Wyoming and as such loved the outdoors. One of my favorite activities was fishing, especially fly fishing. I used to fly fish in Yellowstone park quite regularly and loved the challenge of landing a huge fish with the small hook disguised as a fly. The problem I had though was that I could literally go through 30 different flies trying to find the one that would work. This was not an easy process and at times was very frustrating. Over the years I learned patience from this process because I knew if I found the right fly I'd land the big one.

When I first started trading I had a similar frustration at times as I moved from one stock to another trying to land the big one. After several failed attempts I found what works for me and haven't really ventured far from that. I still have to exercise patience as some times I feel like getting in the market even though my strategy tells me not to.

As a premium seller I am an odds maker of sorts and when you have to pay out it hurts, financially and mentally. Every option cycle I'm in the market selling that low probability chance that the market will make it to a certain level by expiration. At times it's gut wrenching while at other times I find myself extremely bored.  I find myself wanting to trade something, anything, and then I remember to exercise patience and move on. At times I have to physically remove myself from the office and go do something else.

Yes, cash is a position, and you can keep out of the markets if you're not comfortable shorting (buy a put for heaven's sake) or don't know how. My point is that if you are trading to trade, your odds of success are low. Stop! It's been rather easy lately to make a decent return trading as it seemed that every dip was bought and stocks didn't know how to make a lower low. The market has changed recently and it may be some time before solid opportunities present themselves again. Protect your trading capital so when a high probable trade comes along, you can act upon it.