Introduction
Psychology
Psychology is the scientific study of the mind and behavior, according to the American Psychological Association. Psychology is a multifaceted discipline and includes many sub-fields of study such areas as human development, sports, health, clinical, social behavior and cognitive processes.
Psychology is really a very new science, with most advances happening over the past 150 years or so. However, its origins can be traced back to ancient Greece, 400 – 500 years BC.
The emphasis was a philosophical one, with great thinkers such as Socrates (470 BC – 399 BC) influencing Plato (428/427 BC – 348/347 BC), who in turn influenced Aristotle (384 BC - 322 BC).
Philosophers used to discuss many topics now studied by modern psychology, such as memory, free will versus determinism, nature versus nurture, attraction etc.
The Beginnings of Psychology as a Discipline
In the early days of psychology there were two dominant theoretical perspectives regarding how the brain worked, structuralism and functionalism.
Structuralism was the name given to the approach pioneered by Wilhelm Wundt -), which focused on breaking down mental processes intro the most basic components.
The term originated from Edward Titchener, an American psychologist who had been trained by Wundt. Wundt was important because he separated psychology from philosophy by analyzing the workings of the mind in a more structured way, with the emphasis being on objective measurement and control.
Structuralism relied on trained introspection, a research method whereby subjects related what was going on in their minds while performing a certain task.
However, introspection proved to be an unreliable method because there was too much individual variation in the experiences and reports of research subjects.
Despite the failure of introspection Wundt is an important figure in the history of psychology as he opened the first laboratory dedicated to psychology in 1879, and its opening is usually thought of as the beginning of modern experimental psychology.
An American psychologist named William James -) developed an approach which came to be known as functionalism, that disagreed with the focus of Structuralism.
James argued that the mind is constantly changing and it is pointless to look for the structure of conscious experience. Rather, he proposed the focus should be on how and why an organism does something, i.e. the functions or purpose of the brain.
James suggested that psychologists should look for the underlying cause of behavior and the mental processes involved. This emphasis on the causes and consequences of behavior has influenced contemporary psychology.
The Perspectives of Psychology
Structuralism and functionalism have since been replaced by several dominant and influential approaches to psychology, each one underpinned by a shared set of assumptions of what people are like, what is important to study and how to study it.
Psychoanalysis, founded by Sigmund Freud -) was the dominant paradigm in psychology during the early twentieth century. Freud believed that people could be cured by making conscious their unconscious thoughts and motivations, thus gaining insight.
Freud’s psychoanalysis was the original psychodynamic theory, but the psychodynamic approach as a whole includes all theories that were based on his ideas, e.g., Jung (1964), Adler (1927) and Erikson (1950).
The classic contemporary perspectives in psychology to adopt scientific strategies were the behaviorists, who were renowned for their reliance on controlled laboratory experiments and rejection of any unseen or unconscious forces as causes of behavior.
Later, the humanistic approach became the 'third force' in psychology and proposed the importance of subjective experience and personal growth.
During the 1960s and 1970s, psychology began a cognitive revolution, adopting a rigorous, scientific, lab-based scientific approach with application to memory, perception, cognitive development, mental illness, and much more.
The Goals of Psychology
The four main goals of psychology are to describe, explain, predict and change the behavior and mental processes of others.
These are as given in the following lines.
To Describe
Describing a behavior or cognition is the first goal of psychology. This can enable researchers to develop general laws of human behavior.
For example, through describing the response of dogs to various stimuli, Ivan Pavlov helped develop laws of learning known as classical conditioning theory.
To Explain
Once researchers have described general laws behavior, the next step is to explain how or why this trend occurs. Psychologists will propose theories which can explain a behavior.
To Predict
Psychology aims to be able to predict future behavior from the findings of empirical research. If a prediction is not confirmed, then the explanation it is based on might need to be revised.
For example, classical conditioning predicts that if a person associates a negative outcome with a stimuli they may develop a phobia or aversion of the stimuli.
To Change
Once psychology has described, explained and made predictions about behavior, changing or controlling a behavior can be attempted.
For example, interventions based on classical conditioning, such as systematic desensitization, have been used to treat people with anxiety disorders including phobias.
Critical Evaluation
Kuhn (1962) argues that a field of study can only legitimately be regarded as a science if most of its followers subscribe to a common perspective or paradigm.
Kuhn believes that psychology is still pre-paradigmatic, while others believe it’s already experienced scientific revolutions (Wundt’s structuralism being replaced by Watson’s behaviorism, in turn, replaced by the information-processing approach).
The crucial point here is: can psychology be considered a science if psychologists disagree about what to study and how to study it?
What is Trading Psychology?
Trading psychology is a broad term that includes all the emotions and feelings that a typical trader will encounter when trading. Some of these emotions are helpful and should be embraced while others like fear, greed, nervousness and anxiety should be contained. The psychology of trading is complex and takes time to fully master.
In reality, many traders experience the negative effects of trading psychology more than the positive aspects. Instances of this can appear in the form of closing losing trades prematurely, as the fear of loss gets too much, or simply doubling down on losing positions when the fear of realizing a loss turns to greed.
One of the most treacherous emotions prevalent in financial markets is the fear of missing out, or FOMO as it is known. Parabolic rises entice traders to buy after the move has peaked, leading to huge emotional stress when the market reverses and moves in the opposite direction.
Traders that manage to benefit from the positive aspects of psychology, while managing the bad aspects, are better placed to handle the volatility of the financial markets and become a better trader.
The Challenge of Trading
Active trading as a profession presents many challenges to an individual entering the marketplace for the first time. Statistics are not encouraging, with most empirical evidence suggesting that an individual's trading career will be brief and expensive.
Longevity in the marketplace among new traders is predominantly fleeting. Academic studies focused upon the length of time new traders remain active show that nearly 40% last one month in the market, and only 7% remain active after five years.[2]
In addition to the short trading career, a novice trader's entrance into the financial markets can also prove expensive. The amount of monetary loss sustained by a new trader during his or her introduction into the marketplace can vary wildly, and is ultimately dependent upon how much capital is at the trader's disposal. In addition, reckless implementation of leverage by an inexperienced trader can rapidly turn a manageable drawdown into catastrophe.
While it's true that active trading produces many more losers than winners, the possibility of success does exist. Personal anecdotes of financial gain, the impressive track records of famous investors and profiles of day traders who took small amounts of venture capital and subsequently built fast fortunes are easily found through some basic research of the trading industry.
Perhaps the most compelling evidence that trading success is possible are the statistics surrounding the trading practices of profitable traders. Studies have shown that the 1-2% of traders who achieve long-term profitability account for 12% of all day-trading activity.[2] This relationship illustrates that successful traders have found a method of conducting trade that creates an "edge" that can be applied repeatedly to the marketplace. Through consistent and calculated action, these traders are able to regularly prosper.
Trading Mistakes And Remedies
There are several common mistakes made repeatedly by new traders. Each one acts in opposition to the achievement of success and profitability. However, given the proper time and attention, each fault can be remedied.
Listed below are a few common mistakes made by new (and some veteran) traders:
Lack of a comprehensive trading plan: The marketplace is a dynamic arena with nearly limitless possibilities facing an active trader. Without a clearly defined trading plan to use as a point of reference, a trader will operate within the market from a reactionary posture and struggle to stay on the market's "lead lap."
No defined money management strategy: Money management may be the most important facet of trading. If fundamental principles of money management aren't employed, undue risk may jeopardise the solvency of the trading account.
Acting on "tips" or "advice": Making trading decisions on a "hot tip" or "inside information" is often a product of emotional trading. Odds are that the hot tip is a rumor, hearsay or worse. Even if true, there is a strong possibility that the tip has been widely circulated and is already priced into the market.
Satisfying the desire to be "right" instead of making money: The main goal of actively trading financial securities is to make a profit. At the end of the day, the market is always right, and traders are often wrong. The realisation that one can be wrong about many things and still make money is a difficult idea to accept, but one that is a key part of a healthy trading mindset.
Each of the aforementioned mistakes acts as a potential barrier to a trader's success and profitability. However, through dedicating adequate time and effort, the frequency of these mistakes can be reduced or eliminated.