Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

TRANSFORMATION VIA ADHERENCE TO MECHANICAL TRADING SYSTEMS

The personality traits that sabotage trader success are manifold but generally can be categorized in this way:

• Lack of discipline and/or inconsistency. The key to transformation of this trait is elimination of blocks to single-mindedness, and review of how (in general) the markets reward us for following and punish us for deviating from the rules of entry, exit, and money management.
• Euphoria and/or greed. Here our discipline breaks down as profits accumulate. We break the rules of exit or of money management due to impatience and a lack of respect for the market's ability to turn profits into losses. Transformation of this personality flaw is linked with our ability to practice even-mindedness. If we can reprogram ourselves to act the same way when the market generates profits as when it produces losses, then we will not abandon discipline during a large win or winning streak.
• Fear, inability to initiate, and/or the perfect trader syndrome. The flip side to greed and euphoria are fear and an inability to take trading signals. This can occur due to an unwillingness to fade the crowd, fear of losses, or fear of relinquishing profits. Here the key to transformation is nonattachment, to act without attachment to the results of our actions. We must forget about whether the trade will result in a profit or loss, because the result of that action only exists in an unknowable future. Instead we must focus on the present moment; ...