A common problem among novice and experienced traders alike is at some point they fail to implement their trading plans. They may spend countless hours developing a trading plan, but for some reason, when the time comes for executing their plan, they lose sight of the goal and let the trading opportunities presented pass them by without reaping any of the benefits.

For example, you may see the market is approaching your price level to buy, but you fail to pull the trigger at the critical time. As the market is moving up, you feel compelled to act, yet you do not. You feel angry and begin beating yourself up psychologically. You keep asking yourself why you didn’t take the necessary action? To get a better understanding of this behavior, let’s look at factors that make up our behaviors.

Behavior of a dynamic system results from two factors: internal dynamics and external factors. A dynamic system is any type of system that exhibits a behavioral change over time. A dynamic system, be it a stock market or a human being, moves and interacts based on the outcome of two primary forces, internal dynamics and external forces. For example, when you arrived at your office this morning, you used a means of transportation (an external factor) to meet your immediate objective (your want and desire, internal dynamics) to get to the office.

To identify the main cause behind the “not-pulling-the-trigger” syndrome, we will review these two factors in the following sections.

Internal Dynamics

In addition to external factors, your own internal dynamics can dramatically impact your behavior. According to David McClelland, a psychologist with about 40 years of research in human motivation under his belt, three variables interact in complex ways and cause an individual to elicit certain behaviors:

1. Cognition (i.e., your knowledge, your beliefs and understanding);
2. Skills and adaptive traits (i.e., your habits, abilities and personality traits);
3. Motives.

So, how does each of these factors affect a “not-pulling-the-trigger” syndrome?

You did not have a trading system or have the proper knowledge for trading. (Cognition);
You were not able to follow or implement your trading system due to your personality traits and habits. (Traits);
You did not place your order due to lack of motivation and desire (Motives).

In short, your understanding, psychological and emotional states and your motivation collectively had a major impact, so you did not place your orders. Let’s look at each of these three variables in the following sections.

1. Trading systems and trading knowledge. Your cognitive understanding of the market, i.e., your knowledge and beliefs about your trading system, help you perceive outside information and filter it accordingly. To trade successfully, it is necessary to establish a trading plan that answers the following questions: What market(s) do you want to trade? Do you want to trade futures, stocks or currencies? In which timeframe are you interested? – long term (position trading), short term (swing trading), day trading? How do you want to trade? – do you want to use a mechanical system or a discretionary system?

The cognitive variable deals with your understanding and belief. Today, a majority of traders know that they should have some sort of trading system before they risk their hard-earned money in the market. Your trading system basically tells you when to enter the market by placing your buy (long) or sell (short) orders, and it also tells you when to exit and where to put your protective stop. In future articles, we would discuss the essential factors in choosing and developing a sound trading system. For now, you should look into your own trading system to see if its variables are compatible with who you are. However, knowing how to trade and implement your system should enable you to bite the bullet and pull the trigger.

2. Applying your trading system and knowing your ABC’s. According to Dr. Ellis, the father of Rational - Emotive therapy, our beliefs about events, rather than events themselves, determine our emotions and behaviors. His theory is based on the ABC model. When you see an activating event (A) in a particular way, because of your beliefs (B) about the consequences(C) of that behavior, you adapt your behavior to the perceived outcome of the action. The activating event (A) and what you believe (B) about it, creates the consequences (C) of your behavior. Your beliefs create and shape your behavior rather than the activating event, e.g. the market.

Let’s look at an example of this theory. Suppose you are driving home from work, when a cyclist seemingly comes out of nowhere. You hit your brakes and the car screeches to a halt. Your heart is racing, adrenaline is coursing through your body, and you may even break into a cold sweat. Though you were surprised, the event was resolved quickly and no one was hurt, yet your physiological reactions were identical to those had you had an accident. This is due to the fact that your beliefs about the event, whether real or not, had a powerful effect on your experience both physically and emotionally.

Similarly, your beliefs establish a foundation for your reaction to market behavior. Though the market is the same for everyone, everyone’s reaction to the market is not. For example, you may think that futures trading is high risk and akin to gambling. Since this is the basis of your belief, your action is based on this belief, and you exhibit gambling behavior. You might risk too much or try to make a killing in the market. The result is that you may not follow your trading system; you may pull the trigger too much or not enough. On the other hand, your friend views trading futures markets as simply another way to make extra when they traded consistently through a system. Because of your friend’s belief about the futures market, he is likely to pull the trigger exactly when he planned.

Using the ABC model then can enable you to understand and, more importantly, correct your behavior. So, it’s important for you to analyze not only your beliefs about the market, but also the basis of your beliefs about the market.

Like our beliefs, our traits affect our actions and behavior, even in trading. Think about your experiences trading. Do you become nervous as soon as you place a trade and end up not following your trading plan, or do you sit back and gauge the market’s movement against your plan? On a Trading Personality Profile (TPP) test, for example, a nervous trader will likely have a high score in neuroticism, a determining factor in your trading. Dr. Pierce J. Howard describes neuroticism or negative emotionality as one of the main dimensions of our personality traits. The range of behavior ranges from reactive to resilient. In that continuum, the middle ground is someone who is responsive, someone who may have a mixture of both traits. Have you noticed how some people are naturally cool under stress? You may even call them cold or aloof. They probably have a low score in neuroticism.

Perhaps, you’re not exactly nervous when you trade, but you always feel you can improve on your trading plan, and you’re constantly tweaking it. Say that on a particular day you notice that a few signals were not profitable. Then you start playing with your system with the idea that you could improve on it. “Why not,” you think to yourself. You could add a few more indicators that seem to have some validity and achieve a better performance. You check out a few indicators like moving averages or different periods for the stochastics. Subsequently, you get a signal from your new and improved system, and it is a loser. Now you realize that the old version of your system might have produced a winning trade. You get angry with yourself because you did not follow your system, and you kept modifying it.

A TPP test may reveal that you have a high score in the openness dimension. It means that you like to explore different options and keep tweaking your system while looking for the perfect system. You find that you keep repeating that same behavior and you wonder why. You repeat your behavior because it is part of who you are, that is one of your traits. Rather than beating yourself up over it, you may need to look for a system or an alternative method that is compatible with your particular personality traits rather than try to change the system or trade in conflict with it.

In order to quickly identify your strengths and weaknesses in trading, take a TPP test. If you are able to identify your particular traits, you then can create or select a trading system that is more compatible with your own personality, giving you a higher probability of success. As you can see from the previous example, we must have a better understanding of our own personality traits in order to become better traders.

3. Trading motivation and desire. Why do you trade? Do you like the action? Do you see trading as quick money? Your answers to these and similar questions will reveal your inner motivation for trading. Motivation is the underlying force that moves you toward or away from something. Many traders may come to trading – in particular day trading – because they enjoy the action. Some may trade solely for its potential monetary rewards. However, other people may trade because trading presents an intellectual challenge for them and keeps them sharp. They like the challenge of trying to figure out what the market will do next.

What is your motivation for trading? If, like many individuals, you started trading merely to make money, then ask yourself, “can I make the same amount of money without going through all the inherent financial risks and the emotional stress of trading?” What if you were offered a job that you could make the same amount of money, even more? Would you take the job?

Let’s consider two traders who have just taken long positions in the S&P.

Trader A watches the market as it fluctuates around the entry point. Then, without warning, the market breaks three points straight down. The stop being used is a mental stop of two points. Trader A gets angry and exits his position with a three-point loss. Although upset, he realizes that this is just part of the cost of doing business and begins to look for the next setup.

Trader B also watches the market as it fluctuates around his entry price. Again, without warning, the market breaks and is now three points below the entry price. The stop is also a two-point mental stop, yet the trader does not exit his position. He gets very angry and begins cursing and banging on his monitor. He is yelling at the floor traders, brokers, whoever might be responsible for this move against his position. Now the market retraces about two points toward his entry. He is now feeling much better about things and is validated for not exiting his position and following his plan. Then, just as suddenly as the last break, the market drops another four points. Now he is fuming. His position is now underwater five points. And, yet, he still does not exit his position. His anger is fueled by the fact that he could have exited with only a one-point loss, but now has a five-point potential loss.

Considering the pain vs. pleasure principle, why has he not exited his losing trade? Often traders feel pain from losing trades, but don’t follow their plan or make the necessary change in strategies. Did Trader B enjoy his feeling of loss and regret? What was his motivation for not exiting? Did he not like being wrong? Or was it something deeper? Was it denial? Or was it about control. These questions require serious consideration before one could answer them, and it is essential to identify the motivating factor behind your behavior before you can change it.

The blanket view of the psychology of trading focuses on fear and greed. Fear as a primary motivation may show itself in different variations. Fear and greed may be utilized as general concepts to understand market psychology. To break it down, fear is primary, but does not provide the answer for the causes underlying all problems. The trader in a losing trade fears losing more. It is human nature to manage risks, so he manages his losses and stays with the losing trade longer than he should. Another way in which a trader exhibits fear is when he cuts his winning trades short. He takes the profit quickly out of fear of losing whatever money he has gained. Further research of the psychology of human behavior reveals that we are risk averse in our gains; we try to protect profits by exiting trades quickly. Nevertheless, understanding that motivation is a critical component of internal dynamics should shed more light on behavior, in particular, trading behavior.

Many times motivating factors are clear, and many times they are not. Motivation and emotions interact with each other in a complex format. Sometimes the motivation might be easily distinguishable from emotions. Other times, the line between them is blurred, making it difficult to find the underlying cause for behavior. One way to identify your inner or subconscious motives is to look at your value system. What do you value the most? How do you define good and bad? How do you define success and failure? The answers to these questions can help you figure out your motives for being in the market and help you define or redefine your value system for faster goal attainment.

If money is your primary motivation, then you will experience emotional swings associated with your performance. In some cases, when the market moves against you, you may get frightened and exit your trade prematurely. Then, after you exited your trade, the market goes in your favor, as was indicated by your trading system. Or when your position starts to show a bit of profit, you are compelled to exit quickly. Then, much to your dismay, you see the market continue going in your favor for a much larger profit. This type of motivator creates behavior that, in turn, results in an emotional roller coaster for you. You start beating yourself up psychologically and your self-confidence is shaken.

For the same reason, you may not pull the trigger since you had a losing trade and are concerned that your next one may be a losing one too. So, you tell yourself that this time you will look for more confirmation before you enter your trade. This time the market moves away from your potential entry point too quickly. Now you feel that you acted too slowly and missed a great deal of profit on the trade. So the next time you decide to be more aggressive and not wait for confirmation to enter your trade. As luck would have it, the market moves against you and you end up with a losing trade. “@!#%$$,” you repeat to yourself and curse the market and whoever is close by. You again start the negative internal dialogue and feel there is no end in sight.

Trading is a business and, like any other business, you need to have the fundamentals before your start. A love and passion for trading. A motivation for trading far beyond money. A sound trading system or methodology, a sound, trading plan, and the ability to implement that plan. If you only trade for the money, you would do best to find another career and avoid risking both your emotional and financial capital. Your motivation for trading is an important component underlying your behavior or lack of it. If you are not able to pull the trigger, I encourage you to find the real reason you are trading.

External Factors

External factors and your environment, such as your trading location, may also play a large role in why you can’t pull the trigger. Are you in an office or at home? If you are at an office, are you alone or in a group setting? Are there any windows? Is the room light and airy or dark and subdued? What color are the walls? All of these may or may not have an impact on your trading. In addition, there are other external factors. Your Internet connection, your PC, your account size, your broker, etc., all can have an impact on your trading. Though external factors may influence your behavior, they affect you only to the degree that your personality shows sensitivity to them.

External factors are more like catalysts; they affect your behavior and your ability to implement your trading strategies. However, the decisive factors are internal dynamics: your motivation, knowledge and personality traits. Among your personality traits, you have one dimension that is called the extraversion dimension. This dimension of your personality deals with your preference for being actively involved or engaged with other people and environments.

Depending on your score for the extraversion dimension, you could be categorized as either being an extravert or an introvert. If you like to take charge, assert your opinions and work with people, you are most likely an extravert. If you tend to be more independent, steady, reserved and comfortable being alone or working alone, you are most likely an introvert.

An environment more suited to your personality would facilitate better trading results. Therefore, you need to pay close attention to your trading environment and arrange or modify it so that it best suits your personality.

Understanding the internal dynamics and external environment will help you implement your trades and help you avoid the “not-pulling-the-trigger” syndrome. You need to acknowledge and identify your habitual behavior patterns or personality traits in order to be a successful trader. Paying attention to your personality will aid you in making the right decisions and increase your willingness to pull the trigger. A proper trading environment and support group along with your clear understanding of your trading system, habitual pattern and personality traits and your true motivation, all hand in hand eliminate the “not-pulling-the-trigger” syndrome and help you achieve your trading success.

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