Trading Psychology & The Ego: Why Mindset Comes Before Strategy

Carol Harmer · Asset Management · Beginner

Ask Carol Harmer why most retail traders struggle and she'll point to ego before strategy. In this module she explains what ego-free trading looks like in practice: being equally comfortable long or short, letting market conditions decide, and getting out quickly when a trade is wrong. Drawing on more than 40 years of trading through Black Monday, the ERM crisis and other extreme market events, she covers: Why ego is so damaging to decision-making How wins and losses drive emotional trading, and how to manage it Why patience and discipline matter more than excitement Recognising overtrading, and when not to be in the market Beginner to intermediate. This is the foundation for Carol's risk management and chart reading modules. Educational content only. Not financial advice. Trading involves risk and you can lose money.

Transcript

Good morning. My name is Carol Hmer and today I'm going to talk to you about the importance of psychology when you're trading markets. It is probably the most important thing as new traders that you need to learn because trading is 90% and that's a huge piece 90% of psychology.

Now obviously you know the markets that I've worked through and the things that I have I've done and the circumstances that I've worked under you know have been extremely psychologically challenging and unless you master this really important piece [clears throat] of information then unfortunately you know trading isn't for you.

But as I say, because you're working within a 90% structure of psychology, and everybody's everybody is the same. So, what I'm going to do in this video is I'm going to run you through um I'm going to run you through things that I think are important to new traders. I really enjoy teaching and this bit is so easy to master.

And once you've actually got your head around this psychological barrier, then you will be a far better trader than what you would have been if you're not understanding actually what runs the market. And it's quite surprising as I go through this little presentation, what runs the market.

Now, most traders don't fail because they can't read a market. They fail because they can't manage themselves. So, what I'd like to show you is why you break your own rules, why you hesitate or overtrade, why the losses feel bigger than they are, and why discipline is harder than strategy. And that really is the case.

You know you it's in it's astounding how much psychological willpower you need to have to become a trader and to make not to become a trader but to maintain being a trader.

Now in the psychology section what I'm going to point out to you is why ego is the is the trader's most hated tool that you can live with. It really is a battle of wills because you need not to have an ego when you trade, but you need to be confident when you trade. So there's a big difference between ego and and confident.

For example, as soon as you take a position, you are either in the long camp or the short camp. Now, you've taken that trade because of a reason. Okay? The reason being that you feel that you've got enough I use three reasons to be either short or long of the market. The problem comes when the market goes against you and you need to flip the trade. So for example, you've gone from being a buyer to being a seller.

That is a very difficult thing for traders to get their head around and yet it is what runs the market. The reason being is it it all boils down to ego. You've taken that trade. It's your personal trade. You don't want to be any other way around.

And I mean, it's different these days cuz it's just you and a laptop. But in my day, you know, once you made a statement, I am long, you didn't really want others to realize that you'd made a mistake or vice versa. So I had to learn very very quickly ego doesn't come into it. And one of the reasons I I learned that was because I was seriously into charts.

So for my reasoning behind a trade would be I would buy say the T- bonds. I would buy the bonds at a certain level because given the market conditions the criteria would be for me to be long.

So supposing so you've got your entry point, your exit point and your stop loss. So the market goes against you. So you need to be able to say, well, I was long because of it's gone down through my entry point, which it shouldn't never do. You should always put your stop at break even. However, for this little master, you go, it goes below your entry level and it starts to go away from you.

It is very difficult to get out of the feeling of, hey, I bought these at 31. At 26, they're a lot cheaper to buy. No, that isn't the that isn't the case because the market has now gone in the reverse order that you thought it was going to go to. You need to have that not ego brain, but you need to be able to flip that trade and go, I was long because of that reason's now gone. I want to be short.

If you can master that and that is one of the most difficult things to do because no one wants to admit that they're wrong. But if you go through the cycle, you know, you've got the fear, the grief, the hope, the frustration, revenge trading, the I'll just take one more trade trap. You know, you go through all these. Now, these are going to come up every single day.

And my way of trading, my style of trading is I probably take three to four trades a week. Now, you're going to get platforms that don't want you to do that. They want high frequency traders, but you don't want to be like that because you need to be able to look at the market, make a strategic entry of on markets, you know, what one's going where and whatever.

And what I do is I do most of my homework, virtually all of it still on a Sunday when I have no noise, no markets are open. I can go through what's happened the previous week and I can then make my trading strategy for the week. Please don't get me wrong. I get it wrong. You know, after 44 years, I misread some of the markets, but I'm very quick at knowing where I'm wrong. I don't have an ego.

So if it's not going my way, I'm not going to sit there hoping that it's going to come back. I'm not greedy. I'm not fearful of it. I get frustrated, but not to the extent where new traders gets frustrated. So this is a very easy lesson to learn if you follow the rules of psychology in trading and most don't and that's where they come unstuck. Let's take for example the S&P chart.

Now the whole world wanted to be short and it was the right move at the time. So you saw this topping pattern play out here and the market was going down in quite a structured structured way. So you would have seen people short either when it crossed here or down below this 200 day moving average. So, and then it reversed.

So, the market went lower, but obviously you would have had your take profit in somewhere around this area here and then resold. Now, when it reversed and started to go up, this wasn't a place where you could resell the market, it was actually telling you that, hey, we're not staying lower. We've gone up. We've broken through some key resistance on the top side and we will continue.

And one of the reasons this mark this fueled the market was the fact that no one was expecting it. They were all expecting it to if they were all expecting it to go.

I mean I was hearing end of the world scenarios. So, you know, that's the sort of thing that you need to be aware of is that as soon as that trade goes wrong, you don't have an ego. It's not your trade. The reason for taking that trade is now gone. Flip it. You know, it doesn't matter. Um, and many many traders fall into this trap. You're not alone. You know, I've I've seen it for the last 20 years.

But if you know how to use your strategy and use psychology in the market, then at least you have a really good chance of becoming a profitable, consistent trader. And that's what we're after, profitability and consistency. There's no point having one big win and then losing the next 100 trades. That's not what makes it work. And that is why 90% of the retail fail.

If you're taking out the emotion of the trade and don't get me wrong, we as traders, we are emotional, you know, that's the way we are. So, we are emotional, but using charts and technical analysis, it should should take the emotion out of trading. Um, I still get emotional. I think most traders do, but you need to cut down the amount of emotion that you put into the trade.

And as I say, that is where ego comes into it. It's not a great thing. You need to be flexible. You need to be able to flip a trade. And it doesn't matter what market you're in. It doesn't matter. You're not buying cheaper or selling at a higher level. The market is telling you something. You're wrong. Get out and rethink.

So apart from that you have two things that run a market. Fear and greed. Now fear and greed they drive selling and they dry buying. So what we need to do is you can't take fear and greed out of a market because it's in there. It's it thrives on that. What you need to do is harness that and apply it to your trading strategy.

So you can't be if if you're in any way scared of the market, that's when it will get hold of you, chew you up, spit you out. Now, there have been occasions that have been pretty volatile in any trading environment with you had the 1987 stock market crash. We had the ERM in 1991.

We had the 2000 stock market tech bubble burst followed by the 2001 stock market crash. We've had 2008 2009, you know, where central banks were bailing out banks and we had the credit crisis. We had COVID. That wasn't an easy time to trade through. However, if you can apply psychology to the market, then you really have much more than a 60% chance of actually going through and making it as a trader.

But understand that the fear and greed is there. And understand that you could harness that fear and greed that you see play out in the market every single day. And you can do it to your advantage. That's the key.

And I learned that very early on in my trading career back in the 19 early 80s. I learned that that was probably my first lesson. But then I could see it because I worked on the life market. So you had, I think at the time when we went live, six or 700 traders, 300 of them in the 30-year long bond, you know, so you could see the fear and the greed play out in front of you.

And that's a thing that is missing, I feel, today with the retail trader trading on his own with a laptop. It's you you don't see the flow. You don't feel the market.

And that is what you you really do need. You need to be able to see what it's doing, know what it's doing, feel what it's doing, and apply the psychology to traders like bit like little sheep.

Whatever chart that you look at, it doesn't matter what one you look at, but whatever chart you look at, you see these patterns play out.

And even though I'm away and working from a desk, you know, back home now, my my training, if you like, being in on life for years and then being in a bank dealing, well, three bank dealing rooms and then going back to trade my own money on life and running hedge funds when I when life closed. You you get to know you just have this feeling about them.

So you can look at a price and know where the market is, what it's going to do, how the traders feel, who's running it, who's driving it. It's like I'm going to show you this Bitcoin chart now. You know, in this bit here, you couldn't find many buyers because Bitcoin looked like it was in a downtrend and it sort of was playing out this sort of pattern, expecting the next leg down. Again, we went sideways.

Now in the last two sessions we've actually broken above here. So you can see that everybody was shorting the market up to this line and they were you know I was I'm in contact with many traders and a very good friend of mine owns a cryptocurrency company. So, I know what they were doing because you can see when you've done it as long as I have, you can see what the market is going to do.

Here is where the fear and greed popped up. You know, because they were all short, they had to buy it back. That pattern didn't play out. Now, with Bitcoin, it's quite volatile. there is a chance that it's going to go back below and that this was just stops coming out of the market and the alos. So you have to be aware that there are other factors at play but if you are short you are getting out around here.

Now if it comes back you rethink go yeah that was the right idea I'll go short again. However, if we break above here, you go long. At the end of the day, what you're trying to achieve consistently, consistency, and to be able to read a chart, to be able to read a market, to be able to put all of your trading strategies into place, but understanding how a market works.

As I say, once you've grasped that, the rest is easy. It really is. And most traders fail at the psychology level. That they they do. I mean, because they can't they don't get their head around how markets act psychologically, which is a big mistake.

This is another thing that's going to hurt you is fear. If you're fearful of the market, then you have to rethink whether or not you should be in the business because being scared of it is is okay a little bit, you know, a little bit of fear is okay. You harness that into your trading, but you don't you don't be scared of the market. So, you don't go, "Well, it's broken this level and I'm I'm the wrong way round.

I've got to well, I now I've got to go long and But uh that will screw you. You know, you can't be like that. What you need to do is sit back, be calm, collected and work with the things that we discuss that we know a market will follow. I mean we do we know we know this over many decades and instruments might have changed human nature doesn't.

So, in 40 plus years, I see the same mistakes being made over and over and over again. And I try really hard to put it across that you can master this. You c you can, but you need to be able to not be scared of the market. That's one thing that will really hurt hurt you, and you know, we don't want that.

The other little one is greed. It is, as I've said, look, a liability in trading. The reason it's such a liability is because you chase more, you risk more, you ignore good setups, and you take on trades that you wouldn't normally take on. I I've seen it. I've seen people buy at a certain level. It's gone down. they buy more. It's gone down.

They buy more and you know it's it's the wrong strategy to have the wrong the wrong one. So once you've done your setup, stick to it. You know, you really must stick to it because if you can't step away from a market and you've got to be chasing it all the time, all you're doing is getting yourself in a real tizzy.

And at the end of the day, it isn't going to make you any richer, you know, and when we talk about being rich, the days of being able to make a million overnight on the life market, oh, they're gone. Okay, so what you want to do is you have to apply. Okay, I want to be a trader. Why do I want to be a trader? And unless you are committed and love it, you know, you you will you will fail.

Um, you don't have to sit in front of a screen all day long. Yeah. I don't I I I check it. You know, I run upstairs and have a look. Um, years ago, I used to use brokers and they would ring me and say, "Look, your your order's in here, Carol. It's around 10, 15 pips away. What do you want to do?" And I'd go, "Either buy or sell. Just okay. I've made my money. That's it.

Look again." But a lot of traders don't do that. They're always waiting for the big one. Again, I've lost count of how many the big one trades people want. You're not going to get them. And if you do, it's more by luck than judgment. Okay? So you want to be able to look at a market cleanly and once you've made your profit.

So if you enter the trade and you've got an exit level, exit it or exit half and bring the stop up so that that trade will not lose you money. I have seen many many traders that are I'm going to pull a a figure out of my head now. 15 grand up, for example.

Okay. And I've then watched them lose 8 to 10,000. And they've said to me, "Yeah, but I only lost 10 grand." I'm like, "You didn't. You lost 25 because you were 15 in profit and you're now minus 10. So you were greedy. You just thought it would go that bit further. Go that bit further." The trouble is when you've got a setup, you have to imagine.

Oh, not even imagine. But everybody's looking at the same thing. So that's why you take your profits. You don't you can always go back in the market, but you go back in the market once you've locked in your profit.

It's a very easy concept to follow and one that most traders find very difficult to follow. I should really have called this one despair, but this is what happens. You hope that the trade will come back into profit once it's run away with you from you.

You hope it does, but hope isn't always enough. Look at what the market is telling you. It tells you a story. Everything plays out on a chart. Yes, you do have fundamental data that comes out. Absolutely right. But the majority of traders are looking at charts and the news that comes out is a knee-jerk reaction.

Yes, the war with Iran wasn't great for traders at the time, but you you can use it to your advantage and you and you really can and most do in the professional world. It's in the retail world that this gets lost in translation.

So these are the emotions that we have. Fear, greed, revenge trading, overconfidence. You've got to be confident, not cocky. You need to have a little bit of ego, insywincy little bit of ego. Otherwise, you wouldn't go into a trade. You'd go back to fear. And this one, you don't revenge trade because you're not in the right frame of mind to do revenge trading. So, we leave that one alone.

It's been too often you see traders lose money and then go full pelt in. I'm going to get it back. I'm at the end of the day, they don't, you know, it is lost. So, watch that confidence. Every trader needs confidence. Overconfidence doesn't work. Okay? It really doesn't because you're you're only being overconfident with a scream. You have nothing to prove to the outside world.

It's different on the life floor when everything was open outcry. Ego came into it in a huge way. Huge. But it didn't it didn't make them a better trader. It made them a a worse trader. So that's what you've got to be aware of. You've got to be aware of these four trading emotions.

So the key factors of this little segment that I've done to you is put the stop in the system, not in your head. Once it's in there, once it's in there, it can't be taken out.

decide the risk before you enter. I use a 3:1 ratio. That's the way I trade. So, I would expect, for example, I don't put stop losses at percentage points. I put them where I know that I'm going to be wrong and that I can then reverse the trade. So, decide the risk.

Small losses. This is a key one. Small losses are tuition. Big losses are trauma. And that is so so true. You know, I've you see people that are defeated. So, I hope you've enjoyed this little look into the world of trading psychology. And as I say, it probably is going to be one of your best trading tools that you can ever imagine. And this is why I'm so hot on it.

For new traders, you need you need to know about psychology. That's you know get books read up go on the internet you know before you start trading understand the concept of how the markets work and how by using psychology you will be able to trade out through any market conditions and you can because if you couldn't I wouldn't be here would be I wouldn't be here, you know,

because I've traded I've traded through some real horrendous ones before the 1987 stock market crash. We had central banks intervening on a daily daily basis. And I don't know if any of you uh remember, you probably don't actually, the um SMB, Swiss National Bank. I used to work I used to work for a Swiss bank many years ago. I worked there for six years.

So I understood the Swiss National Bank and the Swiss, you know, don't poke them. Just don't poke them. And I remember that Euros Swiss was captured in the bottom of the the the levels was was 120. It wasn't going any lower because Switzerland would come out and it would defend the Swiss National Bank would defend the Euro Swiss. And it was Merkel at the time, Angela Merkel.

And she just kept digging and digging and digging and digging. And you watched Euros Swiss when it used to bounce off 120. It go 125 back 120 125. And this was going 120, 121, 121 and a half, 120. And I thought, this is not looking great.

And funny enough, I'd just started at this hedge fund and I'd only been trading with them um about three weeks and I had an office adjacent to my home and I had four or five traders in there and all professional traders obviously and I was looking at Dollar Swiss and the Dollar Swiss chart was like running out of steam.

So I went on on the platform and I sold dollar Swiss and all the guys in my office were all professional traders and at that time in 2015 the professional platforms didn't allow you to run spot positions I was different hedge funds could professional traders couldn't so they bought Swiss futures so they were in effect short dollar long the Swiss Frank anyway I went downstairs I went back into my house,

went downstairs to do something meanial, and two ran out onto the balcony and was screaming. And I was sure the third one had had a heart attack. So I ran back upstairs and the Swiss National Bank had come out and said, "Yeah, we're not defending the Euro Swiss anymore." And it plunged 15,000 points like that.

Now I was lucky. I was short dollar Swiss. My little band of traders, they were lucky. They bought Swiss futures, but virtually all the retail platforms, it was a it was a feed on effect. They just went closed and they didn't trade.

Where the professional platforms and the hedge fund platforms, there were prices all the way down. I think I got out of them. Oh, I can't remember. I can but I can't.

I can't tell you really. I was going to say I think I made the two-year profit in a day. Um and then we said then they told me the hedge fun said no we didn't want to make that much. We only want to make 1% a month. It's like go away.

But my point being is that when you see things that are looking to turn, you're imagining in your head uh the market doesn't want to go up anymore because it's the sellers are getting less and less and um it just looked to me things look they look either toppy basy or in a continuation pattern but that's how markets can move. That's probably the most um That's probably the most I've ever seen a currency move.

15,000 points. It's carnage. And to this day, Euro Swiss is not back up where it used to be a decade ago. Anyway, I hope you've enjoyed this little insight into trading and trading psychologically and being aware of what makes the market run. And um hope you take note of quite a few things I've pointed out. And all then I have to say to you is good luck on your trading journey. I wish you all very well.