Litmus test for trading psychology: Is glass half full or half empty?

Is an individual’s trading psychology affected by his world view?

The half filled glass is often used to illustrate a situation that could be cause for optimism (half full) or pessimism (half empty). From Wikipedia: it is a test of an individual’s Weltanschauung. 

The purpose of the question is to demonstrate that the situation may be seen in different ways depending on one’s point of view and that there may be opportunity in the situation as well as trouble.


Enter our own litmus test – daily chart of AUDCHF and XAUUSD

The AUDCHF has been falling for 12 weeks.

Do you see:

  1. A great trend and the opportunity to short some more.
  2. A very oversold pair that is just so cheap to buy.
Daily chart of AUDCHF

AUDCHF falls for 12 weeks and enters potential week 13


Gold XAUUSD is now into its eighth month of fall.

Do you see the chance to short it with the trend or a generational buying opportunity?

Daily chart of gold

Fallen for past 7 months and now into #8


Individual trading psychology comes in a spectrum

On both ends are the perma-bullish and perma-bearish. The perma-bulls are very optimistic individuals who might brush off bad news while perma-bears are pessimists who see bad news as vindication. Everyone else falls somewhere in between.

If you have chosen to short both pairs based on the chart above, you are a good trend follower and can surely ride a big price wave when there is one. If you have chosen to long both pairs, you might be challenged by your trading because you are always unsatisfied with the status quo and want to do against the majority.

I am inviting comments: how many other types of trader psychology are there? Also read this story ‘Internal hurdles on the road to successful forex trading‘ by Jerome Lee.


Update on 26 June 2013 – personal world view works as filter

I have been thinking about this posting since I first published it. My personal observation of trading psychology is this – that there are individuals who are very optimistic and there are those who are very pessimistic. As mentioned before, optimistic individuals brush off bad news while pessimistic ones embrace bad news as a vindication. In my opinion this becomes a filter or trading bias. An optimist sees a market reversal as a correction to buy some more. His natural reaction is to buy every dip in the market. A pessimist sees every market correction as a reversal. He is either short (many times wrongly in a rising market) or he keeps closing winning positions.

There are many shades in any spectrum. I often wonder why many apparently good traders are very ‘fluid’. They adjust very quickly to market changes that do not appear to be rule-based but accurate judgement. When I talk to some of these folks, some of them come across as non-committal, people who do not have strong opinions. Is this a quality that makes them good traders?

Rounding up my ideas I think that there are many forces at play but amazingly they seem reinforcing yet contradictory.

  1. Conviction is a quality that traders need to hang on to winning trades but a person with strong conviction colours the way he processes market information i.e. becoming over bullish or bearish.
  2. Using a rule based method to trade could help to diminish the effect of personal world view but rules may become a stumbling block for good traders.

Are there ways to select good traders? How about ways to make traders with ‘bad’ trading psychology into good ones? Is this written on the face? Or in educational qualification? How do companies hire traders? Do they hire many and then let the ‘jungle of the market’ enforce natural selection so that the fittest survives?


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11 thoughts on “Litmus test for trading psychology: Is glass half full or half empty?”

  1. Kai says:

    seeing it as very bearish to short is also acting as an opportunist in a optimistic way isn’t it?

    1. Soh Tiong Hum says:

      It is true since being pessimistic with AUD in this context means you are optimistic with CHF. But I mean there are also contrarians who want to long AUDCHF when everyone else is short and when they do get it right with a long, they shoot themselves by turning short again. Just party poopers.

  2. jayromelai says:

    COWABUNGA ! ride the wave and be a trend follower

  3. guoyong14 says:

    xia xia xia!

  4. Ou Yong says:

    The trend is my friend. The sight of the chart doesn’t evoke too much emotion for me. I will just stick to the plan and find the necessary SR lines and see if a setup that meets my trading plan exists.

    1. Soh Tiong Hum says:

      Great attitude. I like +1

  5. Vince Ding says:

    I can see both Long & Short opportunites. I can go Short by following the Trend and Long for the retracement. (Counter Trend).
    But, its easier said then done, cause of internal hurdles. Greed, fear, am I right/wrong and many other factors…
    I’ve tried all of the mention hurdles on Jerome’s article and the title fits very well “Internal Hurdles on the road to successful forex trading”.
    1. Jumping the gun when triggering orders
    2. Sitting on losses for too long
    3. Taking profits too quickly
    4. Over-trading
    5. Shifting plans mid-way in a trade
    Would like to add the following too:
    *6. Suicide trading – Self Destruction Mode
    – When the trade are against you, you put in more lots hoping to recover your loses. hahahah
    I think it’s part & parcel for every trader to experience this up and down journey. Its only when you hit the walls and feel the pain that you will start making the effort to change. Upon the change, will be repeating and maintaining the winning habits towards your desired goals.

  6. Veera Raghavan says:

    I would like to follow the trend. Will wait for retracement 1234 and take position.

    1. Soh Tiong Hum says:

      +1 I like. Trend following is the path to trading longevity. Because traders who keep picking tops and bottoms might get it right once in a while but wrong most of the time. Trend followers will be right most of the time and only wrong once – when there is a genuine reversal.

  7. Helmy Hamzar says:

    Personally, while I like to follow trend, sometimes, I must admit that itchy finger to go the other way around does happen to me.
    To be able to stick to a conviction/rule/trend, to me, is not to have emotion (which is easier said than done). I noticed that whenever my running trades yield good result, I tend to either lose, breakeven or exit with much smaller profit. The reason for this, in my opinion, is the blur vision created by a happy emotion which leads to inability to recognize a change of trend or deep pull back or refusal to believe the change of trend. For this reason, I adopted a “no comment” stand whenever I have a running trade. I only speak about it when the trade has been completed. I don’t know if others have similar experience.

    1. Soh Tiong Hum says:

      +1 I like. Helmy you have shared something that people who really trade go through. It is hard to believe if an individual comes out now to say that he is not affected at all.

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