How to Develop a “Trading Brain”

“The greatest enemy of the trader is fear. He who is afraid loses.”

—Norman Welz

That is the main idea of “Tradingpsychologie,” a German book on trading psychology published in 2012. Many readers and reviewers said it was the finest book on the topic they’d ever read, or the first that was really useful.

Norman Welz, the book’s author, is a psychologist and journalist who became fascinated with the stock market and its psychology. His area of expertise is trading psychology, in which he has not only significant experience but also some unique insights. He teaches traders how to grow their minds in the appropriate way, among other things.

Welz emphasizes that the focus on practical trading psychology distinguishes both his study and his book from the considerable literature in the topic. Although it is common known that traders need discipline, merely embracing this concept is insufficient to allow investors to function appropriately.

Key Takeaways

• According to Norman Welz, author of the 2012 German book “Tradingpsychologie,” having the appropriate attitude is key for becoming a successful trader.
• To address trading psychology, Welz works with traders’ minds using the subconscious and hypnosis.
• According to Welz, effective trading requires personality adjustment, since individuals who focus only on charts and trends would eventually flop due to the numerous emotions that come into play.

How to Develop a Trading Brain

It Is Truly All in the Mind

The crux of the issue is that most individuals value and need security in all forms, yet “trading is the most insecure industry you can be in,” according to Welz. He claims that no other occupation elicits such a wide range of emotional emotions and reflects so much of our personality. Welz even claims that stock market operations “personify money”: “We don’t simply transfer assets and money; we become the money.”

To trade efficiently, you must have the appropriate attitude. Nothing is more difficult, however, than distancing ourselves from the myriad causes that generated our attitudes in the first place and control how our brains work. Parents, family, friends, the environment, society, the media, literature, and other factors all have an impact on us. All of these pressures tend to fix trading habits that are often dysfunctional or inefficient by the time we start trading. Attempting to modify these tendencies is both challenging and terrifying.

Why Do Traders Neglect the Power of Psychology?

To comprehend Welz’s method, one must first comprehend the ubiquitous importance of psychology and the brain. While the idea that psychology is important in the stock market is not new, Welz argues that trading is entirely psychological. We could never measure financial risk or spot patterns without a psychology. “No brain, no stock market dealing,” Welz claims.

Thus, mental fortitude is critical to trading success. Furthermore, about 95% of our actions are subconscious, and we tend to repeat our habits. All too frequently, this replication entails repeating incorrect or even catastrophic actions.

To back up this claim, Welz cites a research in which 120 traders were given a strategy that had statistically shown its inherent worth in 19 of the preceding 20 years. After a year of testing, it was clear that 119 of these traders had failed the system because their mental proclivities had led them wrong. Except for one trader, everyone had the improper thought processes.

“Success comes from the brain,” Welz explains. The technique was sound, but the traders’ attitudes and mentality in applying it were not.

Most traders are males who believe that psychology isn’t all that important. They believe that what counts is that they are coldly reasonable, well-informed, and experienced. However, logic, knowledge, and experience, according to Welz, are ineffective if the brain is not properly configured and tuned. So, what can we do to train our brains and subconscious minds to behave properly?

Welz’s Approach

Welz manipulates traders’ minds using the subconscious and hypnosis. Trainees are placed in a trusting mindset, and the essential capabilities are ingrained in subconscious brain areas. Consider the following if this procedure seems strange: For many years, Welz has helped individuals overcome their concerns and barriers, allowing them to win sports competitions and even an Olympic gold medal. Furthermore, he has assisted traders in earning money by generating the appropriate mental energy, motivation, and, as a result, conduct. He emphasizes that each individual has their own set of mental bridges and obstacles that must be crossed or conquered in order to achieve success.

“Trading discipline” refers to changing one’s behavior in the desired direction and overcoming mental resistance and fear, which are common roadblocks. Welz argues that “armies of resistance” exist, particularly in the context of trade. The trading brain, in reality, includes the combination of appropriate investing and market knowledge with appropriate mental ability. The regular talents are not irrelevant; they are just overshadowed by the incorrect mental and behavioral tendencies.

Thus, effective trading necessitates personality development. “People who are unwilling to undertake this should not even bother with trading,” Welz says. Those who focus only on the so-called logical components of charts and trends, including all those patterns like “flags, triangles, and channels or stops and trading ranges,” will eventually flop and even control the markets due to the many emotions that unavoidably come into play.

According to Welz, the above is “the ultra-short version” of his idea, yet it represents the substance of the subject. In addition, he thinks that everyone can become a trader and conquer their concerns. If individuals are sincerely determined to work on themselves and are not clinically unwell, they may overcome their core fears. Furthermore, they must have a firm grasp on reality if they are to achieve success. Of course, financial knowledge and skills, information, and research continue to be important.

However, getting there is a difficult task. People should not expect to “start with a mini-account and live off their profits as a professional trader within six months,” according to Welz. It requires time and effort. Welz feels that if this was not the case, the roads would be clogged with Ferraris and Porsches.

Frequently Asked Questions

How do you develop a trading brain?

To be a successful trader, you must grasp the importance of emotion and psychology and actively take efforts to reduce their effects. Maintain a consistent routine and an objective trading approach. Document your transactions and how they turn out by utilizing pre-determined entry and exit points that may be amended based on reasonable criteria.

Who is Norman Welz?

Tradingpsychologie: So denken und handeln die Profis, by Norman Welzis, is a German book about market psychology (“Trading Psychology: This is how professionals think and act”).

What does market psychology teach us?

Because market participants are humans, markets may exhibit herding behavior and other irrational tendencies such as panic selling and irrational exuberance, which leads to asset price bubbles. Recognizing the presence of market psychology allows us to see that markets are not always efficient or reasonable.

How can one use market psychology to their advantage?

People may determine when market psychology, such as fear or greed, results in oversold or overbought situations and execute contrarian trades—buying when others are overselling and selling when others are overbuying—by doing their own research. It may also beneficial to get on trends early rather than chasing trends after they’ve gone beyond their basics.

The Bottom Line

The importance of trader psychology is often overlooked, and too much attention is focused on the technical side. While both are necessary, it is undoubtedly the appropriate mentality that distinguishes successful traders from failed traders.

However, studying the technical components of trading is easier than developing a top-tier trading brain. The latter often requires focusing hard on one’s own personality qualities and breaking bad habits. This is a difficult process that needs commitment, patience, and, in many cases, the assistance of a qualified coach. Nonetheless, the outcomes are extremely likely to pay off.

Investopedia does not provide tax, investment, or financial advice. The material is offered without regard for any individual investor’s investing goals, risk tolerance, or financial circumstances, and may not be appropriate for all investors. Past performance does not predict future performance. Investing entails risk, including the possibility of losing money.

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