The Importance Of Psychology In Trading

When we discover the world of trading, usually we just jump quickly into technical analysis and forget about money/risk management and psychological sides of trading. We just want to make money based on some trend lines and indicators but at the first trade turning on against us, we would lose our self-control and feel fear and hope for the first time without knowing what to do. DON’T FORGET THE PSYCHOLOGICAL SIDE!

 

Emotions

Controlling your emotions is the key to be a successful trader. You will have to deal with Fear, Excitement, Greed, Ego, Hope and so on, all of these emotions can hurt you badly if you don’t know how to manage them. Losing streaks activate your ego and push you to trade bigger meaning taking much more risks than you can afford to, just to get back your losses. Winning streaks on the other side, decrease your fear of losses and increase your sentiment of excitement to make a ton of money quickly. In both case you become a gambler and not a trader. Emotions distort your capacity of judgement. If your trade goes not into the right direction you will start to feel fear hoping for the price to reverse, then because of the price is approaching your stop loss you will even think of remove it or wider it to still have some chances for a reversal. This situation can be dramatic and just blow up your account. Chasing and creating opportunities is the reflection of being greedy. Because you want to be rich quickly as you have seen on Instagram, you will enter anywhere at anytime just because you see an opportunity where there isn’t one.

Money

The money used in your trading account should not be the money you use to live. Because of the trading nature, you can’t know in advance when you will sell or buy and if you use your trading account to pay your bills, you will have definitely more pressure. You also have to assume that your entire account can be lost. I hope it will not be the case, but you have to assume that. When you trade, you have to be as much as possible detached with your P&L (profit and loss). If you look in real time how much your are winning or losing, you increase your chance of doing something stupid just because of your emotions. For example, during a retracement, you could be in a situation where you are losing $200 and your stop loss is just $50 away. The natural way of thinking would be to cut your position to “preserve” your money. BUT, because where you put your stop loss was the level where you were comfortable to accept a loss, you should let the market do the job. By not looking at your P&L you decrease substantially your chance of doing the wrong thing at the wrong moment. Finally, don’t be greedy, just preserve your capital and let your gains accumulating. You don’t need to be full invested or trade 500 times a day, one high probability trade would be better than 100 mediocre trades.

Learn to know yourself

With trading, your personality will be challenged a lot. Because you are using your money, every action you will take will have more impact on you and your mindset. Selling too early, buying too late, missing a trade and so on are facts that will impact your daily life if you don’t know how to manage them. You have know who you are. Am I usually patient ? Can I get angry quickly ? Do I usually accept to lose in games ? Do I want to play again and again when I win a game ? What happens when I lose ? There are so much questions that you can/have to answer yourself to know your personality. Work on your weaknesses, personality tests can be found on the web to know your strengths and weaknesses. If I tell you this, it’s because your personality defines your trading style and strategy. For example, whether or not I am patient will define if day-trading or swing-trading would be more appropriate for me. Do not underestimate this, the weakest element in trading is you, not the trading style, not the trading strategy, but you.