How Important is the Psychology of Trading?

Lately, I have been revisiting the importance of the Pyschology of trading. It’s largely seen as a hassle for traders – it is definitely hard, don’t get me wrong…

But with enough time, your trading psychology is something you can actually enjoy working on.

It can seem quite boring when you compare it to the work you are doing with charts everyday. Trading psychology is certainly not for everyone.

However, it impacts every single trade you will ever take.

Should you just get out of this trade and take the profit?

Is that 1:2 risk-to-reward ratio good or should I push it to 1:2.2?

Your aim with these questions is to have an objective answer. Your mindset, however, will do whatever it can to do decide what action you take.

That is why you psychology is important. If you ignore it, it will have a negative impact on your trading and your trading career.

Let’s take a look at trading psychology for both new and experienced traders!

Psychology of Trading in Your First Year

When traders first start their careers there is a long list of psychological pitfalls that you are likely to fall into.

Things like Fear of Missing Out (FOMO) and taking trades too early are two examples of poor psychology that every trader experiences. They are really frustrating issues to deal with!

There are so many more of these pitfalls that newbie traders are vulnerable to. It can get extremely difficult to keep a positive mindset.

This highlights just how important and impactful trading psychology is.

Not only does it affect how you enter and exit trades – it also affects how you handle any bad trades, what you will do when you see the same problems, and what mindset you will have for the next trades.

So as a new trader you face a problem that impacts you much more than an experienced trader.

Inexperience

New traders are obviously put into situations that are new to them. Having no previous experience means you can’t have any knowledge on how best to react.

Every professional trader started out as a newbie trader. You are going to make some mistakes just like they did, so don’t beat yourself up about them!

Mistakes are not what you should focus on.

You should focus on your psychology!

If you react with anger or frustration when you have a bad trade, you are only putting yourself in a tougher situation. You are letting your emotions dictate your trading.

You could let that anger spill over into your next trade. That anger has now led you to revenge trading!

Personal events may coincide with bad trades and you start losing motivation. Your trading can start to become a source of frustration because it isn’t going the way it should.

Now, it helps in these scenarios to learn from your reactions. Often, you cannot predict how you will react to a losing streak.

One way to improve your mindset is to reflect on what emotions you felt in previous trades. You will probably find that you shouldn’t trade if you are angry or upset.

This all requires experience. But it also requires you to analyse your mindset. Put the time into this and you will see the results in your profitability.

A stable and consistent mindset whilst trading is the goal.

So, what’s it look like when you achieve that?

The End Game

Well, once you start to get an understanding of your psychology, you can use it to your advantage!

I don’t focus on the win percentage since it is not an indicator of your profitability. But when you start to master your trading psychology it will increase your percentage.

This is because of the simple fact that you will make less mistakes when it comes to emotional trading.

As you gain more experience, you get more of an understanding of when not to trade.

I can help direct and lead you toward knowing ‘when not to trade’. However, a big part of ‘when not to trade’ is knowing when your own mindset is not in the right place to take a trade.

You are going to be the best judge of that (or perhaps someone who is close to you)!

There is an alternative to just not trading in those scenarios. It takes a lot of practice and commitment though.

It is the ability to adjust your emotions and/or feelings in order to make a trade.

Let’s say you have had an awful day, you are angry at a friend and they have let you down. If you took a trade in this state you would usually make rash decision.

An experienced trader, however, could still trade and not let these emotions impact his decisions.

Think of Usain Bolt getting in the zone before a 100m final – no one and nothing can penetrate his mindset before that race.

The same can go for trading. It is just very difficult.

You will have to learn to control your emotions, because you cannot stop them.

With experience and time, you will be able to better handle situations and identify scenarios where you feel confident enough that you can trade.

Thus, being in control of your emotions will lead to more trading opportunities. And isn’t that exactly what you want?

Challenge Yourself

You need to challenge yourself and your mindset to improve it. It can be a scary thing to practice trading when you are emotionally vulnerable – you may lose trades.

So use a demo account! You will have to perform on your live account at some point, sure, but you can start on a demo account.

It is the one fail-safe way to practice and test anything when it comes to trading. Your capital won’t be at risk and you get the opportunity to take trades when you normally wouldn’t.

Make sure that you are trying to get in control of your emotions when you do this! If you simply start to demo trade when you are angry and you’re not even trying to let go, then you aren’t really trying to improve your mindset, right?