Why is understanding trading psychology important??
Good trading is mostly about being your emotional best. Emotions or psychology are usually what separates the poor and average traders from the best. When you get the psychology right, you achieve trading maturity, which makes the biggest impact on your trading success.
Humans are emotional beings and usually it’s the emotions that fail them.
Have you ever been stuck choosing between reading a book and binge-watching an interesting web series? usually, binge-watching wins because that’s easy, more comforting, and of course, interesting. Even though hooking on to the TV does not add much value, we fail at this choice over and over.
How you behave in the above situation has less bearing on your life, but, if you carry the trait to trading and choose what’s easy and shun what’s painful, you would most likely be out of the ring sooner or later. That’s why training the mind to do the hard thing is the key to trading.
Though it’s applicable in all the professions, you have to be more careful about psychology in relation to trading, because trading can send you to the poor house..
Strategies and systems are no secret, there are thousands of books, a zillion Youtube channels, newsletters, and many courses that can help you learn about strategies and systems. That’s the part that comes easy if you are smart enough.
However, no matter how good the strategy is, if you don’t have the emotional edge to respond appropriately to market situations, you will not go very far in trading.
As a trader, you must recognize all the emotional pitfalls that traders face, and be ready to deal with them when they arise while trading. When you do this a lot many times, your reactions to such situations become unemotional and you achieve the zen state required for trading.
Types of emotions
Traders generally need to master two major emotions to be successful in trading - Greed, and Fear
Greedy traders take oversized bets and stick to positions longer than needed, to squeeze every penny of the profit. They hope a lot more than they should be hoping and leave too many things to chance. Especially, at the height of euphoria, they trade the heaviest, without proper safety nets, thinking that the party will continue forever. The most devastating of all mistakes, greed blinds people of the downside, making them less respectful of stop losses.
Unfortunately, traders that are too greedy return with their hands chopped when the tide runs out. Only traders who are cognizant of their greed tend to manage it well, saving their capital and profits.
Fear is good, it keeps you from losing your shirt, but too much of it will leave you with only one shirt.
Fear is the opposite of greed in trading and fearful traders often aren’t successful traders. You need to be risk-first but not overly fearful when it comes to trading.
A fearful trader would take the profits too soon, panic at the slightest sign of volatility, or bet too small to make any significant difference to the overall capital. He will try to avoid loss at any cost and while in loss, he would try to get his money back from the market, indulging in revenge trading, and giving back more in the process.
Often, a fearful trader will go with the consensus because it’s comforting to be wrong with everyone else rather than being wrong alone.
A fearful trader never goes too far in trading. He remains in the game just for the excitement and never makes a significant leap in his trading capital or wealth. Once the trader identifies the fears and learns how to deal with them, the road to trading success becomes much easier.
Getting the trading psychology right
Like any other profession, trading also can be done well with enough practice. The only prerequisite is to be an observer to your trading and learn from your mistakes.
Many successful traders have lost their accounts multiple times in their trading career, but they came back because they kept doing more of what was working for them and less of what’s not.
Here are a few things you can do to get the trading psychology right.
Have a plan: When you have a plan and objective for trading, you would always do what’s best for your trading account. A plan gives you much-needed clarity and purpose for your trading. When you realize that emotional errors take you farther from your trading goal, you would make a lot less of them.
Research: If you have researched your trades well, you would let the trades be until any of your trading rules are triggered. The research adds conviction to your ideas. Of course, you would top it up with proper risk management for the time you are wrong.
Journal: It’s always a good idea to document your trades and go back to understanding the reasons for the failed and successful trades. Your trading journal is the powerhouse of information that can help you enhance your trading game by leaps and bounds. Maintain a journal through thick and thin and you would see the difference.
Be flexible: A trader has to change course often and if you are too rigid in your ways, it will be difficult achieving meaningful success in trading. On the flip side, you also need to ensure that you don’t change your ways too often without giving enough time to whatever you pursue. Too much flexibility is also not good, you need the right balance.
Learn from the best: Read the best of the trading books/blogs and listen to the most successful traders. Learn as much as possible about your trading system and the mindset you need to develop for the same.
The Final Word
A human mind is hard to mend, especially when it has been conditioned through years of inappropriate feeding. This is why the difference between winners and losers is mostly the mindset. Therefore, no matter where you come from, what you know, and who you are, you need the right psychology to succeed in trading. You need to unlearn much, and learn more of the new. It’s an exhaustive exercise for the brain, but, worthwhile in the end.