Trading Psychology

What Is Trading Psychology?

Trading psychology refers to the emotional components of trading which include our thoughts and beliefs about;

•  Wins and losses
• Trading plans
• The nature of technical analysis
• Risk management
• Money management

Forging a healthy trading psychology helps traders grow above the damning influences of emotional trading decisions caused by greed and fear. 

Unfortunately, most new traders fail to improve their trading psychology and may end up forming bad trading habits or making trading errors, which are a major roadblock to consistent profitability. Some of these trading errors include;

• The Fear of Missing Out: The fear of missing out on trades causes traders to make trading decisions outside the rules set by their trading plans. This can be overcome by understanding that there are endless opportunities in the forex market, and developing the patience to wait for the next setup.
• Fear of Losing Trades: The fear of losing trades forces traders to hesitate before entering trades, or cut winners short and hold on to losers. This prevents them from optimizing the returns their trading systems have to offer.
• Greed: Greed is an emotion that results in illogical trading decisions, such as adding more positions to losing trades and ‘hoping’ that they turn out profitable.
• Poor Risk Management: Overleveraging and failure to properly define risk are common trading mistakes. Poor risk management is the reason why some traders who are knowledgeable about technical analysis find it difficult to maintain a steadily rising equity curve.

If you’re trying to overcome these trading errors, here are 5 tips to boost your trading psychology! 

•  Implement a Risk Management Technique

Demo trading has its advantages but for most traders, it is seen as a way to simply test their trading methodology. This causes them to ignore the importance of defining their risk percentage (or amount) before entering trades. This habit prevents traders from making consistent profits or maintaining steadily rising equity curves while trading live accounts.

Managing risk is the first step to optimizing any trading methodology. It is done on the premise that as traders, we don’t know what could happen next in the market but by managing our risk, we can remain profitable by mitigating our losses with our wins. Poor risk management may also be caused by greed and the desire to make an unrealistic percentage return in one trade. This leads to overleveraging and colossal loss of deposited funds in the event of a losing trade. 

To improve your trading psychology, endeavor to define your risk before entering every trade. Your risk per trade can be defined in terms of percentage using a position size calculator. Professional traders risk 0.5% to 2% per trade.

• Create a Personalized Trading Plan

A trading plan is a set of instructions that guide the trading decisions we make. The trading plan should outline the criteria to enter or exit trades, the risk percentage, how to manage trades, and when to stay out of the market. It is a formula that contains rules to curtail the natural self-sabotaging impulses that make us susceptible to trading errors.

Trading with random variables and entering random trades would produce results that are random or non-reproducible.

Trading with a trading plan ensures that the results of your trading methodology are reproducible. This helps you overcome the fear of losing trades, creates confidence and trust in your trading system, and consequently strengthens your trading psychology. 

• Develop a Probabilistic Mindset

One of the realities of trading is that it is impossible to predict the outcome of every trade. As a trader, you have to think in probabilities-some trades are high-probability while others are low-probability trades. Understanding this is integral to the development of the right trading habits and a winning mindset. 

Probabilistic thinking helps overcome trading errors because understanding the randomized nature of the outcome of your trades, helps you ensure your risk is managed since you don’t know which trades would be winners or losers. It also improves your attitudes towards wins and losses because you realize that every loss brings you closer to the next win, and every win brings you closer to the next loss.

•  Improve Your Technical Analysis

The technical and fundamental aspects of trading aren’t as disengaged as most people believe. One of the ways to improve your psychology as a trader is to ensure your method of technical analysis works. This ensures you have a profitable system that can be trusted. Optimizing or improving your strategy can be done by vigorous backtesting with or without certain variables or ‘confluences’. Backtesting also helps to improve your pattern recognition skills. This familiarizes you with your setup or strategy, making it effortless to spot opportunities in the market when they present themselves.

Optimizing your technical analysis helps your trading psychology because knowing that you have a system that works, helps you give less emotional reactions to losses. 

• Discover Your Trading Style

Professional traders believe that to become a disciplined trader, you have to be a disciplined person. This is because our personalities and attitudes as individuals, affect our styles of trading and our successes as traders. A lot of new traders struggle with self-doubt because they keep trying to be like everyone else instead of discovering themselves-their strengths and weaknesses. 

Self-discovery as a trader involves; 

• Finding a trading style that suits your personality(scalping, swing trading, day trading).
• Discovering the trading errors you are most likely to make and taking steps to overcome them. 
• Building a trading strategy that works for you. Alternatively, you can optimize an existing one to suit your style of trading.
• Understanding how your personality traits impact your trading. Work on your strengths and find ways to mitigate the impact of your weaknesses.

Discovering yourself as a trader allows you to optimize the mental edge provided by your personality traits. This is important because many new traders move from one system of trading to another, struggling with self-doubt and inconsistent trading results. Self-discovery ensures you channel your time, energy, and mental capital into improving your trading results. 

Finally, becoming a consistently profitable trader is a marathon and not a sprint. Improving your trading psychology could mean unlearning poor trading habits and learning new ways of thinking about trading in general. Fortunately, with hard work and dedication, you can improve your trading psychology and become the best trader you can be!