Straight talk: Most traders lose money. The reason why? Psychology.
You can be a brilliant market analyst or an excellent chart reader, or have a great trading process in place, but the truth is this: Both trading failures and even successes can leave a subtle negative imprint on your trading psychology that, if left unchecked, will creep into your trading style and hurt your long term results.
And worse, in many cases traders recognize way too late that their psychology is an issue and they get to the point where they blow up their accounts or they are literally so traumatized on some level that they start questioning every move and see conspiracy theories everywhere and can’t pull off one decent trade. Whether consciously or not, many traders recognize that their psychology impacts their trading to negative effect but more often than not they find it extremely difficult to change their behavior. And that failure to manage their psychology spells the ultimate doom for their trading aspirations.
Many new traders initially come to trading with a premise somewhat similar to this: On the surface trading is an easy 50/50 proposition. Your trade is either profitable or not. And since you can control your loss with a stop and your winners can rise for years on end, coupled with the fact that markets historically rise most years, one should be able to make money in the market. Sounds simple enough. But it isn’t.
From my years of trading and speaking to many traders I have come to realize that the topic of trading psychology is simply the most core element of trading that is the most overlooked and yet the most critical one to master. Indeed I have come to recognize psychology as the central binding aspect of my trading process.
Let me Share you Conversation with one of my Students during our 1×1 Interaction
Raj tell his trading Problem , ” Sir I win sometimes, but when I lose, I lose big and lose my profits of last few trades and also my capital, Its the 4th time I have buusted my account in last 5 years.”
I ask him a Counter question
“Why are you putting on big trades? Do you see a high probability setup that warrants increasing your position size?”
Raj admits, “I do not have a good reason. I just want to put on a big trade to make huge profits.”
I again ask Raj
“But if you do not have a sound reason for the trade, why put it on and take such a big risk?”
Raj gets Frustrated but answers after few mins,
“I just need to make big profits. I have got my dreams and ambitions. I want to be a success, so I will finally get the respect I have always wanted, I want to showcase my big Profit Screenshot on Social Media .”
Raj is human. He craves success and trading offers him a way of gaining success in life. But Raj carries around a lot of “psychological baggage.” In other words, he has unresolved past conflicts that use up his limited psychological resources, interfere with his concentration, and do not let him focus objectively on his trading. His motives to trade successfully are coloured by un met psychological needs, and this baggage prevents him from trading calmly and without bias. Not all traders carry psychological baggage, but if you are one of them, it would be wise to acknowledge problems you have in this area and work them out.
There are many kinds of psychological baggage, Carrying psychological baggage with you is not exactly the same thing as merely having disturbing memories of past trading losses; it is deeper than that. For example, many traders face severe drawdowns in which they have made trade after losing trade before finally hitting a winning streak. During the times of severe drawdown, some traders, especially novices, may feel a little disappointed, and thus, they may be carrying around a little psychological baggage, but not necessarily a lot. Ideally, a trader with no psychological baggage views the drawdown as nothing more than overhead expense of trading.
Trading is based on odds, and the odds are such that even a top-notch trader may face a drawdown. So it is best to look at a drawdown as nothing more than a minor temporary setback and press on. But for the trader with psychological baggage, the drawdown may take on greater significance: it may represent a “personal failure.”
When a minor event starts to symbolise a “bigger issue,” it often reflects long-standing unresolved psychological conflicts. When a trader starts thinking, “I do not have the skills to get past this drawdown,” he or she is carrying psychological baggage from the past into the current trading situation. Although psychological baggage is often deep seated and reflects long standing unresolved conflicts, it can be resolved over time through intense self-reflection and introspection.
Carrying around psychological baggage influences what you do. Regardless of how much actual financial capital you have on the line in a given trade, the trader with psychological baggage has personal emotional capital on the line as well. In addition to the money, such traders have their self-esteem and self-worth on the line.
The trade holds colossal psychological significance, and should the trade be a loser, its impact has even greater personal impact. When the pressure is on, even the best of us may wither under the strain. The weight of psychological baggage puts even more pressure on the trader. There is a hidden agenda in each trade. Not only must the trade be a winner, but it must also validate one’s personal value. Trading is hard enough without placing extra pressure on oneself. Do not carry extra dead weight by carrying heavy psychological baggage. Lighten your load. Identify your psychological baggage and cast it aside. You will find you can think more clearly and decisively. You can focus your attention more easily, trade your plan, and watch the profits roll in.