How Important Is Psychology In Trading?

By | August 16, 2022 4:15 pm

Trading psychology contributes about 60% to success and position sizing contributes another 30%. Furthermore, most traders ignore the first two areas and don’t really have a trading system. That’s why 90% of them fail.

Maintaining the right mindset is one of the most important factors in being a successful trader. Find out how you can improve your trading psychology to minimise the effect of emotions and biases during your time on the markets.

As a market strategist for over the past 15 years, I’ve corresponded and provided market color to thousands of retail and institutional traders. In this post, I wanted to share what I have consistently found to be a distinguishable factor that sets successful traders apart. The difference that divides professional traders is an important lesson for all investors that boils down to trading psychology. This specific mindset is what prevents professionals from chasing losing trades and blowing up their accounts. I’m sharing this to help investors realize how a small and simple change may spark a drastic change in stemming underperformance that many investors suffer from.

First, I would argue that trading psychology accounts for 100% of success. Why? This conclusion is based on two findings. First, people generally are programmed to do everything the wrong way. They have internal biases that seem to lead them to do the exact opposite of what is required for success. For example, if you are the most important factor in your trading whether u trade in Forex,commodity or Stocks, you should spend the most time working on yourself, but the majority of people totally ignore the “you” factor in their success.

I now think that there are five components to trading well:
1. The trading process. The things you need to do on a day-to-day basis to be a good trader.

2. The wealth process. Exploring your relationship with money and why you do or do not have enough to trade with. Never ever trade with leveraged money or money you might require in short term.The more you do more you will be in pressure of making profits and which will eventual lead to losses.Do not belive me check you ledger when you have done trade with money you required in short term.

3. Developing and maintaining a business plan to guide your trading. Trading is as much a business as is any other area. The entry requirements are mucheasier because all you have to do is deposit money in an account, sign a few forms, and start trading.However, the entry requirements for successful trading require that you master all the areas listed here. That requires a lot of commitment, which most people do not have. Instead, they want trading to be easy, fast, and very profitable.

4. Developing a system. People often consider their system to be the magic secret for picking the right stocks or commodities. In reality, 70% of your job should be done as soon as you enter the market. You should be cleasr about your sl and Tgt.Most of traders loose here because they do not have a definite trading plan nor a trading system.They trade on their emotions which lead to eventual downfall of a trader and whiping out his trading account.
5. Learning to accept losses as part of the game and cutting them short is the single most important step towards becoming consistently profitable. It sounds simple, but in reality is extremely difficult for everybody. Why? Because we’ve been taught that giving up is for losers and we should fight till last breath. I certainly agree that you should not give up quickly, but only if you can influence the end result. Let me be clear, the stock doesn’t know that you own it and it doesn’t care that you cannot afford to lose the money. The market will strip your last cloth if you don’t know how to manage risk. You have to understand and accept your power. You cannot move the market. You cannot tell him where to go and how fast. This is why so many people, who are successful as entrepreneurs and engineers, have troubles breaking even in the capital markets. It takes a special kind of person. Someone, who can forget his ego and concentrate on what actually works. Very few people are able to reach that level and to distinguish their trading life from their personal life.

We all have a natural inclination to want to win. No one likes to take a loss on a trade, but many people equate “losing” to taking a loss on a trade. This leads to a terrible habit of holding on to losing trades for too long or adding on to losing trades.Many inexperienced traders would define winning as closing out a profitable trade every single time – an impossible feat. As a strategist who has worked with thousands of investors, I can tell you that an experienced trader can accurately call the directional outlook of an asset about 60-65% of the time. Yet, I hear many novice investors attempt to “win” 80-90% of trades, a near impossibility in the long run. To change one’s psychology for trading, we need to redefine what winning is in a trading account.

The Golden Rule

With a clear understanding of the game, we shift our focus on long term profitability and “staying in” this infinite game of financial markets. The answer is astoundingly simple and rooted in the fundamentals of math. Never risk more than 1-2% of your entire account on any single trade. The primary shift in thinking for professionals is on risk, not reward. At all costs, one must prevent a trading account from blowing up (dropping out of the infinite game). Without running too deep into the math, it all comes down to the power of exponential functions. The % amount that is required to breakeven, grows at an exponential pace for every 1% loss in your trading account. The # of trades that are required to blow up an account, grow at an exponential pace for every 1% less you risk per trade. Simply due to these 2 functions that govern your trading accounts, you can reduce the risk of “blowing up your account” significantly by risking only 1-2% of your entire account per trade. Moreover, I’ve noticed that traders are less emotionally attached to small trades and less likely to chase a losing trade. When traders risk very large amounts, they tend to become emotionally attached and get into bigger trouble.

Here are some tips you can follow to control your emotions:-

  • Before you attempt your next trade, take a few moments to consider whether this is the appropriate thing to do or if this is exactly what you should be doing. Examine your chart carefully and consider what a professional would do in similar circumstances. This brief pause can occasionally turn the tables in your favour.
  • Early entries and misleading indications might leave traders in a bind. So, before making any decisions, wait for a candle. This could help you perform better as a trader. I’m sure you’ll find this concept challenging when you try it out, but that’s how you’ll learn how emotions influence your decisions.
  • Mid-candle judgments are almost often spontaneous, as proven by experience . It is always advisable to the new traders not to make mid-candle decisions as it may severely affect them. You will be able to witness for yourself how you are a victim of impulsive trading decisions once you employ this strategy. If you wish to control your emotions during trading, try making decisions candle by candle.
  • Making a list of all the entry criteria is a great strategy to avoid making emotional decisions. Make a list of the entry requirements and have it accessible near you. This assists you in developing mental discipline.
    You won’t go anywhere near success if you don’t believe your system and ability and stick to a consistent strategy in everything you do, not just trading. Move forward after being clear and explicit about your trading rules and approach. When we are influenced by the opinions of others, we may change our best rules. At all costs, this must be avoided.
  • Opinions are important, but only if you do your study and grasp both sides of the issue. It is not reasonable to rely on it solely because it seems interesting. When it comes to trading, relying on other people’s opinions might be detrimental at times. If you want to trade with confidence, Avoid listening to other people’s opinions.
  • While we can blame a lot of losing trades on our inability to control our emotions, we can’t blame every loss on emotions. However, if you can keep them under control, it will be easier to spot other problems and continue to progress. It’s difficult to fight your natural inclinations and reactions, but with enough practise and persistence, you may start to regulate your emotions when trading.
Category: Trading Education

About Bramesh

Bramesh Bhandari has been actively trading the Indian Stock Markets since over 15+ Years. His primary strategies are his interpretations and applications of Gann And Astro Methodologies developed over the past decade.

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