Trading is hard. It's not just for the lazy who don't want to work. Trading is hard because of all the emotional baggage that comes with emotion emotion. Fear of losing, greed for making money, loathing where you are today because it never seems good enough. So many emotions, sometimes it's hard to know if you are learning or falling apart.
Introduction to Trading Psychology
Trading psychology is the way of gauging your moods before you start trading. If you are not in a good mood, chances are this will affect your trading results. A trader’s success depend on his or her risk taking behavior rather than luck. Your willingness to take on sufficient risks that are based on sound analysis, aggressive trading mindset based on confidence, and ability to control your fear of making mistakes will lead to expanding profits.
A trader’s agony can be summarized in 3 words:
Loss of discipline
Misplaced entry points
And trading with the wrong perspective
Why is Trading So Hard?
One poll found that only 24% of all traders make money over the course of a year. With these odds it is unsurprising that trading can seem like an impossible task. But why are the profits so low? As this article explores, the biggest reason for the poor success rate is how difficult it is to manage your emotions in trading.
The Black Box Problem
The black box problem sounds complicated but is very easy to understand. Basically it’s the time gap between receiving anecdotal information and researching to see if there’s credible material to back up your claim. When there is a delay in research before making a decision, you’re in a riskier position.
A Brief History of Trading Psychology
Trading psychology is a very important concept in trading. The trader needs to have the right balance of risk and discipline, but they must also be prepared to make decisions with no guarantees. Markets change and becoming a successful trader is not about building skills and understanding what’s happening in this type of market. While the market might be the same, successful traders will make adjustments when need be in order to push out profits and remain one step ahead at all times
Questioning Your Strategy / Stick with It / Making Mistakes
Questioning Your Strategy: Who am I kidding, I’ll never make money trading this way? Stick With It: This is going to hurt, but my strategy has been somewhere around 50/50 and that’s good enough. Making Mistakes: Almost everyone makes mistakes when they’re learning a new instrument. The trick is how you learn from them. Here it can be helpful to use a Trading Journal!
Where is the Evidence of Our Edge?
This often happens when traders think that since they feel that they can beat the markets, then they should also see evidence of that same feeling in other traders. If other traders like this trader are outperforming the markets, then there has to be a good reason for why.
What we have done is highlight some key points for your trading psychology. These key points will hopefully help you to improve your conscious thinking and adaptability.