The most successful traders don’t just know what they’re doing.
They have an innate understanding of how their minds, emotions, and behaviours work together to create trading success.
When it comes to trading, psychology can make or break you. The key to trading is not the technology you use, but the mental fortitude to keep yourself in the game long enough to be rewarded with profits.
If you want to make money trading, you’ve got to conquer your mind.
This article reveals the precise way your brain works when you are investing and provides proven techniques to supercharge your performance.
What Is Trading Psychology?
Trading psychology is all about understanding your own emotional make-up when it comes to trading your own money.
Most people are hardwired to avoid losing money at all costs, which will lead them to make bad decisions in the markets.
This is because they are emotionally invested, and the fear of losing the money outweighs anything. This is the reason why so many beginners close their positions early.
Without control over these emotions, making any form of money – in trading or the real world – will become a difficult mountain to climb.
The thing is:
Some people are able to switch off their emotions, untie them from the value of goods, and able to trade/invest with conviction.
Most forex traders for example want to make a fast buck and frequently, this is a method of trading called Scalping, BUT this is what most traders don’t intend on doing.
They fall into this trap from losing an emotional battle with the markets.
Answer me this:
Have you traded something in the past, and you’ve done all your analysis, but the market went against you as soon as you entered?
It continued lower and you adjusted your stop loss, so you wouldn’t be taken out?
If you said no, there is a high chance you are lying because everyone has done this at least once.
This is a common psychological behaviour to avoid loss (especially so early on in the trade).
This demonstrates a lack of discipline and also exposes you to a greater than intended loss, essentially turning a trade into a gamble in the prospect of the market turning around.
The wrong types of trading psychology can be narrowed down to two emotions that will ruin any trader if caught off guard.
Fear and Greed.
These two emotions will make you lose more money than any.
Let’s look at fear first.
With fear, you either avoid entering the trade because of the risk of losing money.
(Side note: if you are completely against risking money, you may as well stop looking at trading as a whole. It’s a risk-taking business after all!)
Equally, fear can be injected another way:
If you see the market moving up or down fast (to short sell), fear is what urges you to jump on for quick profit potential.
This is fear of missing out and is common outside of trading to fit in with the crowd.
This can really destroy your account and your confidence.
On the flip side, you have a powerful emotion in greed.
Everyone that trades want to make as much money as possible, whilst risking the least amount as possible.
Greed can induce overconfidence when trading the markets.
For example, your analysis could point to a buying opportunity but your analysis says the timing is not right now.
However, the markets shoot up 70 pips.
Greed would kick in and you would try and jump in on the large move expecting it to move higher to only find out it then plummets down 70 pips.
Greed took over from your analysis because you didn’t want to miss the move up.
Not only can it make you jump into terrible opportunities, but it can erode your good trades if you are not careful.
Now don’t get me wrong:
Squeezing every last pip out of a trade is what you should do (using trailing stop losses to maximise this).
However, this is done methodically.
When greed takes over, you can move your stop loss away and turn a winning position into a losing position in the space of 10 minutes.
Both emotions are natural but they are controllable.
It goes against our nature to risk money, that is why most fail.
It’s not easy to stomach a loss, especially when it’s a small fortune.
That is why it is important to grasp two psychological tools you can implement to at least protect irrational decisions.
This is discipline and removal of value, and I’ll share with you how below to improve your forex trading psychology.
How To Master Trading Psychology
There is a big emphasis that the key to success is only learned after learning how to master trading psychology.
As much as I agree it’s a part of the whole “success” ethos, I believe that these tips below can help anyone set up their trading psychology for success without dwelling on it.
So you can focus on what truly generates the profits:
So let’s go through these two tools to shortcut and eliminate greed and fear.
The truth is:
If you build a mechanical and rigorously tested trading strategy, that includes risk management and knowing your risk reward ratios, you can remove the need for emotions in trading.
But that is easier said than done.
However, by mastering this, you gain discipline & confidence in trading.
You need the discipline to stick to your rules no matter what.
By working this way, you will be following your tried and tested rules that have generated profits in the past.
You know it works.
By being as strict to the rules as possible, there is no room to think about fear or greed to enter a random trade.
Now the hardest part of this is developing the trading strategy to follow religiously.
This is something you can do by testing what works for you.
If you have your blueprint to success or a trade entry checklist written out in front of you whilst you trade, there is significantly less chance that you would give in to the temptations of greed and surrender to fear.
This is something I recommend all traders start with.
Removal of Value
Your emotions are tied to the value of the trade, e.g) the money.
If all you see is the green and red values of money, it’s an instant realisation of your PnL, which then makes your brain fear losing more (or greed to win more).
You have to be able to switch off the value of the trade, and you can do that on most trading platforms.
Here are some tips on how you can manipulate your trading psychology to remove value:
- Instead of seeing the monetary value of the open trade, switch it to points or pips.
- Produce your risk management using points or pips.
- Only view the PnL that is closed.
Using the methods above, combined with a trading plan and a trading strategy, you will master trading psychology and instil confidence with your technical analysis.
Thus giving you better conviction in executing your trades, and therefore, more consistent returns.
Give it a try, and if you are still stuck, let’s look at some of the best trading psychology books you can pick up.
Best Trading Psychology Books That Will Help You
If you want to read further into trading psychology there are several books that could certainly help you out in today’s financial markets.
I discuss some of these books in my best forex trading books article, but here are some specific books for trading psychology:
Market Mind Games: A Radical Psychology of Investing, Trading, and Risk
Ever watch the TV show Billions? (If not, you should it’s good).
If so, one of the main characters – Wendy Rhodes (The hedge funds performance coach) is based on the author of this book, Denise Shull.
Performance coaching is essential in today’s world, especially how fast the forex markets move.
This book gets to the roots of YOU and how you can use what you have to your advantage.
It will also discuss how to manage your own mind when it comes to trading in the markets.
The New Trading for a Living: Psychology, Discipline, Trading Tools and Systems, Risk Control, Trade Management
What better book to read about trading psychology than from an author who is a trained psychiatrist and trader in the markets.
This book is an all-in-one resource that will certainly help you become a grounded trader.
This book also explores the uses of technical indicators and risk management.
Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude
Another popular book within the trading community, Trading in the Zone also explores the importance of trading psychology.
The book shows traders how to overcome the mental habits that cost them money and aims to teach you how to look beyond random outcomes found in the markets.
You don’t need all of these books.
As I said, psychology is important but it can be worked on easily by developing a rules-based system, to begin with.
I’d read the reviews on the 3 books above and see which meets your interest.
[If you would like to support Alphaex Capital, you can do so by purchasing one of the books through the links above. We receive a little compensation from your purchase, but this doesn’t affect the cost to you.]
3 Tips To Improve Your Trading Psychology
The Perfect Trade Doesn’t (Always) Exist
The fear of losing money is real. However, waiting for the perfect trade set-up can feel like an eternity in trading.
You do not need the perfect setup.
Head and shoulder patterns do not form the same every time.
Flag patterns do not form the same every time.
Once you realise this and understand that there is a slight variance in all of the trading opportunities you find, you’ll no longer have the fear of losing every trade if it doesn’t exactly match your chart formation.
There is ALWAYS another trade around the corner
As a trader, you always want to get involved in the markets as there are opportunities happening every single minute across the world.
Never feel bad about a loss, they happen. There is always another trade available soon.
Never feel bad about taking profit too early, it happens from time to time.
You can’t be perfect every time.
If you make a mistake, forget about it and focus on the next trade.
You must be at peace to lose money
When you trade the markets, you will lose every now and then.
So you have to be prepared and only invest what you can afford to lose.
And when I mean afford to lose, I mean you would be only annoyed at losing the amount with an “Oh well, that sucks” attitude.
Not feeling like the world is about to end and become resentful.
If you are trading money with less attachment to it, and understand that this is an affordable risk to grow your capital, then I think this is the sweet spot for trading.
However, if you feel pain around your heart after losing every few quid, then you’re definitely in a bad place with your trading capital and should reduce it.
If you struggle with the losses (because they are higher than you’d like), this can open up a whole world of pain by trying to chase trades and will end in a painful downward spiral of losses.
You can be an excellent trader, but if losses hurt hard, this can control you and destroy you and your confidence.
Don’t let losses and money override your gift.
Conclusion: Conquering Trading Psychology Should Be Easy
The one message I’d like to get to you is that trading psychology isn’t all that.
It isn’t the reason why trading doesn’t work for you.
It isn’t the reason why trading is difficult.
It is the reason if you find impulses to trade without any solid evidence of a trade opportunity.
It is the reason if you are trying to risk more than you should to avoid a loss.
The good news it’s easily fixable and I’ve shared some methods that I believe will truly help you.
If you found this article useful on trading psychology, feel free to share this article with other traders who could benefit from this.