Overview of trading psychology.
Trading psychology is a key aspect of trading and it deserves all the hype that it gets, because a bad trading psychology could make a trader go nuts. Once your money is on the line, there’s only a slim chance for you to detach your emotions.
When it comes to trading psychology, traders are told to ‘remove’ emotions from trading. However, that is a flat statement because they are not told how to do it. Also, that would be a sound advice only if it was highly possible to do so. As feeling beings, it becomes hard to detach yourself from your hard-earned money.
You may have been experiencing a downturn in your trading career probably because of a whack trading psychology. The point of this post is to teach you how to put ‘remove emotions from trading’ into action.
You work your way up to good trading psychology adopting some sound trading rules and I will run you through them below.
Lot sizing or volume.
To keep your sanity whilst trading, this is one of the first things you should moderate. It is helpful to trade sizes that you are comfortable with. First consider your account size and always chose a size that fits it.
If you put on a trade and you can’t go to bed comfortably, you may be trading a size that doesn’t suit your account. If you put on a trade and you keep on tracking the charts on every pip movement, you may be guilty of over-sizing.
Trading a size that doesn’t suit your account would only get you to lose all or most of your money when things go south. Knowing this makes you uncomfortable whilst trading and it is a block to your progress as a trader.
This concept is directly linked to the above point of lot sizing. Using leverage would only force you to trade bigger lots. In my books, you have no business using leverage if you are not right 100% of the time. You are a trader not a gambler.
Avoiding leverage totally would cause you to trade lots that are favorable to your account which goes a long way to help you keep a sound mind.
Frequently watching your profits or loss.
If you are a highly emotional person, I’d suggest you quit doing this if you are guilty. Once you put on a trade, let your stop loss or take profit levels decide whether you are right or wrong. The brain is a great but tricky organ of the body.
If you are frequent watcher of how your account balance swings, you are likely to manipulate your trades. That is, you close immediately you see a loss and try to be greedy when you see a profit. This would only contribute to you moving around in circles without seeing any improvement.
Recency bias avoidance as a trading psychology hack.
This affects you as a trader especially when you are inexperienced. Recency bias influences you to think that just because a previous trade ended in profit, the next one would end in profit as well and vice versa.
This concept goes a long way to instill fear or overconfidence in you. Fear when your most previous trade ended up in a loss so you think the next one will do so too. And overconfidence when your most previous trade ended up in profit so you think the next one will give the same result.
You’ve got to consider that every trade you take is individualistic. This is why you can master, and trade one setup only and still experience drawdowns from time to time because a lot of factors affect every trade.
To curb recency bias, don’t anticipate previous results on incoming trades and keep in mind that every trade taken is an independent one.
Confidence in your trading system.
This is a key aspect in trading psychology because a lack of confidence in your system will mess you up emotionally. You will put on a trade and start doubting if it will play out well. It is the doubt that kills.
To kill this doubt, you must practice your system religiously to know the ins and outs of it. This will help you know whether it works for you or not. If it works for you, you must know when it works and when it doesn’t work and develop rules around it.
My personal view on how to know the potency of a system is to take 100 trades and record the outcomes of each.
Inexperience messes up trading psychology of a trader.
Experience plays a major role in every aspect of life and it is very critical in trading. Experience is what separates pros from amateurs and probably your mentor from you. Inexperience also contributes to a lack of confidence in trading system.
An experienced trader would know how to deal with turbulent times of trading; whereas the inexperienced one may just blow up. Experience puts you in a better position to handle stressful moments in trading.
Sadly, experience can’t be transferred and you would have to trade and accumulate the years to gain it. You may be taught all the “what and what not” in trading; but you would have to go through them first-hand to have a full glimpse of it.
Don’t downplay experience, it remains the best teacher!
Frankly speaking, unrealistic expectations is what pushed most of us into this career. The freedom to be independent and make our millions, from wherever we are in the world is a myth that has been sold by some people to aspiring traders.
Sooner rather than later, we get to realize that it isn’t necessarily so and it’s easier said than done. The more you struggle to come to terms with the reality of the market, the harder it will get for you psychologically.
Knowing that there is nothing like perfection in this market; do well to keep your goals realistic so it doesn’t take a toll on you.
As critical as trading psychology is keep in mind that trading is not easy; but it could be simplified for you if you put in the work. A sound psychology mingled with good risk management and strategy will end in success.
Kindly let me know what has been your biggest drawback psychologically in trading in the comment box below. After that, check out some other ways to deal with emotions in trading.