Trade Psychology

Trading is an endeavor where you are totally responsible for your actions. Your losses and your gains are the sum result of your decisions alone. The sooner you realize and accept this completely, the sooner you will be on the path to becoming a better trader.

It has been said that trading is about 10% understanding the market and about 90% knowing yourself. If a trader devotes to studying his behavioral patterns he will be far more apt in battling the market, and winning more often.

The goal is to identify bad behaviors and limiting habits as a trader. These are mainly the result of emotional reactions. The best way to trade is to be emotionless and mechanical. But we are humans and not robots. What we can do is identify our winning and losing patterns, and then enhance our supporting behaviors while suppressing the losing ones. The goal is to make trading as automatic as possible by creating winning habits. “We are what we repeatedly do. Excellence, then, is not an act, but a habit” – Aristotle.

Now, the above is much easier said than done. Knowing and doing does not come easily to most traders, as proven by statistics showing the vast disparity amongst successful traders and the losing traders. How we train, is how we fight. Thus, concentrating on our focus, persistence, perseverance and patience are daily musts for winning traders.

There are two easy and universal truths that if a trader is aware of, he then can focus upon till he masters them;

Preserve your capital – protecting your capital ensures that you get to trade again tomorrow. The goal is to stay in the game as long as possible to gain more experience and knowledge. Remember, it is not competing against others but attempting to be better than your former self, day after day.

Losses are part of trading – once a trader truly grasps this truth, he can overcome a major challenge that has ended countless careers of otherwise very intelligent traders. Most traders enter a trade only after assuring themselves, upon investing time and effort analyzing the market, that their bias is correct. Often, in the very next moment, they have to completely discard that confidence in their decision and have to decide ‘to exit or not to exit’ the trade because the market moved contrary to their expectation. This decision to act ‘to exit or not to exit’ is what makes or breaks a trader. Many traders hold on to a position long after they should have discarded it, in hopes that the market will come back. The losses only end up compounding and eroding their confidence in themselves. They do not take future setups as they are now doubting themselves, or even worse, taking much bigger entries to try and make up for the loss. The market is funny in that sometimes it will let traders be right in their bad behaviors, only to wipe them out once they falsely start to believe in their gambling mentality. The goal is not to prevent losses but to minimize and manage them. Always know your entry point, your take profit point and most important- your stop loss.

Having a mindset of a money manager instead of a trader would make for better trading. Defense wins championships. Practice preserving your capital as your top priority and understanding that just as there is no light without darkness, no up without down, no positive without negative, there is no profit without losses. So, don't frustrate over the inevitable but manage it and learn from it. It is not failure, it is feedback.

Here are some ideas to get you started towards becoming a better trader:

A couple of pages of writing do not even begin to scratch the surface of this complex subject. It requires practical experience and constant researching and learning to master the psychology behind trading. A worthwhile pursuit for any aspiring trader.

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