To be a good trader, you don’t have to know how to do math or how to pick stocks. Understanding the psychology of trading is very important. After you have a quantified trading system with an edge, how you deal with your emotions will determine your success more than anything else. This is because how you deal with your stress and fear of losing your open paper profits in a winning trade will determine your success more than anything else.
To keep your emotions in check, you first need to trade a system and method that you think will work out in the long run. This confidence comes from back-testing and historical chart studies, as well as your faith that you can follow through with your plan with discipline.
You need to know that not every trade is a winner and not blame yourself if your equity goes down when you trade with discipline.
When you trade, don’t risk all of your money on any single trade. Instead, make sure you position size correctly, and only risk 1% of your total capital to a loss when your stop gets hit. This will lower your stress level and risk of ruin odds. I am talking about the maximum loss here, not the size of the positions.
Here are some examples of emotional equations to help you better understanding the psychology of trading (why you feel certain emotions when you trade):
When you’re losing money and your trading isn’t getting better.
Don’t get down, think of your losses as part of running a business and as tuition fees for the markets. Focus on how well you follow your system with discipline, not how well it works. As your faith in yourself grows as a disciplined trader, you will have more hope in yourself.
Disappointment happens when people have high expectations but the reality is very different.
When you start trading, have realistic expectations. Based on other traders who use your method, what do you think your annual returns on capital will be? Your win rate and risk/reward ratio can help you figure out how much money you’ll lose. Trading a strong system for a long time with a lot of discipline will make you money. Your journey may be difficult but If you know the math of what to expect, you will be more successful.
Regret comes from being disappointed in a loss that was caused by not being disciplined enough, which makes you feel bad.
It’s normal to lose money if you follow your trading plan and the market doesn’t move in your direction. But if you go against your plan and trade based on your feelings and ego, you should feel bad and stop being impulsive and lazy. You should make sure that on every entry and with every position size, you don’t have any regrets, no matter how the trades turn out. Your job is to follow your trading system with consistency and discipline.
You will enjoy your trading when you are making good trades and there is no fear of losing money because you are trading with the right amount of money.
Making money on the trading market is much more fun when you only risk 1% of your money in the hope of making 3% on your money and there is no risk of losing your money. Then, when you are only a few bad trades away from your account going to zero, it isn’t fun.
Wisdom comes from a lot of successful trading over a long time.
To become a good trading, you must trade real money to do it, so To become a trader, you have to put in the risk and deal with the stress of real trades. When you put real money on the line for a long time and show yourself that you can come out on top, you become wise.
Faith in your system comes from believing that your system is going to be profitable after you have tried it out in the past and then won with it for a long time.
Whether a trading method is a winner or loser in the long run isn’t the same when you make a single trade with it. Each trade can be random, but the principles of a profitable trading method will work out over a large enough number of trades to rise above the noise and pick up on trends. Having no doubts about how you’re going to trade can help a lot with your emotions when you trade. Emotional problems that other traders have when they’re trading can be avoided if you believe in your method and system as if they were religion. This will help you avoid many of the problems that other traders have when they’re in the middle of the action.
Thank You for reading “Understanding the Psychology of Trading”. Good Luck.