One of the most common reasons people come to trade financial markets is because they seek profits, ideally very large profits.

 

This desire to earn huge sums of money can in turn have huge impacts on a trader’s psychology, usually expressed with one of the two basic emotions of fear and greed (and their related sub-emotions).

 

Rather than being obsessed with the latest indicator or trading strategy, many traders put huge importance on taking control of psychology to reach trading success. 

 

What is Trading Psychology?

 

The Different Facets of Trading Psychology

 

How do I improve my Trading Psychology?

 

Best Trading Psychology Resources

 

Conclusion

 

 

 

What is Trading Psychology?

The fact is, human emotions play a critical role in a trader’s behaviour and thus the results of his trading endeavors. Even algorithmic traders suffer from a similar fate, since they will also experience the same fear when a strategy is in a losing period, or greed when their algorithm is performing well.

 

The traders who can exercise control over their thought process and know how to separate emotions from financial conditions will ultimately be the successful ones.

 

 

The Different Facets of Trading Psychology

 

Trading in financial markets can be tough business, hence why the best traders are so handsomely paid. Here are the main psychological barriers every trader must overcome.

 

• Risk:  Zero-sum games like trading can often be dominated by sentiment, which is essentially the collective psychology of the market. This can mean that risks are difficult to calculate or completely unknown, putting everything down to the individual trader’s risk appetite. 

 

• Fear: Behavioural economics has proved that the fear of losing can be up to two times more emotionally impactful than the joy of an equivalent gain. This can manifest in many different ways, a few losses in a row leading to a trader being like a deer in the headlights, unable to pull the trigger on the next trade.

 

• Greed: In many ways, this is the biggest hurdle that every trader will face when trading financial markets. Everyone wants to be successful, but this can be a double-edged sword, with positive trading results leading to overleveraged trading. Every trader must learn to recognise greed before reality catches up with them.

 

• Biases: Everybody suffers from biases, especially those with money on the line. It’s difficult to accept a mistake or a loss, and this often leads to things like confirmation bias. Recency bias is another common one, with traders assuming that recent returns will remain the same forever.

 

To be successful and profitability navigate the global financial markets, improving and working on each of these trading psychology elements is essential.

 

 

 

How do I improve my Trading Psychology?

The securities market is a mind game wherein a trader isn’t just facing the market, but also themselves. Here are some tips on how to keep yourself in check.

 

• Keep a Trading Journal: Trading is an art that will be a struggle to master without maintain a journal. This journal should comprise a detailed description of every aspect of every trade, and naturally should include psychological elements. Here are some things that a good trading journal will track:

 

• Reasons for entering the trade: Record reasons that lead to you opening a position. This will usually be about your trading strategy, but can also include emotional states that induced a trade (which are almost always negative).

 

• Rate your execution: Your trading strategy should have strict rules for entering and exit a trade. Rate how well you stuck to that plan, and whether or not the execution was swayed by emotions.

 

• Avoid FOMO: FOMO stands for Fear of Missing Out. Th is usually a byproduct of greed, wherein a trader suffering from FOMO feels like money-making opportunities are fast getting away from them.

 

However, smart traders know that chasing the market is always a bad idea and that reigning in this all too human is the key to good trading. After all, if you miss a trade today, there is always tomorrow.

 

 

Best Trading Psychology Resources

• Trading in the Zone by Mark Douglas

This highly acclaimed book by Mark Douglas starts by exploring the depths of market microstructure and the truth of every zero-sum game, before moving onto how these realities can affect a trader’s mindset and how to deal with it.

 

• TraderFeed

This blog by Dr. Brett Steenbarger is filled with invaluable content amassed over his impressive career. He is also the author of many books on trading psychology, each of which are must-reads for traders.

 

• Reminiscences of a Stock Operator by Edwin Lefèvre

This 1923 roman-à-clef is considered a classic amongst most traders. The story is about Jesse Livermoore’s rise from a farm boy to one of the richest men in America, and trading psychology is a common thread that ties the story together.

 

 

Conclusion

An improvement in a trader’s psychology can be the final decider of success or failure in the financial market. A trader who fails to control either his fear, greed, or any of his biases will ultimately lead to his demise. 

 

Hence, mastering the art of trading and improving psychology by maintaining a detailed trading journal and avoiding pitfalls such as FOMO is the only answer. 

 

Having been trained by trading psychologist and author Dr Brett Steenbarger, elite trader Scott Pulcini presents a live pro trading webinar every week on our Discord channel, where trading psychology is often a big focus of his lessons. The pro webinars are free and open to all. Join today.