The Psychology Of Trading

Successful online trading is heavily dependent on ONE often overlooked factor. It is NOT the market you choose to trade; whether forex trading, stock trading, bond futures trading, or options on any of these. It is NOT the timeframe  - i.e. day trading vs. long-term investment - that you choose to trade. It definitely is NOT how much money you have in your broker account. Strangely enough, it is NOT even how good your trading information is, whether technical charting or economic fundamentals, or a combination of both.

All of these play their part in your trading success, and that is certain. However, this ONE factor is what my friend, the late Robert Krausz (who was featured in Schwager’s “New Market Wizards” book) repeatedly stated was responsible for fully 70% or more of a trader’s success.

What is that factor? It is Psychology!

On the face of it, this may seem strange. Surely, you might argue, if I have a fixed rules trading system, what part could my psychology possibly play? If you trade by analyzing the markets through in-depth technical analysis charting, surely your success is dependent upon THAT, and not your psychology?

This is not the case. In fact, more than almost any other discipline, in Trading your psychology is so important that it virtually overrides everything else.

In Sport, you can argue that physical fitness and talent are key. In business, you could argue that establishing excellent systems and processes, coupled with maintaining high quality relationships and staff management are important. However, in online trading it is just YOU, your computer, and the markets.

Hence, anything that you choose to do or not do is down to your personal psychology. If you have a proven forex trading system that you purchased for big bucks, for example, it is your trading psychology that will determine whether or not you stick with that system when times get rough, or abandon it for some other method. If a string of trading losses leave you feeling depressed and dispirited, and you decide to overtrade in order to make back your losses, thereby making the situation even worse, it is your trading psychology that was behind it.

It is your beliefs about Money that determine whether or not you will attract a serious amount of it into your life. Most people have a threshold on how much they believe that they can make. It functions in much the same as a thermostat. It does so in trading the markets too. If you have a psychological limit on what your net worth can be, then you will find it impossible to earn more than that from your trading. It will be like an invisible barrier that you cannot break. Every time you hit this ceiling, you will inevitably start to lose in the markets until you are back to your comfort level. Once there, you will find that your trading improves… until you hit that barrier again. This kind of cyclical behavior is common not only with traders, but with commission salespeople too.

Psychology also affects your trading SIZE, or rather your trading size affects your psychology and hence your trading. People who have only ever traded two soybean futures contracts in their lives will find that their psychological comfort level, and consequently their trading performance,  is altogether different if they are asked to trade two hundred; same market, same price movements, different trade size and hence different psychology and consequent performance.

If you are an essentially negative person of low self-esteem, you will tend to take market price action personally, especially when it goes against you. You will tend to think that the universe/market/broker is conspiring against you to ensure that you fail. This is actually a very common feeling that a LOT of traders share.

 However, if you are a person with a positive outlook who follows a disciplined trading approach, your attitude to losses will be completely different. You will see them as an essential part of trading, much as breathing out is an essential part of breathing, and you will not be the least bothered by them.

It all comes down to psychology. Moreover, although the phrase “trading psychology” is being used, it is really your overall psychological approach to life that is under discussion here. Whatever approach you have to life in general is the approach you will invariably bring to your trading.

The most important aspects of this are (a) your attitude to money, (b) whether your approach to life is basically optimistic or pessimistic, and (c) whether you possess high self-esteem and self-confidence. All of these psychological approaches were largely implanted into you at an extremely early age by your parents and environment. You literally absorbed them without discrimination, at an age when you were simply too young to distinguish between what was true and false. Moreover, without a substantial amount of inner work, this psychological inheritance is extremely hard to change for the better.

A number of methods are available. You may wish to study up on self-hypnosis. General self-help personal development material is definitely valuable in assisting you to unlock the psychological damage of the past. There even exist an increasing number of experts – “Trading Shrinks” if you will – who specialize in helping traders at all levels with the psychology of trading.

It is beyond the scope of this discussion to give you a complete solution on how to improve your psychology, and your trading psychology in particular. The first step to changing something is to know that it needs changing in the first place! Now that you do know, it is down to you to seek out precisely what you need to make the changes that will improve your trading.

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