Psychology Of Trading

Profitable trading is very dependent on ONE single frequently overlooked factor. It is actually NOT the specific market you might choose to trade; be that forex trading, stock trading, bond futures trading, or options on any other for that matter. It is NOT the timeframe  – i.e. short-term day trading vs. much longer-term investment time horizons – that you choose to trade. It most certainly is NOT how much cash you happen to have in your brokerage account. Strangely enough, profitable trading is NOT critically dependent how good your trading information is, be that technical charting methods or macroeconomic fundamentals, or a combination of both.

All of these assuredly have their role to play in your overall trading success, and that is indisputable. Nevertheless, this ONE factor is what my good friend, the late Robert Krausz (featured in Jack Schwager’s “New Market Wizards” book) continually stated was responsible for 70% or even more of a top trader’s success.

So what is that factor, you may ask? It is Psychology!

At first glance, this may seem very strange. Surely, you will argue, when I trade a fixed rules trading system, what possible role could my psychological profile play? If you trade by analyzing the markets via in-depth technical analysis charting, then isn’t your success dependent upon THAT, and not your psychology?

Sadly, it would seem not. Indeed, more than virtually any other skill or profession, in Trading your psychology is so critical that it actually overrides pretty well all else.

In Sport, you could argue that physical fitness and talent are key. In business, you might claim that creating excellent systems approaches and processes, combined with maintenance of top quality relationships and employee management are paramount. However, in online trading it is just YOU, your computer, and the markets.

Hence, whatever you choose to do or not do is ultimately down to your private psychology. Hence, even if you have a proven forex trading system that you purchased for big money, for example, it is still your psychology which determines if you stay with that system when times get tough, or whether you abandon it for some other method. If a sequence of losing trades leave you feeling worthless and sad, and you decide to overtrade so as to make back your losses, thus creating an even worse result than before, it is your trading psychology that was the culprit and that caused you to make those decisions.

It is your beliefs about Money that decide whether you will or will not draw a serious quantity of it into your life. Most human beings have an upper threshold on how much they believe they can earn. This threshold works in exactly the same way as a thermostat. This same phenomenon is present in trading the markets too. If you have a psychological upper limit on what your net worth can be, you will thus make it impossible to make more than that figure from your trading. It will be like an invisible barrier that you cannot break. Every time you hit this barrier, you start to lose in the markets without fail until you are once again returned to your mental comfort level. Once there, you will then discover that your trading miraculously improves once more… until you collide against that barrier yet again. This kind of cyclical behavior is extremely common not only with market 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 a fundamentally negative person with poor self-esteem, the natural result is that you will always tend to take market price action personally, especially when you lose. 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 ultimately comes down to your psychology. In addition, despite the term  “trading psychology” being used, it is actually your overall psychological approach to life as a whole that is under examination 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 total solution on how to improve your psychology, and your trading psychology in particular. The first step to change and overcome something like this is to know that it needs changing in the first place! Now that you do know, it is up to you to seek out exactly what you need most in order to make the transformations that will turbo-charge your trading.