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    Mastering Trading Psychology: Key Strategies for Consistent Success 2024

    man sitting on chair all the feelings name coming out of his mind in trading psychology

    By Admin

    Posted on August 1, 2024

    You must have seen many professional traders talking about the most important thing, which is trading psychology. But what is it? Let’s understand this.

    Many of you traders might have a good understanding of Technical Analysis and Price Action. You might be able to read Price Action well, predict the market trend, identify potential targets, determine entry points, set stop losses, and decide on targets. It’s possible that you excel in all these areas!

    Trading Psychology written with bold letter and candle stick chart pattern is in the background

    Your accuracy in chart reading might be quite high, and you can predict whether the market will rise or reverse from a certain level, and the market might follow exactly as you predicted.

    However, if you still can’t make money from trading, then you need to focus not on Technical Analysis but on your mental analysis!

    What is Trading Psychology?

    Mental analysis or trading psychology means dealing with your emotions, fear, greed, excitement, FOMO, anxiety, depression, hope, and panic while taking a trade or during a running trade.

    These emotions affect your trading decisions, causing you to convert a winning profitable trade into a loss. And when that losing trade hits the target later, all you’re left with is frustration and regret.

    A middle age boy thinking "what is trading psychology?" in library

    After this, you might become emotional and take random trades, leading to even bigger losses. After the market closes, you might think that the market did exactly as you analyzed, and your projected target was hit.

    Yet, despite your target being hit, you ended up with a loss. You won’t understand where the mistake happened.

    Let’s understand this with an example: Suppose a trader has a trading fund of 50,000. He has a very good knowledge of Technical Analysis and Price Action. By reading the Nifty Price Action chart, he plans an entry for the bearish side using a Put Option. He invests his entire 50,000 capital in this trade and buys 20 lots at 100.

    After entering, the market starts falling in his favour, and he begins to see a profit on the screen. However, he waits for his target.

    After a while, the market starts moving against his trade, and he begins to feel scared because he sees a big loss on the screen. As the market approaches his stop loss, his fear increases, and out of fear, he exits the trade before the stop loss is hit. As soon as he exits, the market starts falling again, and his projected target is hit.

    mental psychology when you're trading

    Now he feels frustrated and regrets, thinking his luck is not good. He thinks the market was just waiting for him to exit his trade, and that’s why it fell right after he exited. This trader’s trading psychology is now completely messed up for the day.

    In an attempt to recover this loss, he engages in random trading and ends up closing the day with an even bigger loss. If you were asked where the trader made a mistake, what would your answer be?

    1. The trader should have waited for the stop loss.
    2. He should have averaged and sold more quantity where he exited.
    3. The trader should have taken the trade according to his risk.

    Well, the correct answer is 3: the trader should have understood the risk before entering the trade.

    Before entering the trade, he should have planned the risk according to the stop loss. This is because the trader entered with a heavy quantity. After entry, when the market experiences ups and downs, and the profit seen on the screen starts converting into a heavy loss, the trader becomes scared.

    He feels fear in the trade because he used his full margin to trade a large quantity. When the market moves slightly against his entry, he sees a big loss on the screen. Out of this fear, he exits the trade before the stop loss is hit.

    man sitting on chair all the feelings name coming out of his mind in trading psychology

    Instead, if he had entered the same trade by managing risk properly and traded the quantity according to his day risk, his trading psychology wouldn’t have been disturbed. Because he traded the quantity according to planned risk, it wouldn’t matter even if the stop loss was hit, as his risk was managed.

    I hope you have understood well from this example what the most important role is in trading psychology.

    But risk management alone is not enough, other factors also need to be controlled.

    Strategies to Improve Trading Psychology?

    Emotions play a major role in all moments of our lives, but if they start creeping into trading, they can end your trading career before it even starts. However, just saying or reading this won’t make you start controlling your emotions. For this, you need to practice. So, learn how to control them.

    info graphic showing tips to improve your trading psychology

    These are some tips that can help you change your mindset regarding your trading psychology. Read them in detail so that you can become a Successful trader in the future.

    Develop a Strategy

    Trading is a career that you can start in a single day, and this often turns out to be the most costly mistake because trading cannot be learned in a single day. You need to thoroughly understand the market and its trends, which will take time. This is the most important thing, and the market only asks for your time.

    strategy development

    When you develop a strategy, take your time to backtest it, do paper trading, and calculate its reward ratio. Mentally prepare yourself to be ready for the potential losses when you trade with real money. I recommend taking 2 months to backtest any strategy because people come into trading quickly and leave just as quickly. Therefore, it is important to take time to perfect your trading plans.

    Here Indore’s top stock market institute Street Investments, focuses the most on human psychology and strategy development, which helps students achieve long-term profits.

    Also Read: All Option Trading Strategies You Can’t Afford to Miss Before Trading in 2024  

    Practice and Mastery

    Keep testing new strategies in the stock market and try to stay updated with the market. This way, you’ll understand trends more quickly. Whenever you create a trade setup, do paper trading with it and manage risk as you would with your real amount. If you use a larger amount in paper trading, the profits you make in real trading will seem much smaller, and this will affect your trading psychology.

    bruce lee quotes about practising one thing

    Risk Management

    So, let’s move on to risk management. It’s extremely important. Why is it so important? Think of it this way: you did the first step well and are now ready for real trading, but you put all your capital into the first trade. Even if you have a good strategy, if you incur a loss, it will be a huge loss that you are not prepared to face. That’s why you should only use an amount in a single trade that, if you do incur a loss, it won’t significantly impact your capital.

    new traders risk management

    That’s why my suggestion is to only risk 2% of your total capital on a single trade and be prepared to face that loss.

    Use Stop-loss & Take-Profit

    Use a stop-loss, but that doesn’t mean you should place it just anywhere. Set the stop-loss where it should be, and manage your risk according to the stop-loss. Now that we’ve talked about SL, let’s discuss TP (Take Profit). When you plan a trade with a full analysis and make an entry, don’t fear exiting the trade midway. Let the trade run it will either hit the TP or the SL. If you keep exiting trades midway, you’ll always do this. So, trade with an understanding of your risk.

     

    Emotional Detachment

    Getting emotionally attached to any trade can cause problems in the long term. You need to control your emotions and learn from your profits and losses. It is important to practice this process over the long term so that you can become a profitable trader in the long run.

    gustavo fringe emotionless face

    Overcome Your Fear

    In trading, as long as you are afraid, you cannot achieve anything. To overcome your fear, there’s only one thing you can do: trade with real money. No matter how many strategies you backtest in paper trading, until you start trading with real money and try your market theories practically, you won’t become a good trader. Therefore, the first thing you need to do is overcome your fear.

    new traders and their fears

    Avoid Overtrading

    Yes, now that you have done everything practically and have complete control over your mental psychology, there is one more important thing to control, and that is trading. Yes, I am talking about controlling trading because you need to stay in this for the long term, not the short term. Therefore, taking only one or two trades a day will be the best for you.

    me avoiding overtrading

    Stick to your strategies

    You don’t need to keep changing your strategy. If your strategy is not good, then yes, changing it is in your best interest. But if your strategy is good, even if you incur losses six times in a row, you shouldn’t change your strategy. In trading, where there is profit, there is also loss. As I mentioned earlier, you need to be prepared to face losses here. But what should you do if this happens? Let me explain that now.

    me trying new strategies everytime i loss

    Take a Break

    So, what should you do when you face continuous losses in trading? At this point, your trading psychology is likely shaken. The best thing to do is to take a break. Forget about your boring desktop, forget about trading, and get out of your room. Give yourself some time, go out with your friends, and spend time with your family.

    taking break after trading meme

    This is my suggestion because if you try to cover your losses by trading right now, there is a high chance that you will incur even more losses. Therefore, taking a short break can help in long-term trading.

    Do meditation daily

    If you try to control your feelings every day, it won’t be good for your health. That’s why investing money in the financial market every day and constantly seeing profits and losses is not good for our mental health. Therefore, I suggest you do meditation every morning on a daily basis. It might feel strange at first, but if you want to work on your psychology, you have to take full care of your mental health.

    And there is nothing better than meditation to improve your mental health.

    Keep a Journal

    By keeping a journal, I mean monitoring the details of your trades. Note down the basis on which you are taking trades and whether you are making a profit or a loss. If you are getting emotionally triggered, find out the reason. Track all these things so that you can improve both your trading and your psychology.

    keeping trading journal

    Now that you know what to do to improve your trading psychology, doing it regularly will reduce the chances of your emotions being triggered. I am not saying that they will completely go away, but it will help you. So, just keep practising it continuously.

    But why is it that emotions get so involved in our trading? There must be a reason for this. So, the next topic we will explore is why your psychology gives you multiple thoughts and disrupts your trade while trading.

    Why is Trading Psychology important?

    Trading psychology is important because it is involved in every decision you make in your trade. Without any psychology, you won’t be able to make any decisions or understand what is happening in the financial market. But why does all this matter so much? Let’s understand this.

    Why do you make any decisions while trading? The answer is very simple: based on past experience, hearsay, and the things everyone talks about. Each of your trade decisions is made from such influences.

    Your psychology completely depends on your past experiences with money. If you come from a financially stable family, your psychology about money will be entirely different from someone who has experienced poverty. Essentially, everything depends on your financial background. Morgan Housel explains this very well in his book “The Psychology of Money.” Therefore, I suggest reading it to better understand these concepts.

    Types of biases that influence your Trading decisions

    There are several types of biases that are involved in your trading psychology, among which the most important are cognitive and emotional biases. Let’s understand these.

    info graphic on top 5 biases a trader face

    Cognitive Bias

    Cognitive bias helps you make quick decisions, but along with speed, it reduces the range of your thinking. This means you make trades based on the first thought that comes to your mind and ignore other factors, which can lead to losses and affect your trading psychology. Therefore, in trading, you should make decisions as calmly and thoughtfully as possible.

    There are also some factors in this that you need to understand, which will help you grasp things better, and they are:

    Confirmation Bias

    Confirmation bias means that your thinking or knowledge about trading is limited, and you only see what aligns with your existing beliefs. You trade with limited information, which often results in losses. While you might make a profit occasionally, in the long term, you will likely be at a loss.

    Anchor Bias

    Anchoring bias is when the first piece of information you receive about a topic strongly influences your beliefs, even if later you are given more information on the same topic, you only believe the first information is correct. In trading, this bias affects you because you focus only on the initial piece of information and ignore subsequent information, which can lead to poor decisions. This is problematic because even an amateur can provide important insights that might benefit you in the long run.

    Overconfidence Bias

    Overconfidence has ruined many traders, and you are not Warren Buffett who can make the market move according to his wishes. As a newbie, you should never be overconfident. While it might earn you a profit once or twice, a single loss can shatter that false confidence. Therefore, it’s better to advance cautiously in the market.

    over confidence in market meme

    Emotional Bias

    Emotional bias is when you have a gut feeling about whether the market will go up or down, and you make trades based on that feeling. Sometimes, you might make a profit because luck is on your side that day. However, if you continue to trade based on your emotions, you will likely start incurring losses. This can be a major reason why you might end up leaving trading altogether.

    emotional bias meme

    Regret Aversion Bias

    Regret aversion bias is when you predict that the market will rise from 100 points to 400, so you enter the trade at 101. However, when the market drops to 90, you panic and close the trade at a loss. Later, the market quickly rises to 400 as you originally expected, and you feel a lot of regret. This is why it’s important to learn patience in the market.

    regret in trading psychology

    So, these are some of the technical feelings you experience during a trade, but you can’t change them immediately. You’ll have to go through these feelings repeatedly to understand how to control them easily. Although I’m telling you this now, you might not fully grasp it, but when you go through these biases yourself, you’ll eventually realize that they don’t matter much in trading. However, in the starting phase, you have to face them.

    Books to Improve Your Trading Psychology

    What I’m writing here is important because it comes from my personal trading experience. However, as they say, there’s always someone more experienced. There are some well-known authors who have published books on trading psychology. These books have personally inspired me a lot, and I recommend that you read them too.

    Trading in the Zone” by Mark Douglas

    Trading for a Living” by Dr. Alexander Elder

    The Psychology of Trading” by Brett N. Steenbarger

    The Psychology of Money” by Morgan Housel

    Mind Over Markets” by James F. Dalton

    The Disciplined Trader” by Mark Douglas

    Yes, yes, I know that just hearing about books can make some people sleepy because that’s how our psychology has been shaped, given that we’ve been reading books in school since childhood. But still, I am telling you to read them. On the first day, you might feel sleepy and have a headache, but once you get into the flow, you won’t think about anything else other than these books.

    Movies to Improve Your Trading Psychology

    Alright, even if some people don’t try reading the books, what can I do? But I won’t let you go just like that. So, here are some movies. Yes, I’m mentioning movies as well. But remember, movies are made to entertain the audience, not necessarily to impart knowledge. However, these are some movies from which you will at least get a basic understanding of trading psychology.

    Rogue Trader: Directed by James Dearden

    Floored: Directed by James Allen Smith

    Wall Street: Directed by Oliver Stone

    So, watch these films and then read a book. You’ll understand what is important, where the actual knowledge is, and where the entertainment lies. Overall, it’s up to you.

    Popular Quotes on Trading Psychology

    But sometimes you just need instant motivation, which you can’t get from books or movies. That’s why there are some popular quotes about trading psychology. Reading them gives me a little motivation.

    “The market is a device for transferring money from the impatient to the patient.”Warren Buffett

    “In trading and investing, it’s not about how much you make but rather how much you don’t lose.”Bernard Baruch

    “The goal of a successful trader is to make the best trades. Money is secondary.”Alexander Elder

    “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”George Soros

    “The most important thing in trading is to be disciplined and to have a clear plan.”Marty Schwartz

    FaQ’s

    Q. What is the psychology of trading?

    Trading psychology is about how your feelings influence the decisions you make during a trade. Your emotions, past experiences, and financial background all play a role in your trading behaviour. Therefore, you should daily practice all the things I have already mentioned to manage these aspects effectively.

    Q. How to practice trading psychology?

    To practice your trading psychology, you can do the following:

    1. Develop a Strategy
    2. Practice through paper trading
    3. Understand risk management
    4. Use Stoploss
    5. Avoid overtrading
    6. Do meditation daily
    7. Maintain a trading journal

    Q. How much psychology is in trading?

    Psychology plays a very important role in each of your trades because you trade for specific reasons based on your psychological state. Without psychology, you wouldn’t be able to trade at all. If you could remove emotions from your trades, you would approach trading in a completely different way. But as soon as feelings come into play, you realize what trading psychology truly is.

    Q. Is trading 90% psychology?

    To put it directly, as a trader, you need to understand that psychology plays a major role. However, having a good grasp of trading knowledge is also essential. Otherwise, it would be like trading without any knowledge and just taking losses. That’s why a lot of things matter in trading.

    Conclusion

    Now that you’ve read all this and gained complete knowledge of how psychology works in trading, there’s only one thing left: start applying these things. If you combine theory with practical knowledge, you’ll learn 100x faster than others. You just need to be consistent, and you’ll see clear results in your trading. Just remember that trading won’t change your life in a day; the more patience you have, the sooner you’ll achieve success.

    Finally, I wish all the new traders the best of luck and hope that you all will follow my advice carefully. By walking this path, you will achieve success. So, guys, “Best of Luck” to all of you new traders!

    Share this post with your friends so they can also understand trading psychology better. Comment and share your experiences so that other traders can be inspired by your story.

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