In this guide on trading psychology, you will learn:
The goal of any trader or investor is to achieve long-term consistency of results. In theory, that can be achieved with a systematic approach and trading plan, but in practice, this only works if one can execute the plan consistently.
Quite often, emotions and psychological biases cause us to deviate from the plan, resulting in inconsistent results. So, in order to become a good trader, we need to identify these potential pitfalls in advance, and find solutions to overcome them.
To become a successful trader, one needs to master the different aspects of trading psychology, which includes the following:
Besides learning the theories of trading & investing psychology, the more important part is learning how to apply it to your trading.
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There are some common dangers in trading psychology that trick traders into making bad trading decisions. Understanding how this happens will help you avoid making these mistakes.
Here is the list of mistakes to avoid if you want to improve your trading psychology:
The best way to improve your trading psychology is to trade more and practice to get more experience, but make sure you do so with a plan in mind, and keep good records so that you know what to improve on.
Conclusion
I hope you have enjoyed this guide on how to tackle trading & investing psychology.
Now I’ll like to hear from you: what is your key take-away from this trading guide?
What of these biases are you struggling with the most?
Which do you think will have the greatest impact on your trading results if you manage to overcome it?
Are there any other psychological issues that we have missed out?
Let me know by leaving a quick comment below right now.
Very insightful guide on how one thinks when making decisions for trading. I didn’t know there are names for such ways of thinking.
You’re welcome! These ways of thinking are useful not just for making trading decisions, but also can be used for making any decision in life!
Hi! Maybe you can teach how do we go about using the sufficient data for evaluation and testing? Maybe you can do a guide on that?
I’m not quite sure what you mean by “using sufficient data for evaluation and testing”, could you please elaborate on that? Thanks!
I think he means how much data do you need to evaluate and do back testing?
For backtesting, you usually need many years of data and its usually done on MT4 platform. I can suggest you to backtest 75% of that data to test your strategy and then use the remaining 25% data to check if it works for that range. Finally, you have to test that strategy forward by using them in live market.
You have to find a balance. A strategy that works for a market might not work for others. And make sure that strategy cannot be too fit.
Thanks for sharing!
I agree that your mind needs to be as objective and neutral during trading. It is as important as your trading skills. I am a scalper btw. So this applies even more to me.
You’re welcome! I would say staying objective is important whatever the trading style is (swing trading, scalping, trend-following, etc), but for shorter timeframes like scalping, decisions need to be made faster so it can be more challenging. Keep up the good work!
So which cognitive bias affects you the most when you are starting out?
It really depends on the personality and psyche of each individual. Different people can be “immune” to some biases, while very susceptible to other biases. If we look at the most common issues, it will probably be loss aversion and anchoring, making it hard for people to cut losses.
Appreciate your response! Yea, I am quite affected by loss aversion personally.
You’re welcome!
Stumbled upon this trade while reading at the review of Die with Zero.
Just want to share my thought on Trading Psychology here.
I had a really good month of trading, and I felt ecstatic, not only because of the profits, but due to the fact that my strategies were working and all my long hours of practice was starting to pay off.
Then the day came.
It was a devastating disaster. I was so ill disciplined after a few losses, and by the end of the day, I knew I was just gambling in my trades.
It was really awful and disappointed with myself.
The truth is, I know it better than anyone else. I have studied so much on trading psychology, and understand it is arguably the most important aspect of trading, yet I still succumbed to my own weaknesses.
Did anyone of you faced what I went through?
Is Gambler’s Fallacy considered a cognitive bias?
I pretty much think so. It stems from a lack of understanding of how probability works. The probability of one independent event does not affect the probability of another independent event.
Yes. I think A LOT of people do not really understand how probability works. I think you can cover a topic on this. It will be useful. hopefully it will be simple for layman like me.
You are welcome! Actually, we have started creating some short videos on probability on our Tik Tok channel.
Is the knowledge of probability required to trade better? I am horrible at maths.
Don’t worry, you only need a very basic knowledge of probability to understand the risk management part of trading.
I like your 5% money rule management.
Yup… so hard to explain that the probability of this current trade does not affect the next one.
What is the estimated percentage that psychology plays a part in being a great trader? I read some guides that a good trader is emotionless.
It’s really hard to give a number for this, but if I had to estimate I would say about 60-70% of trading is executing your plan with the correct psychology.
If we have algorithms or signals, won’t that take away the psychology portion and we can focus more on the actual trading itself?
It still requires the right psychology to execute and manage the trades.
No wonder mindset covers 60% of the success of a trader!
“Win as though you were used it to, lose as if you enjoyed it for a change.” – Ralph Waldo Emerson
A perfect mindset!
Agree!
That’s right!
I agree too! It applies to daily decisions that you make everyday. Took me by surprise how many thoughts we go through daily. And I also heard defensive mechanisms. But I guess that doesn’t apply to trading.
I think loss aversion might be a psychological defense mechanism.
Hindsight Bias is probably the most common. Its supposed to be helpful though, thats how we learnt from mistakes.
That’s not true actually. Experience is how we learn from mistakes, whereas hindsight bias gives us the illusion that we would have acted differently before given the information we know have after the event has occurred. But before the event occurred, there is no way of knowing the outcome of the event.
WOULD YOU RATHER BE RIGHT, OR AVOID BEING WRONG?
So philosophical. Do you want the glass to be half empty or half full?
Do you want to make money or don’t want to lose money? 😛
I See Only What I Want to See!
I am only making profits.
Great to see that psychological topics that I learnt in uni is being applied in trading too!
Managing winning trade is as important as managing your emotion in losing trades too!
Yup, trading is 80% psychology, once you have learnt the key technical knowledge.
How about self-fulfilling prophecy? Does it constitute as part of the trader’s mindset? If you don’t believe you can do it, you might end up sabotaging your own trades?
Self-belief needs to be backed up with skill, to be able to perform consistently. After you have learnt the key technical knowledge, then it boils down to practice and confidence.
A pity that this portion is not completely finished yet…
Working on it, thanks for your patience! 😀
Always use a stoploss. You can NEVER go wrong with that.
Agree! It also makes your trading so much less stressful.
Honestly, I really feel that I need a lot of help with psychology and discipline. I am always in the green after a few trades and then I will keep on trading until it turns red 🙁 This has happened consistently for the past 2 weeks of trading days. The largest swing is from positive $19000 to negative $10000. I am unable to get myself out of this shit. I am always in fear of leaving money on the table. How do you know when to walk away?
I think the key problem is that you might view trading as gambling.
Full time traders take profit even if you are not capturing the entire gains!
Making $10 is better than losing $10.
I went through a similar process like you until consecutive back to back losses of $6000 changed the way of how I traded.
Your mindset needs to avoid losses.
Then, the gains will come.
There are a few ways in the trading platform to do this.
1) set either a trade limit number
2) time of day limit
3) profit limit
If you don’t, the trading mistakes will just keep coming back to haunt you!
Do track your trades, and why do you go red after being green?
Try reading Trading in the Zone: Master the Market with Confidence, Discipline, and a Winning Attitude
An excellent book on trading psychology!
The simplest exit strategy is by having a profit percentage target in place.
Once the trade is positive, and it hits your chosen percentage, be discipline and you exit!
There are no decisions to be made, as you have already made the decision. Exit you go.
Hey guys, have you tried listening to classical musical while you are trading?
Research has shown that background music or music that plays while the listener is primarily focusing on another activity can improve cognitive tasks.
Another research also presents further positive impacts of music in relation to stress reduction.
What do you think?
Trading Psychology, in my opinion, is talked about far too much and emphasize in the world of trading.
Is it an important part? Yes, but maybe about 15% of it.
HOWEVER, if you are not executing your trading plan properly, you are destined to fail. Furthermore, if you don’t have a statistical edge, you will lose money! It doesn’t matter how many times you improve or consciously work on your trading psychology.
The trading edges are the hardest to achieve!
Thanks for the information shared here! I have read and know that the psychology factor is a huge part of trading. But, I am still unsure how to improve on it. I am currently still paper trading for now, and I am stubborn on gaining experience and try looking at the charts as objectively as possible. In addition, I always look out for my risk management and as well as journaling my trades.
Are there any other resources or tactics to practice on what I have just mentioned?
As much as I do not hate paper trading, it is a good start and solid way to learn how to trade. However, you are never going to learn the psychology of trading until you put money on the table.
There is definitely a huge gap in your mindset for both scenarios, including the trades you take and how long you stay in those trades.
So dive into the battlefield and use your own money (even if it is little) rather than using a paper-trading account.
I been struggling and also understanding with trading psychology. Most of the time, I am always guilty of revenge trading and being greedy in my trades. How do you professional traders do it?
Spencer covered it somewhere in this website.
Go read up on “Trading Journal”.
https://synapsetrading.com/trading-journal-market-edge/
If you can stick to it, you will solve most of your problems.
Out of curiosity, I was wondering if anyone can share their advice on how to prevent those inner battles, where you start to second guess yourself and hesitate on trade executions! Even though when you know it is definitely the right thing to do so.
I have pissed at myself for missing out on making some money because of this 🙁
Weirdly, I find it odd for people to regret trades they did not make or make it in time to maximize their profits.
I only have regret trades that I MADE.
Surely, you will probably get another chance to make or lose money in the very near future.
Saw this information a few weeks ago. An excellent way to deal with anxiety is to replace “what if” to “when”
This forces you to shift your attitude to something more logical. If you fear that you might lose all your money in your account, then try asking “when”, and you should naturally find or look for things that will stop that outcome from happening.
Does any of you take a short term break from trading everyday?
This should be a healthy way to take a break and helps in your trading psychology.