Trading success stands on four fundamental pillars: knowledge, experience, psychology, and luck.
In this blog, we are going to talk about the psychological aspects of trading. To be more exact, we are going to dive into some of the lesser-known (and incredibly important) aspects of psychology in trading.
There are several commonly know physiological obstacles in trading that are plastered all over the internet in the form of blog posts, educational websites, or Youtube videos.
Ultimately they come down to the emotions of fear and greed. Understand these and you’ll understand how mass-market participants think.
Fear and Greed in Trading
Fear is probably the most common emotion for traders and investors. Usually, traders are afraid of missing out on a trade. All traders and investors feel fear at some level, from time to time.
Many traders struggle with uncertainty and fear, that as a result can demobilize you from applying your hard-learned technical skills.
Here are types of fears traders have to face every day:
- Fear of losing accumulated profits.
- Taking profit too early or trailing stop loss too tightly.
- Trading with stop losses that are too tight.
- Fear of losing money or being wrong.
- Moving stop loss further away from the price in the hope the price will move in your favor.
- Taking too much risk or too large a position size.
- Trading too frequently – this is directly linked to fear of missing out.
- Jumping into trading before you’re educated and ready.
How to Overcome Fear and Greed
As a trader, you must move from a fearful mindset to a mental state of confidence and serenity of mind.
You will have to work past these emotions by repetitively implementing a proven probability edge in the market. Well, this may not sound easy, but there is a way to stop mixing your trading and emotions. First, you have to believe in your ability to execute every trade. Thus, you’ll have to calm down and try to separate your emotions. Once you have your trading plan, a proven mechanical strategy and routine in place, you’re on the right path.
Here’s what you have to do:
- Set goals around implementing your trading plan.
- Keep it as mechanical and consistent as possible.
- Work on developing your patience and discipline.
- Make your trading process a habit.
- Diminish any type of self-sabotaging behavior.
- Focus on your process, rather than the money
- Once you have the process executed in a non-emotional way, the money will come in time.
Reprogram Yourself and Your Subconscious Mind
If deep down you don’t have belief in yourself and your trading you’ll unconsciously self-sabotage. Now you know you’re a profitable trader. As soon as you’ve put in the work to prove your trading strategy is profitable your belief system begins to change.
From this belief, your conscious and subconscious mind works in harmony to execute your trading edge towards your goals. No more self sabotage!
On the flip side, some arrogant newbies think they can leave the rate race because of trading within a few weeks. This isn’t belief in something real, this is a delusion. You still have to put in the work and be patient.
Trading Psychology and Belief Systems
Ever wonder why truly confident people consistently seem to win at life? It’s because deep down they believe they can achieve.
Newbie traders usually don’t have a proven strategy with statistically relevant backtesting results, thus they don’t know whether their strategy will work or not. Without proof, there is no self-belief. Backtesting gives you data on potential trading strategies. This means you won’t look for another method as soon as you take a few losing trades. Backtesting gives statistics, and statistics don’t lie!
What Should You Do – Final Thoughts
The ultimate goal to conquer your fears and greed is to reprogram your subconscious mind. You will win as you conquer your major fears. First make sure to start by testing your strategies, step-by-step. Or you can always invest in a mentor who already has experience with dealing with fear and emotions.
Create some process-oriented goals, as well as mechanical trading plans with rules to follow. Finally, discipline yourself! Most importantly, don’t lose hope and have confidence in your trading. As long as you are diligent enough to become a better version of yourself, you’ll start to develop a deep belief in yourself and your strategy’s lucrative performance!