Mastering Trading Psychology; Why Mindset is the toughest skillWelcome all to another post.
In this article we will dive into the process of Mastering Trading Psychology.
1) What is Trading Psychology:
Trading Psychology, it is your mindset. It is what you think, how you feel, what you need to do, what you want to do. It is a mixture of thoughts, future actions, emotions and past, present or future behaviors that influences your present self in making good, or bad decisions in the market.
It can be considered a “strategy” but leans more to a “skill” It’s about what your thought process is when you are under pressure.
Everybody, investor, gambler, trader, swing trader, day trader, scalper and holders, bring their own personalities & habits into the trading space. Whether it’s impatience, or patience, fear or greed, confidence or impulsiveness, or discipline. These mental sets determine how frequently you can follow your edge and how well you can manage wins, losses and uncertainty.
Trading psychology is the framework of the mind. It works for you or goes against you. Both are under your control to choose from. A strong, stable, clear mind keeps you going. A weak, broken, cluttered mind keeps you falling.
Ultimately, to master trading in psychology, you need to master yourself.
2) Pros and Cons of Trading Psychology:
Pros:
The pros/benefits of Trading Psychology, once it is mastered, is simple.
You understand the game. You understand the process. You understand why you lose, why you win, why manipulation takes place and why you trade it.
It is a skill that is developed through patience and perseverance along with constant practice.
Like every other skill, it demands TIME, ENERGY, and constant Trial and Error of failures, wins, adjustments and so on. It isn’t something that can be taught or learned once, except for those who learn to recognize and leverage their mental strengths & weaknesses can truly master it over time.
Cons:
Trying to master Trading Psychology means you need to LOSE. You need to experience loss after loss after loss after loss. You need to fail many times. Every time you fail, you understand how to take control of your emotions, you learn where things went wrong, you learn how to build your edge.
But it’s not always about losses, it’s about gains (wins )too. You need to maintain a stable status of emotions whether you win or lose. You can’t show anger, you can’t show excitement. Because both will come back at you with another loss.
This means you cannot allow yourself to be ruled by any emotion, positive or negative. It can be a long uncomfortable process that can take years to master. Sometimes even decades.
What makes it more challenging is that trading psychology does not exist in isolation.
Psychology outside of trading must be mastered too. How you think, act, live, every single day.
- We will explore this topic further down the article.
3) Why it is important in the trading space:
Psychology is an essential topic that must be taught and considered. Because without it, you will not succeed. Without self-control, or a strong mind, trading will become nothing more than just gambling like a slot machine.
It's a skill that many overlook. With it, you are aware of what works and what fails. It allows you to step back and re-assess the next trade instead of forcing it.
The end goal is to make money, but to even do that you first have to protect your capital. Only take A++ Set ups (High confluence/probability set ups) and avoid any traps involving emotions like: Fear of Missing Out (FOMO) or the “I just need 1 good pump” (One Big Win) Mindset.
With it being in the trading space, it gives users the ability to pause, re-assess and question your decisions on the trade you are about to take.
It helps to mention, “Is this an A++ Setup?” “Does it align with my strat, my edge, my goals?” If it does not and you decide not to take it, you save yourself a loss of capital and have made a win of improved trading psychology.
It assists you in distinguishing the difference between good/bad trades. Not on the result but the process. It keeps you grounded.
4) How to Master Trading Psychology:
Just because it is difficult & challenging, does not mean it is impossible.
First step – building discipline through consistency and structure.
Ensure you have a clear trading plan set up. One that defines your edge or can be adjusted to find your edge. Commit to following it no matter what the market is doing. Pumping, Dumping or consolidating.
Consistency in action will build mental strength.
Secondly, you must work on emotional control. Understand and be focused on how you feel when you experience fear, greed, or overconfidence. These emotions push you off your plan if you let them take over.
Each time this happens, you must log it. That way you can accumulate data and self-awareness.
With that, everyone says this. BackTEST or at least forward test you strategies extensively.
Keep a detailed journal that has a good list of questions that you must answer after each trade. Be brutally honest with yourself. Don’t hide losses because you have already hit 10 in a row. Log them all down. This way you will then be able to recognize emotional triggers and recurring patterns appearing that are holding you back.
Being able to recognise them is the first step to controlling them. OBSERVE YOURSELF.
While this takes place, you must begin to build trust in your system (strategy) and in yourself. You will see how your actions and choices line up with your plan. That way your confidence will shift from emotions to process driven.
Last one is patience. The hardest yet most critical psychological skills. Take ONLY A++ set ups, for example a set up that has 4 confluences or 5 lining up. Doing this trains your mind into avoiding impulsive behavior or falling into FOMO based environments.
To see another deep dive into mastering trading psychology, review the post below to determine which mindset you currently have. Are you a trader? Or are you a gambler.
5) How Psychology in our daily lives affects our ability to trade:
Trading Psychology is an interesting concept, but so is psychology in general.
The human mind is weak and for it to be strengthened, it takes time & self-awareness.
A weak mind won’t get you anywhere.
Psychology is not a simple one sentence definition. It can mean many things, or many situations.
It is a critical role in our life, it shapes our emotions, reactions and choices. It can lead us to self-sabotage or it can lead us to success.
If you cannot control your psychology outside of trading, you won’t be able to control it inside of trading. By this I mean daily emotions.
For example:
Imagine an individual experiences a breakout, they are sad, they are angry, they are emotionally drained and hurt. Then they go off to trade. They will LOSE.
This is because when the mind is in an uncomfortable state, it seeks a dopamine hit, and when they associate a win in trading = dopamine hit, they naturally turn towards trading. They want to feel that dopamine hit, so they can feel good again. But then they are no longer following their edge.
This destroys discipline, objectivity and focus.
This is not just tied to relationship breakups, but everything in our day to day lives. If you experience a bad day at work, failed an exam, argued with family, or facing a stressful time. If you bring unresolved emotions, thoughts and feelings into the trading space, trading just becomes a big emotional outlet.
Psychology appears in every action we do, EVERY day. “I need to drink water” I will get water. I see soda, “I now want soda.”
The mind now as switched completely from the main objective “Water” to soda. If you cannot control your mind to stick to what is right, then you will not master trading psychology.
The better control you have over yourself, & your mind, the more consistent and rational your trading decisions will become.
KEY POINTS:
1) What is Trading Psychology:
- Trading psychology is the foundation of every mental action. You must master yourself before mastering the market.
2) Pros & Cons of Trading Psychology:
- Trading Psychology cannot be mastered without failure, each loss has a lesson, that lesson is based around strengthening your mind with emotional control.
3) Why it is important in the Trading Space:
- Without a strong mind, trading turns into gambling, you must become disciplined and maintain self-control. This splits pros from the gamblers.
4) How to Master Trading Psychology:
- Right to the point: Consistency & discipline, emotional awareness, journaling, and most importantly, being patient. These are core aspects of mastering your mindset and obtaining the right psychological discipline.
5) How daily psychology affects trading:
- The way you manage your everyday emotions outside of trading mirrors the way you will end up reacting to the markets.
Control your life, then control your trades.
Psychology is a great skill, but it’s only part of 3 keys that will lead you to success. Find out the 2 other keys below:
Thank you all so much for reading - I hope this post brings a lesson into everyone's trading journey.
I am aware that this is a big long article, however Trading psychology goes even deeper - I have summarized my knowledge and research that I have obtained over time and summarized it.
Please let me know if any of you would like an a post on a specific topic.
I'd love to provide more for the community!
