How To Master Trading Psychology
95% of traders aren’t successful, not because they are using the wrong strategy.
It’s because they haven’t figured out how to consistently execute a strategy properly.
Trading seems really simple when you first start out. You find a strategy that looks for a certain pattern or has a simple checklist that seems easily repeatable.
The market will always be slightly different.
So no pattern will show up the exact same every single time.
This turns a seemingly simple pattern recognition game into having almost infinite gray areas and uncertainties.
It takes months if not years of time watching the markets to get comfortable with this reality.
Trading is making a decision with half the information and a random outcome.
Compare this to chess.
In chess, you know all the information and potential outcomes. Only a supercomputer or professional can really map out every move but when you make a move in chess even as a beginner you know a few potential outcomes.
Ideally, the goal is to trade thinking like a casino.
Casinos have a slight edge every time you place a bet. It’s really small but over 1000s of bets, they will always win because the odds are in their favor.
Your strategy gives you a slight edge so you will make money over time.
The outcome of an individual trade or even a group of trades doesn’t matter. The outcome over a larger number of trades is what you are focused on.
This all sounds great to do in a perfect world. Focus on the strategy. Focus on the numbers and it will work over time.
You have emotions and they get in the way of effectively executing your trading strategy.
Ideally, we could trade with no emotion and think like the casino but when real money is on the line it doesn’t work like that.
Money is an extremely emotional subject.
So many things in this world are connected to money. So when we are trading with money, especially large amounts our emotions can get fired up.
This is why your results will be completely different when you switch from a simulated account to a real money account. A simulated account doesn’t bring any emotion into trading.
How To Overcome
The way to become consistent in trading is by mastering your emotions.
You’ll sometimes hear that you want to trade with no emotions but that’s not possible.
We can’t shut out our emotions.
But what we can do is control how they affect our actions. You can feel whatever emotions you want but how you act when you feel them is the most important.
“Feelings have never lost you a penny, Behavior has.”
Take FOMO(The fear of missing out) for an example.
This will often lead traders to jump into a trade too early. This is a totally normal feeling everyone has.
But what separates good from bad traders is if they act on those impulsive feelings and jump into a trade when they know they shouldn’t.
This goes for every emotion you have when trading.
In the end, the goal is to:
1). Feel your emotions
2). Accept how you feel.
3). Act how you want to not based on your emotions.
Changing Your Emotion Patterns.
This is an extremely slow process.
But here are the steps for what this process looks like:
1). Have impulsive actions from emotions.2). Become aware of emotional reactions negatively affecting your trading.3). Reflect on the reasons those emotions are happening4). Start to notice in real time the impulsive feeling when the emotion comes up5). Begin to stop yourself from reacting impulsively6). Eventually, this emotion stops negatively affecting your trading as you are aware of it, and stop the negative actions before they happen.7). Move on to the next emotion negatively affecting your trading.
This is what it takes to truly be successful at trading.
This is why journaling your trades is so important. You want to keep track of your strategy results but you must also track your emotions because they are affecting your results too.
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