Trading Psychology: Why Naturals Don't Make Money

Trading Psychology: Why Naturals Don’t Make Money

Trading psychology is the emotional and ego elements that go into buying and selling decisions during the buying and selling decision processes along with the position size to take. Humans are emotional beings and do not always act rationally. Crowd behavior is what is causing huge asset bubbles that have become out of touch with any underlying valuation through greed. Most accidents are due to the intense fear of loss which causes sellers to want to exit the market until it drops to ridiculously low values. It is the psychology of the crowd that drives the market to its limits and it is the psychology of the individual trader that makes them make huge mistakes.

What are sentiments in trading?

Anger: Leads to revenge trading and an immediate attempt to retaliate after a losing trade.

Fear: The inability to enter or hold the winning swing or trend in your favour due to the fear of losing after entering or turning the winning trade back into profits.

Disgust: It can cause traders to lose confidence after being disgusted with your lack of discipline or market price action.

Happiness: Surprisingly, happiness can lead to very large trading and taking many positions. This usually happens after a big winning trade or a winning streak when the euphoria starts interfering with the trading plan or trading system.

Grief: It can make it difficult to enter the next trade or cut a loss. This usually happens after a major loss, a series of losses, or a major downturn in trading capital.

Surprise: Surprise can often lead to decisions based on emotions and abandonment of a trading plan when the unexpected happens.

Carelessness: Trading takes a lot of work and only passion and energy can drive you towards the required duty that leads to ultimate success. You need the energy of passion to stay focused and do the work, and apathy will not be affected by trading.

Anxiety: It can lead to exhaustion due to excessive stress. Confidence in yourself and your system will help overcome inner anxiety.

Love: If you really love trading the markets, only time will separate you from success. If you love trading for the wrong reasons, it can be devastating. Like trying to get rich quick.

Depression – leads to giving up on your trading. You can come back from financial loss but you can’t come back from emotional ruin.

Contempt: Contempt for the markets or other traders will lead to bias and poor decision making.

Pride – leads to trading too big, not cutting losses fast enough, wanting to be right and prove something more than being a rational trader with a plan.

Shame: It makes it difficult to talk to others about your trading and look at your account capital due to your poor decisions.

Envy: Envy leads to the external focus rather than the internal focus required to trade successfully.

Trading is only successful in the long run when it is done using our rational mind, and emotions are only valuable if they create the energy we need to do the work to achieve or achieve goals. Emotions are positive if they protect our psychological boundaries, but they are not an advantage if they support an out-of-control ego. Emotions cannot be avoided, so we must be aware of them. We must be aware of our feelings and understand the message they are sending. Emotions must be felt because pent-up feelings will manifest in negative ways later. Emotions are great tools sometimes but they are bad masters.

How to build the psychology of trading?

No long-term profitable trading system can be followed without self-control and discipline, no advantage will work in the long-run as emotions and ego will cause the trader to trade too heavily, over-trade or abandon the strategy altogether during a losing streak. Trading systems are easier to create and back-test than to implement with real money during open market hours as losses and gains can create issues with fear and greed.

The right mindset of traders is similar to a business’s thinking that the execution of systems is not personally affected by the outcome of the trades emotionally. Each transaction should be a business process within the parameters of the system and not an attempt to prove you are right about an opinion or prediction about an unknown future. The trader should know the expectations of his system and what periods of loss and decline to expect with realistic expectations do not try to get rich quick.

The quickest and simplest way to manage a trader’s emotions is to trade a position size that does not affect their ability to execute their trading plan without emotions getting too high and stress too high. The trade should be meaningful but manageable. If the right position size is correct and losses are managed, then each trade should only be one out of the next hundred and not create a disproportionate need to be correct.

How do you manage your trading psychology?

The right trading psychology is built on a belief in the research and experience that has been used to design a trading system with an edge that works for you as a trader. Belief in yourself to implement this in real time with capital helps keep emotions in check. All traders will experience emotions and ego while trading, and it is not their suppression that turns them on, but rather the vigilance and awareness of them that allows the trader to continue to follow his plan.

Observing thoughts helps unleash their power as they are consciously processed and put into context. Staying within the context of your trading system and executing only the signals in your watchlist, in your timeframe, while deciding the appropriate position size is the first step to getting out of trouble and not moving forward with your trading.

Another important aspect of trading psychology is to mentally move to the next trade after the previous one has ended. Hindsight and regret are two parasites to your mental energy and current mindset if you carry bad deals or losses with you. Learn the lesson if there is one and keep it, but ignore the mental association with losing trades. Focus on the next trade, not the trade you lost or won in the past.

During periods of loss and decline, many traders face the biggest problem with their mindset. Understanding the positive outlook of your system can help you be prepared for consecutive losses as it depends on the odds of winning percentage. These losses should not be unexpected as no trader wins every time and whenever the markets change the trading performance changes as well. This is where trust and expectations should be stronger than short-term feelings and not cause a loss of faith.

Managing the way you think as a trader and understanding your psychology is just as important as developing and managing your own trading system. Don’t underestimate it and make it a priority.

90% of traders lose money, this is normal. Drifting out emotions and ego is what most traders do, ruining their timing. They are afraid to buy breakouts in trading ranges, they are afraid to buy dips in uptrends, and they always have an account of why the trend can’t continue instead of making money in it. The average person doesn’t make money because they are subjectively trading their emotions, opinions and expectations. Objective trading signals with feature is what makes money.

If you are interested in learning more about managing your mind and emotions while trading the markets, you can check out the best selling trading books on Amazon here.

I have also created online trading courses on my here. Educational resources can save you time and money on your trading journey.

Trading Psychology: Why Naturals Don't Make Money

Photo created by Holly Burns

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