by Amanda Harvey
Introduction
The importance of psychology in trading cannot be overstated. Most
people readily acknowledge the necessity of understanding the markets,
learning to use technical analysis, and implementing solid trading strategies,
however, many overlook the impact of psychology in trading. Learning to
exercise mind over matter is of extreme significance in an arena that
can often seem like a rollercoaster ride, and gives rise to some very
intense emotions.
The Elements of Successful Psychology in Trading
• A disciplined approach to trading
provides the best possibility of long-term, continued success. While it
is possible to become swept up in the excitement, and the thrill of the
chase of profits, and to still experience some successes, with this
outlook, there are also likely to be enough spectacular spills to negate
the gains made. Of course, even the best-planned and most methodical
trading perspective will still incur losses; however, these losses can
be minimized and offset with risk management, and outweighed by the
frequent, steady profits that an understanding of psychology in trading
can help to attain.
• Patience is another key to successful trading psychology.
This need for patience is evident in various aspects of the trading
experience. One such aspect is in taking the time to thoroughly research
a potential trade and to select the appropriate moment to enter it,
rather than being swept up in market noise
and diving in at the wrong moment, or entering a trade that is less
than ideal because of an unwillingness to sit back and wait for the
right opportunity. Patience is also required when waiting for the right
moment to exit a trade, and failing to apply this patience can result in
exiting a trade too early and missing out on the full return that could
have been attained.
• Confidence is also vital to the psychology of successful trading.
Decisions must be taken firmly and often quickly, and a reasonable
amount of risk must be tolerated, in order to trade effectively.
Hesitation, doubt, and a tendency to look to others for confirmation are
not the hallmarks of a successful trader. A belief in oneself and one’s
knowledge and ability to make smart choices is vital.
• Realism is essential to a winning trading psychology. A successful
trader knows that not every trade will be a winner, and that losses are
part of the trading experience. Rather than being discouraged by these
losses, they accept them and move on, always looking at the bigger
picture. This trader also understands that huge overnight profits fall
mostly into the realm of idealism, and they are happy to continue making
moderate and steady gains.
Pitfalls in Trading Psychology
As well as the opposite of the positive attributes listed above, there
are emotions often experienced in trading that can be highly
detrimental, and must be managed if a trader is to succeed.
• Greed
is one of the biggest traps that can ruin a trader’s success. This
emotional pitfall most often manifests in the trader staying too long in
a trade, wanting to squeeze more profit out of the position, and seeing
the price plummet along with all their profit.
• Fear
is an equally damaging component to the psychology of trading. This
emotion results in a trader missing out on promising opportunities,
pulling out of a position too soon and failing to see the true potential
of the investment realized, and even taking a loss that could have been
recouped with a more intrepid approach to waiting.
A Final Word about Psychology in Trading
By understanding and cultivating the qualities that contribute to a
winning trading mindset, and learning to manage the emotions that can be
detrimental to a successful trading psychology, a trader gives
themselves a vast advantage over those that focus simply on the technical aspects of trading.