No matter what instruments you are trading, it could be stocks, bonds, commodities, currencies/Forex or derivatives/futures; everyone wants to better themselves when it comes to trading. Trading is a game of psychology, it is important to know how others are thinking about the market. How can we use psychology to gain an advantage during trading? Below, I share some thoughts of trading psychology.
Thought 1: All Traders Losses
Like any business, trading involves both profit and losses. One must understand that all traders will have times when they win, and times when they loss; even for big institutional traders. To understand the psychology in trading, one must first tweak his/her mind to understand that losses are part and parcel of trading. Although the objective of putting on a trade is to win that trade, a trader should be aware of the possibility of losing, and keep the negative psychological impact to the minimum. It is always advisable to keep your losses manageable, not only does it minimize the negative psychological impact, is also the key to long term survival.
Thought 2: Trading is all about Probability
Someone asked me, “What is the difference between trading and gambling?” My answer will always be “Probability”. If all traders win and loss at times, it make sense that the successful traders are those who keep their winning percentage higher than that of their losses. To have a higher winning rate, traders must always trade on setups which yield greater than 50% probability of winning. Never put on a trade when the chances are 50/50, this is as good as gambling.
Thought 3: There is no Perfect Setup
Some traders spend their lifetime trying to find a perfect setup, a Holy Grail that hopefully yields a 100% winning rate! They end up in a psychological trap which can be difficult to escape. Is there really such a setup? Unfortunately, there really aren’t any Holy Grail setups. Instead of spending time to find a perfect setup, why not spend the time to perfect the execution of a particular setup? What traders should do is to find a setup that suits their trading style and be consistent with that setup. One consistently executed setup is more than enough to make you a successful trader.
Trading the financial markets is among the most challenging of human endeavors. It is a process which requires self mastery to a level of near perfection. Although there are countless psychological aspects to trading, I hope the above psychological thoughts make some sense in you and hopefully it helps in your journey as a successful trader.
