The Role of Psychology in Trading

As traders we rely heavily on technical analysis, so why is it important to also analyze our mental ability? How important is having and also maintaining a positive mindset?

Think about how many times you have studied the charts, and said to yourself  ‘Hmmm, looks like the market is heading up (or going down as the case may be)’ and you have sat on the sidelines watching the market do as you predicted while anguishing over the missed opportunities, vowing never again will you just ‘wait and see’

Many refer to this as the ‘psychological gap‘ – the insight and understanding you need about yourself and about the nature of trading.

There are many who have mastered both sides of this trading coin and are now successful full time traders.

So you may very well ask – ‘What is different about the way the top traders think as opposed to those who are still struggling think?’  Eventually, everyone who trades will learn to recognise entry and exit points, but this does not mean you have learned to think like a trader and have mastered the psychology of trading.

The defining characteristic that separates consistent winners from other traders is: the winners have attained a mindset – a different set of attitudes – that allows them to remain disciplined, focused and confident in spite of market conditions. As a result they are not susceptable to the common fear and greed mentality that so often plagues most traders. Evenyone who trades, will end up learning something about the markets, their consistancey, or lack of it will undoubtedly come from their attitude.

A good trader can enter a trade without conflict or hesitation and just as freely exit a trade when it has turned against them – even with a loss. A good trader will not loose their focus, discipline or confidence by a temporary set back. They are confident enough to embrace the risk of trading, stick to their trading plan and move on.

I am sure there isn’t a trader who hasn’t convinced themselves  not to take a loss only to have the trade turn into an even bigger  loss, or alternatively got out of winning trades too early, or finding themselves in wining trades and didn’t take the profits thinking there was more  available only to have the market change direction and the trade turn into a loss. These are not market generated errors. These are errors made by the trader due to their attitude about being wrong, losing money, missing out and also leaving money on the table, the old fear and greed theory.

Many of the thinking patterns that adversely affect our trading are part of the natural way in which we were bought up to think and see the world. These patterns are deeply ingrained and it is difficult for us to consider that the reason for our trading difficulties is internal, and derived from our state of mind. It is much easier to perceive the problem as external ie: the market is against us, causing our pain, frustration, and dissatisfaction.

Take care,
Stock Trading Mum

Tagged as: Positive mindset, Psychology of trading, Technical Analysis, Traders, Trading