How important is psychology in trading? In fact, based on my experience, psychology is the most important part of trading. If we consider that the purpose of trading is earning money, psychology will be 90 percent of your success, everything else like; technical and fundamental analysis, experience or knowledge, market moves understanding will fitt in 10 percent. I assure you that this is the ratio if you trade on your own, manually. That’s how, solving the same, which is extremely hard, will give you the opportunity to succeed in trading and to make money from it.
Trading psychology represents various aspects of your character and behaviors that influence your trading decisions. The most important part in those decisions is risk taking and discipline, which will mostly influence on your mental state or psychology, because fear and greed are the two most commonly known emotions associated with trading psychology. Which means that fear of losing money more than you can accept will afect your emotions and not taking a determinated profit by wanting more will do the same. Both mistakes will disturb you psychologically, after which you can only continue with mistakes until you finally lose everything. What is interesting, after all, you will not be aware how everything went so wrong and you will ask yourself why you didn’t stop doing mistakes? It’s strange, right!? I know that most of you have experienced this, I know I am, for several times. So, how to avoid something like that, to solve the psychology issues?
At first, you need to be aware how the loss is always possible, no matter how good your analysis are. I know how most of you is taking bigger risk then you can handle if it happens, thinking like, it will not happen. That’s why, if it happens and it will eventually, you need to accept the same, because it’s not possible to have only winning trades. Before your entry, think good how much money you can afford to lose in a single trade. If you’re comfortable enough, your mental state/psychology will not be in danger. If you lose more then you can accept or afford, your trading will become erretic and you will become disoriented. That’s why, losing trades will most affect your mental state, much more then a missing opportunity, or missing profit taking by wanting more.
Now we come to the other problem, greed and discipline. Greed is an excessive desire for wealth. It often causes you to stay in a profitable trade longer than you should in an effort to squeeze out extra profits from it, but when the market turns suddenly and erase your current profit, you lose control. I know, there will be times when you will wait for longer, or much profitable trade because you have a good and protected position and the market will return back. Then, you will 5th time close your position and the market will continue much furder, after which you will regret of that missing profit. This phenomenon is usually called professionally a “psychological gap”. A regret of the missing oportunitty when you had a nice profitable trade, which turned to break even, or even worst, to a loss, or even to miss to take more because you closed your position “too early”. You’re affected by not knowing it at all. Such a developments can cause a huge problems, similar to those in the absence of a large loss. You lose control mostly rushing in to another position willing to compensate for the “lost or missed profit” and doing mistakes one after another, not aware of it at all. It’s called a brain freeze and it’s direcly caused by your mental state, your psychology. So, how to avoid this and solve all the psychological issues?
Mostly by strict determination to your plan and your personal rules. You simply need to stay disciplined and focused as much as you can all the time, no matter what. The first of all, you need to be aware that everything you did good or bad is strictly up to you and your personal decisions. If you break you’re own rules, it’s your fault, and the most important thing is that everything you did bad, you need to accept it without a regret! You can’t turn back the time, but you can move on. Just remember this; zero or break even is not a loss and there is no such a thing as; “it wasn’t enough, I could take more”. Each profit is good and it’s very important that you close on time and collect your winning trades, it provides you a security for the next trade in which you need to take a risk again and again after that one. As I wrote in the beginning, for solving the psychology in trading, it’s tough and it take years. You need to trade and to work on yourself, to correct the mistakes as much as you can, which caused those psychological problems.
I wrote in one of my quotes; “For many years I was an excelent analyst and terrible trader”. That means that I was able to analyse and to predict an outstanding moves and I didn’t make money from it. Why? I simply broke my own rules, time after time, again and again. It hurts, but I didn’t manage to handle it, not until I didn’t learn how to accept everything I did, good and bad. It’s normally that we traders make mistakes and it’s imposible for humans to exclude all the emotions. But, we can reduce our mistakes as much as we can with strict rules and most of all, to accept those we make.
Most of you will never succeed, it’s pure statistic, but the only reason of failing is pure psychology, not good or bad analysis or market move predictions. I mean, everyone can open a postion in the market without even wathching where the market was or is at the moment. Market can go up or down without a reason, so you have an equal opportunity to be right. But, how much risk you will take in that position, how much you will lose or earn, it’s only up to you. Trading is not a science, but making money from trading it is and that’s why rarely traders succeed. Of course, good technical analysis and market moves understanding is apsolutely valuable, but you will not make money from it if your psyhology is not at 100 percent.