Creating a Mindset for Success
Trading psychology might sound like a made-up phenomenon, but it’s a very real thing.
The stock market may not have emotions, but as a person, you do.
Yesterday, I talked about how you can take advantage of other trader’s psychology with patterns. But equally important to taking advantage of other people’s mindsets, is controlling your own.
Your own impulses will make or break you as a trader.
To attain and maintain a sustainable and long-term career as a trader, it’s incredibly important to cultivate a mindset where you can stay calm during trades and avoid succumbing to emotional reactions.
But as a human, how do you keep visceral reactions in check so that you can approach trades from a place of emotional strength?
It takes effort. You’ve got to work on understanding trading psychology and guiding your mind to set yourself up for success. In this post, I’ll educate you on what trading psychology is and offer several tips for how to mentally prepare yourself to trade with a level head.
What is Trading Psychology?
To dissect the meaning of trading psychology, let’s look at both parts of the term separately: trading and psychology.
You already know what trading is, but what does psychology actually mean?
According to Merriam-Webster, psychology is defined as “the study of mind and behavior in relation to a particular field of knowledge or activity”.
In the case of trading psychology, this would be your emotions in regard to trading. After all, successful trading depends just as much on controlling your emotions as it does on your prowess with numbers.
So many losses and bad trading decisions are made because traders get emotional in trades and lose their better judgment. This is when they make stupid decisions, seemingly forget every trading basic, and neglect to follow their carefully thought out trading plan.
Unfortunately, when you abandon your trading plan and try to buck against trading basics like cutting your losses quickly, things usually don’t well.
To attain and maintain success as a trader, you really have to work hard to cultivate a mindset where you don’t let your emotions get the best of you. This is what trading psychology is all about.
Reducing Errors in Judgment and Impulsive Actions
Now you know what trading psychology means. But why does it matter? Why is it worth spending time to develop and refine it in your trading career?
Improving your trading psychology can have incredible effects on your trading career by helping you reduce errors in judgment and impulsive actions.
How so? First off, it’s an opportunity to consider how trading psychology affects you personally. Considering your own reactions during trades can clue you in on triggers that prompt you to make bad decisions.
For instance, you may notice that whenever you begin to lose money in a trade, instead of cutting losses, what you do is begin to panic and rationalize holding on to the position longer in hopes that things will turn around.
As many traders who have done this know, it rarely works out that way. Usually, you end up losing a lot more with that “hold and hope” mentality.
When you become mindful of your personal tendencies and emotional reactions in trades, you’re able to identify shortcomings that are holding you back.
Once you begin to identify such behaviors and what causes them, you can begin to take steps to change them.
By working on eradicating these emotionally reactive responses, you can develop a stronger sense of steadiness while trading.
How to Improve Your Trading Psychology
Ideally, you’d trade as if you were a computer: based on facts and data and without any shred of emotion.
If you were able to do so, you’d probably have a higher win rate and wouldn’t have the same emotional gut reaction to things like having to cut losses.
However, as much as you can aspire to that, the fact is that you’re human. You’ll never totally be able to shut off emotions in trading.
But you can take steps to improve your reactions so that your suffering can be minimal.
Here the first of my 8 tips for how to improve and refine your day trading psychology:
1. Get Yourself in the Right Mindset
As a trader, you can benefit from daily pep talks and self-motivation exercises.
No, that doesn’t mean that you need to go all Tony Robbins on yourself. Simply reminding yourself of things like the fact that stock prices are not personal can be powerful reminders.
Of course, another effective way to get in a positive state of mind for trading is to give yourself the gift of time.
If you’re constantly waking up at 8:02 a.m. and scrambling to study and prepare before the trading day begins, you’re more likely to approach trading from a flustered and rushed state of mind. It’s much harder to maintain a level head like this.
Try waking up a little earlier so that you have time to acclimate to the day. It may help to set up a morning routine of working out or meditating before you start your research so that you can approach trades from a calm and relaxed mentality.
Taking a few moments to get centered and make sure your head is in the right place before you start trading can have positive ripple effects all day long.
You might not totally be able to remove emotions from the equation, but it can help reduce potential damage when you find yourself making quick decisions.
2. Have a Great Base of Knowledge
One of the best ways to improve your trading psychology is to increase your knowledge.
Having a strong base of knowledge about how trading works will set you up to make better decisions, both long-term and on the fly.
By gaining technical prowess about how trading works, you can be better able to navigate the many curveballs that will be thrown your way throughout the course of a trade and react in a calm manner.
Think about it this way:
You’d never take on a huge home repair without educating yourself about what’s involved with it and the potential things that could go wrong.
You’d want to be prepared for all outcomes, which requires knowledge and research.
With trading, educating yourself can prove similarly helpful in allowing you to minimize risk and make smarter decisions.
One of my goals with my students is to help new traders create a strong knowledge base that is applicable and actionable in trading.
I make sure to educate on the basics, but then teach how to actually use that knowledge and the trading techniques to try to make profitable trades.
A strong foundation of knowledge is always a good thing, and it will help you make more informed decisions as a trader.
Editor, Penny Stock Millionaires