Trading psychology relates to the mental and emotional state that play an integral role in a trader’s success or failures. The psychological aspect of trading is arguably more important than the technical and fundamental analysis, on which traders often focus exclusively. Numerous obstacles on a trader’s path usually originate from the emotional and mental habits regarding one’s behaviour in the market. The two biggest hardships traders face in regard to their psychology are greed and fear. These emotions are very broad, but I will attempt to describe how they can influence your speculative performance, and moreover how you can handle them better.
People oftentimes have the general misconception that trading is all about being able to analyse the market and make the right decisions consistently. While there is some truth to the preceding statement, we must not fail to acknowledge that due to human nature itself, emotions play a crucial role in a trader’s decision-making and overall performance. Fear, for example, might prevent you from entering a trade that is objectively consistent with your execution criteria. Fear usually drives decisions that appear to avoid risk and generate little return. In a market where risk is always present, being fearful has a lot of drawbacks. Contrastingly, being overconfident and lacking fear is also detrimental to a trader’s performance.
Another factor heavily associated with trading psychology is greed. As mentioned in the MarketNerd’s free lessons, there is theoretically an unlimited rate of return that can be gained on every single trade.
Traders are subconsciously affected by greed and the desire to gain unrealistic rates of return in a short time period. Greediness usually ‘convinces’ traders to enter trades that aren’t optimal, or hold profitable trades longer than they had rationally planned. ‘Rushing’ an entry might also be the result of ‘FOMO’ (fear of missing out). Greed might also cause improper position sizing, which simply means risking more than you should on a given trade by using a higher lot size.
In conclusion, successful trading is a function of multiple factors. A trader will struggle to become profitable in the long run, if he is an expert of technical analysis exclusively, or if he has just mastered his emotions and market behaviour. Competence on a combination of these elements is what shapes someone into a consistently profitable trader. Each trader has his own psychological challenges when participating in the market. In order to discover your weakest and strongest psychological attributes, you must first document and journal every single trade you execute. After doing so, you will start to notice negative behaviour patterns that might be related to fear, greed, or any other emotion. I have included a list of trading psychology books below. These books have helped me notice some of my emotional flaws in relation to trading, furthermore finding solutions to them and becoming an objective trader. I am confident that these books will assist you too.