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HomeTRADING PSYCHOLOGYHow to Master Trading Psychology

How to Master Trading Psychology

Mastering your emotions and ego are an essential part of profitable trading as the trader is the weakest part of any trading system. The three things needed for profitable trading is a quantified system with an edge, proper risk management for implementing that system, and the right trading psychology for executing the system with discipline and perseverance consistently.

Why is psychology so important in trading?

Without self control and discipline no trading system will work over the long term as emotions and ego will cause the trader to trade too big, over trade, or abandon the strategy altogether during a losing streak. Trading systems are easier to create and backtest than they are to execute with real money during open market hours as losses and wins can create issues with fear and greed.

Trading mindset

The proper thinking pattern for traders is similar to a business owner thinking in terms of executing systems not becoming personally moved emotionally by outcomes of trades. Each trade should be a business transaction inside the parameters of a system not a an attempt to prove you are right about an opinion or prediction about an unknowable future. A trader should know the expectancy of their system and what losing streaks and drawdowns to expect with realistic expectations not trying to get rich quick.

Managing trading emotions

The quickest and most simple way to manage emotions for a trader is to trade a position size that doesn’t effect their ability to execute their trading plan without emotions becoming too loud and stress being too high. A trade should be both meaningful but manageable. If proper position size is right and losses are managed then each trade should only be one of the next 100 and not create a disproportionate need to be right.

Managing ego in trading

A trader needs faith in the positive expectancy of their trading system and faith in their self to execute it with discipline. They should not have faith in any individual trade outcome as many of them can be random in nature in the short term. A trading edge comes primarily from minimizing losses and maximizing gains not being right every time. A trader should be open to the fact that anything can happen at any time and go with the flow of the price action not try to prove anything about your own ability to predict or be right on every trade. The only goal should be profitable trading.

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