Trading Psychology

Trading psychology refers to the emotions and mental state that help dictate success or failure in trading. Trading psychology is very important it is said it is 80% of trading and at TI we agree.  We thought we would make some points of our own and would suggest that you read these and practise utilising them. We suggest by way of Daily Reflections i.e. Take one of the examples below and concentrate on applying it for a day each day. We have tried to put this list in order of importance. It is very important that you take some time to identify your own trading psychological weaknesses and then revisit them each day. If mental errors like fear, greed, or you have issues with taking losses or indeed making trades show up in your trading, try and implement the trading psychological fixes in this article.

1. SIZE, SIZE, SIZE Whilst apparently not anatomically important... in trading it is everything. If you trade too large a size you will question the trade, lead to self doubt, invoke all kinds of emotions get stressed and make mistakes. You may be right but you will cut it before target. Never bet the farm - Size is a killer. Always make sure you trade the correct size according to your account - this can be 2 or 3% of account size per trade. Remember it's a long term strategy boring we know but essential if you want to prosper.

2. STOPS A necessary evil. Stops are there to save you money.Treat them as your friend. We know as soon as you put a stop in it gets hit then bounces straight in the direction you wanted it too. All this means is you need to hone in your strategy a little. Can you trade smaller with wider stops?

3. MOVING STOPS... We have mentioned this because yes ... we all do it. It's all very well saying have a stop and don't move it yet getting the direction right and not profiting from it but losing. The question about moving stops is you have to ask yourself what type of day it is ? Is it a range day or trend day.  Where people get slammed here is that you move your stops for say 5 days in a row and there are no issues -  the market does what you are thinking. The next day the market moves 2% in a trend day and nothing works, you move stops and it goes lower and lower and lower and you lose the 5 days profit and more. We have all done this! The key is to remember to manage a bad trade when it is small. The rule we use is if you have moved once - fine, but second time take the hit. We also have a cash limit loss per trade. This is to ensure we stay in the game. It is also important to lose what you can make back otherwise a big loss will psychologically hurt!

4. AVERAGING TRADES This always causes confusion and discussion. Whilst averaging a winning trade in say a bull or bear market is self explanatory and makes sense, averaging on a losing trade is usually a disaster. Our advice is not to play the averaging game on a losing trade like moving stops. It will work some of time and other times you will get slammed. Take the loss and move on.

5. IF IN DOUBT -- OUT We can't stress enough how important this is. I am guessing if you are reading this then you think you have a "feel" for the market - you thought I'll buy here or I shall sell here and it has proven to work in the past. That is based on intuition or experience, that gut feeling!  So if you are in a trade and you immediately think something is wrong -  get out! Use that gut feeling! There is nothing worse in thinking I should get out but don't and then being stopped out. Generally it affects the next trade and you are resentful and angry because you "knew". If in doubt OUT. Otherwise it's a hope trade and hoping is not a strategy!

6. FEAR Putting on a trade can be scary. Your hard earned cash is on the line, and you do not want to lose it. Anybody who has traded a paper account with success and made the move to real money knows the impact fear has on your trading. Fear manifests itself in trading by making it difficult to pull the trigger on a trade, exiting before hitting targets, pulling out of trades before the stop is hit and other micro-managing issues. If fear is showing up in your trading, reduce your risk. The smaller the potential loss, the less scared you are of the trade.

7. GREED The opposite of fear is greed. Whilst we love the challenge and strategy of trading, ultimately we are in this game to make money. This makes us greedy. Greed impacts traders in two major ways. The first is by making our targets too aggressive and illogical. For example, let's say you enter a stock at $90 with a target of just under resistance at $100. As the stock hits $100, you think to yourself that you'll hold on longer, it'll hit $110 and you'll double your profits. This sounds great but you had originally set your target at $100 for a reason. Your stock will likely pullback at the resistance level. Thus, pretty soon that $10 profit is $5 or you lose it all. Greed turned a winning trade into a loser. Fix this trading psychology issue by taking partial profits. In the current example, take half off at $100, move your stop up to $95. This keeps you strategically sound whilst also letting your greed play itself out in a positive way.

8. TAKING PROFIT Banking money feels nice and reduces stress! Therefore like we mentioned in the GREED example above, get used to banking money.  If your target hits - get out and re-evaluate. If you don't get out you will probably resent it!

9. ANGER TRADE / RESENTMENT TRADE This is a nasty one! We have all done it. You have just been stopped out on a ridiculous spike and you are annoyed, frustrated. Then the market turns as you originally intended, you double your size to make the money back, bang you hit the button all in a flash.  But NO... The market then changes tack again and goes against you and suddenly you are having a very miserable day. Something we have learned here is that the quicker the response to a losing trade, usually means another bad trade. Try it out! Remember if you have a losing trade, breathe. Remember the market is not going anywhere. Wait for the next set up and go again. DO NOT CHASE LOSSES.

10. LOSING MONEY Understand this is inevitable. In fact it's mandatory. It is called profit and LOSS. You will lose. Once you embrace the understanding of losing it then becomes a question of RISK. If you have winners and losers then the key is to ensure that you have more winners and manage the risk of the losing trades correctly. You manage the losing trades correctly by applying stops, recognising fear and greed and making sure that you manage a bad trade when it is small. Cutting losing trades is part of this process and if you "feel" something isn't working and the loss is small, then cut it and move on and wait for a better set up. Remember if in doubt - out! This is difficult at first and requires practise but is an important element in managing your risk.

11. DEVELOPING TRADING RULES A set of clear-cut, probability-based trading rules is an important part of defining how you will trade. For instance, rules governing trade entry and exit, when to take profit, rules around stops, averaging trades and timeframe to trade. During volatile periods a detailed set of trading rules can serve as a point of reference and guidebook of what and what not to do based on one's own experience and level.

12. LEARNING We don't know it all. Always research and teach yourself about trading and new trading concepts/techniques. Read articles, read books, learn technical analysis, charting, You Tube, Twitter, ask questions! There is a wealth of information out there so make sure you take advantage of it.

13.DON'T BE FOOLED Stay away from people who describe themselves as Gurus, Kings, Master's of trading who have the most powerful, ultimate or greatest tool/indicator in the world .. None of them exist. If you believe they do, then more fool you. Think Michael Burry, Paul Tudor Jones, John Paulson, not Wolf of Wall Street, remember the latter was salesman not a trader. And there are millions of salesmen on the web!  

14. KNOW THYSELF There has been a lot said and written recently about the spiritual movement and trading. The whole point of trading is not really to make money but to beat the game, face the market and win, then the money comes. In our experience this only happens when you let go and face your own mistakes, weaknesses and inefficiencies. It's not like the good old days when essentially the market was just front running everything. We truly believe if you know thyself, know what your strengths and weaknesses are, understand them and read the above points on a daily basis to try and improve your trading. You will become a success.   

DISCLAIMER - There is a very high degree of risk involved in trading. Past results are not indicative of future returns. TradeInflection.com  and all individuals affiliated with this site assume no responsibility for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice.