Trading psychology is one of the essential characteristics to be a successful trader as it is crucial for your medium- and long-term performance. Yet, it is often one of the most neglected aspects of trading.
What is trading psychology?
Trading psychology describes the emotional and mental state that determines a trader's success or failure. It is a complex concept, representing various behavioral traits and aspects of your character.
Trading psychology is the engine behind the trading decisions one makes. It reflects the trader's profile and motivations. In other words, how fear and greed influence trading behavior and decisions.
The psychology of trading encompasses several factors, including emotional intelligence, mindset, discipline, the ability to recognize and overcome cognitive biases, etc.
Consider trading psychology as the ability to maintain a clear and stable mindset at all times, regardless of market conditions and external factors. In other words, it is the ability of a trader to remain rational and calm even when things are not going their way or when they are tempted to act against their trading plan.
What makes trading psychology so important?
Known trading professionals have already answered this question
"Successful trading is about managing your psychology, not predicting the markets.”
– Mark Douglas
Although often overlooked, trading psychology can be as crucial as factors such as understanding the mechanisms of financial markets, the fundamentals of fundamental and technical analysis, trading experience, etc.
In situations of intense stress, such as periods of market volatility, it can often be the deciding factor in winning or losing the trade.
A trader who lacks resilience psychology is prone to making poor decisions, including going against their trading plan.
For example, traders with a poor trading psychological profile do not have good discipline. As a result, they may fall victim to excessive greed and chase high-risk trades (for example, trading with high leverage during volatile periods). In such situations, even a slight market fluctuation against the trader's position can wipe out their entire portfolio in an instant. On the other hand, this can also lead them to miss trades due to excessive fear.
Maintaining stable trading psychology ensures that your rationality and judgment are not compromised, and you do not violate your trading strategy (for example, regretting losses and trying to compensate, overleveraging a position, falling victim to #FOMO or another bias, etc.)
Trading psychology is an integral part of long-term success. While the most adventurous or undisciplined traders may succeed in the short term, it is mainly due to luck. In the long term, results even out, and exceptional outcomes quickly turn into losses if one does not have an adequate trading psychological profile.