Here we’re going to talk about the fundamentals of trading psychology, and how to master your own trading psychology.

When people first think about trading psychology, the scenes that often come to mind are images from ‘The Wolf of Wall Street’ or other famous movies with trading as their central theme.

They think of traders drinking, partying all night, and driving around at high speed in luxury sports cars.

However, real-life successful traders are almost completely opposite to this. They have learnt how to master their own trading psychology, so they don’t indulge in risky behaviour as a form of stress relief.

They are quietly disciplined, and only trade when they’re feeling fit and well.

In these next two lessons, we’re going to look at how to master trading psychology, and many of the psychological aspect of trading.

We explain why your mindset is the most important thing to get right at the start of every trading day.

Trading psychology is such an important subject, I’ve divided this lesson into two parts.

Trading Psychology Pt 1

In this first lesson all about trading psychology, we’re going to look at:

• how to deal with strong emotions
• how to develop emotional detachment
• getting in tune with the natural ebb and flow of the markets

Trading Psychology Pt 2

In the next part, Trading Psychology Pt 2, we’ll take a look at how to master trading psychology, and the dual enemy of most traders, fear and greed. 

We’ll look at:

• what the biological roots of fear and greed are
• how to deal with these two fundamental emotions
• how to make fear your friend
• how to stop greed from ruining your chances of trading success
• how to use demo trading to gain experience of controlling your emotions

Forget ‘The Wolf of Wall Street’

Most successful traders would never dream of trading when they are not in peak mental health, yet alone when they are under the influence of alcohol.

This is because most serious traders know that trading is hard work, and you have to approach it mentally well-prepared.

There’s nothing physically taxing about sitting in front of a computer and trading. But mentally, it’s really tough.

I can still remember the first time I made a really profitable trade and made over $3,000 in less than an hour, although it was over 15 years ago.

I felt so much adrenalin in my body, and my heart was beating so fast, I thought I was going to have a heart attack!

You can do as much preparation as you please.

You can find a perfect trade in accordance with your trading plan, but nothing will prepare you for the adrenalin rush when you see a trade suddenly go really well – or really badly.

The emotion that hits you is raw and intense and predictable.

That doesn’t make it any easier to deal with.

Dealing with strong emotions

Successful traders have to learn how to deal with strong emotions.

Trading is, in many ways, like setting up home on a roller coaster.

The ups and downs are inevitable and never-ending, and learning how to deal with them is one of the major skills every new trader must learn.

Market Wizard and trading psychology master Dr K. Van Tharp said:

“…I would argue that trading psychology accounts for 100% of success.”

In his award-winning trading psychology book ‘Super Trader: Make Consistent Profits in Good and Bad Markets,’ Dr Van Tharp talks about what the world’s top traders have in common.

“They all understand that performance is a function of personal psychology, and spend a lot of time working on themselves,” he said.

Dealing with strong emotions doesn’t come naturally to many people.

However, it is a trait that can be learned.

A disciplined trader will tell themselves:

“I’m feeling angry at the moment. I’m not going to let my anger result in poor decision-making. I’m going to take a break for 10 minutes, and return to my trading desk when I’m feeling calmer.”

These are the words of a trader who has learnt to deal with strong emotions.

It’s not that experienced traders don’t experience strong emotions sometimes – it’s just they don’t react to those emotions, and keep them in check.

It’s a matter of having:

• the self-awareness to appreciate the nature of the strong emotion
• the self-discipline to keep it under control
• the calmness to deal with it in a rational manner

How to develop emotional detachment

The reason such strong emotions are felt is that trading is very personal, and connected to your ego.

Each time you make a trade, you’re expressing an opinion about the direction you think the market is going to go.

Why else would you enter a trade unless you thought you could make a profit?

By making the decision to commit to a trade, you are involving your ego, your subconscious mind.

Here’s a common scenario that many beginner traders may encounter:

1. After careful planning, you finally find a trading opportunity.
2. You place your long trade, confident that you’ll make a nice tidy profit.
3. But then suddenly, the price dives.
4. Within a few minutes, your automatic stop-loss order gets triggered, and you stare at the reality that you’ve just lost money.

You’re not going to get it back. It’s gone.

You feel like screaming: “NO! That can’t have just happened!”

The realisation that you’ve lost money hurts, but what dents your ego is that you were proven WRONG!

Nobody likes being told they’re wrong. It hurts. Our inner child wants to run, hide, cry, scream, deny, or hit back and get revenge.

All of these are very powerful feelings which can threaten to swamp our logical brains.

This is where the cliché scenes from ‘Wolf of Wall Street’ come from – traders going on alcohol-fueled binges in an effort to mask the pain of financial loss.

However, real-life successful traders don’t think or act like that.

To deal with these fundamental emotions which arise from our ego being threatened, we need to change the way we think about the market and adopt a master trader’s mindset.

Change the way you think about the market

The price of any commodity can only go one of three ways – up, down or sideways.

By taking a trade, we are emotionally ‘backing’ one of these directions.

1. If we take a long trade, we are hoping the price will go up.
2. If we take a short position, we are hoping the price will drop.

However, the first step towards achieving emotional detachment is not to place emotional value on this movement.

Thinking that price movement going up is ‘good’ and price movement going down is ‘bad’ are value judgements.

Good and bad are strong words, and they sub-consciously trigger emotions within the brain.

Get in touch with the ebb and flow of the market

Instead, look at rising and falling prices with emotional detachment, as you might look at waves breaking on a beach.

Waves come in, they go out, they advance, they retreat. It’s like the planet breathing, in and out.

There is nothing ‘right’ about a wave crashing on the shoreline, just as there’s nothing ‘wrong’ about a wave retreating back into the foaming depths.

Great traders realise that price movement is not something to judge, or to use words like ‘good’ or ‘bad’ in relation to.

Price movement just is, it exists, like the rhythmic breathing of the universe. It always will exist, just like those waves will continually lap the shoreline for all of eternity.

Your job as a trader is to execute your trading plan without feeling strong emotional attachment to your decisions.

If your trade makes money, well, that is fortunate. But you were not ‘right.’

You are only ‘right’ when you stick to your trading plan.

And if your trade got stopped out, you were not wrong.

You simply flicked the coin, and it could have landed on either heads or tails.

There’s nothing right or wrong about either side of the coin, just as there is no benefit in thinking of your trading decisions as either right or wrong.

How experienced traders deal with strong emotions

An experienced trader will watch his or her trades open and close without feeling too much emotional involvement.

They will not experience the strong emotions that may occur when the ego is told that it’s either ‘right’ or ‘wrong.’

A detached trader is more likely to react: ‘Oh, that’s interesting, I wonder if there has been a big news event?’ when they see price action suddenly move one way or another very quickly.

Get those butterflies flying in formation!

One way to think about emotional detachment is like this: as a trader, you may still get butterflies in your stomach as you go to place a trade.

The disciplined and experienced trader is aware of that emotion, and is able to get those butterflies to fly in formation.

In other words, you may still feel those surges of strong emotion, but your discipline and self-awareness will allow you to manage those emotions (get them ‘flying in formation’) so they don’t overwhelm your rational brain.

In this calm, detached mental state, the adult in you has control over the ‘ego’ of the child.

The only ‘bad’ trade you’ll ever make is one where you don’t stick to your trading plan.

This includes trades where you act irrationally, let your emotions get the better of you, or place a trade that is not in accordance with your trading plan.

Stick to your trading plan

If you stick to your trading plan, you’ll have successful trades, and unsuccessful ones.

However, your wins will always be bigger than your losses, so you’ll eventually make money.

Once you understand this fact, and begin to trust your trading plan, you’re well on your way to trading success.

Learning the art of emotional detachment is a big step forward for all traders. Start practicing it now!

I’ll see you in Part 2 of Mind Over Markets.

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