• Joseph Barreca

Mind over Market: Inside the mind of winning traders.

Updated: Jun 2

Consistently winning traders are not magicians, they are not fortune tellers, but I can tell you they have what you don’t have: They have a method ( strategy), they manage risk and they manage themselves. Check our previous post on risk management




“We must all suffer from one of two pains: the pain of discipline or the pain of regret.” – Jim Rohn"

KEY TAKEAWAYS:


What is Trading Psychology

The importance of Trading Psychology

Emotions stopping you from being consistent and how to control them

How does he mind of winning traders work and how to take advantage of that

How to achieve a state of mind that makes a winning trader

Here, you will find and apply productive, meaningful, and useful thoughts to trading


Maintaining the right mindset is one of the most important factors in being a successful trader

Everyone has a thinking faculty. There is a saying that goes this way: change your thinking, change your life.


INTRODUCTION TO PSYCHOLOGY OF TRADING

Psychology is the study of the mind, mental processes, and behaviours of humans. Interesting, right? while trading refers to the buying and selling of securities in the financial market.

Trade is a basic economic concept involving the buying and selling of goods and services, with compensation paid by a buyer to a seller, or the exchange of goods or services between parties.

Having a basic understanding of these working terms is a prerequisite for enjoyable reading. The best strategies for trading depend on you. So, you are free to choose. Our blog post for today will be focused solely on the psychology of trading.


“Don't be a hero, don't have an ego." - Paul Tudor Jones

WHAT IS TRADING PSYCHOLOGY?


Trading psychology refers to the emotions and mental states that help dictate success or failure in trading securities. The ability to contain emotions, think quickly, and exercise discipline are components of what we might call trading psychology.

Innate human characteristics like biases and emotions play a pivotal role in trading psychology. The main focus of learning about trading psychology is to become aware of the various pitfalls that are associated with a negative psychological trait and to develop more positive characteristics. Trading psychology is different for every trader, as it is influenced by each individual’s own emotions and predetermined factors.

Trading Psychology is something a lot of new and intermediate traders struggle with. The profitable traders have been there, done that. It took them a lot of trials and errors and emotional stress to overcome these struggles.

What struggle are we talking about ? Trading errors!

Jumping Into a trade when your entry criteria is yet to be presented: this could also be referred to as Fear or missing out (FOMO), Cutting winners short and holding losers too long ( this is ironically referred to as eating like a bird, and shitting like an elephant), errors in execution etc.

All these are trading errors, and trading errors are caused by Fear, Greed and Euphoria.



There are 4 primary trading fears.

I. Fear of losing money

II. Fear of being wrong

III. Fear of missing out

IV. Leaving money on the table

“ If you can learn to create a state of mind that is not affected by the market’s behavior, the struggle will cease to exist” – Mark Douglas. Book: Trading in the Zone I highly recommend you read the book.


FEAR

I completely get it. It’s normal to be afraid of uncertainty, considering the fact that you’re putting your money on the line to find out or predict the unknown, sounds paradoxical? Yeah I completely agree. We need to always remind ourselves that this is a game of probability. The money we expose is what we risk to find out whether we’re going to win on a particular trade or not.

The earlier you realize and accept the realities of the trading business the better for you. You need to learn to accept losses. Take it as a fee to pay to run your business. You surely are going to be paying your employees, and certain expenditures if you were to run a business.

Tip: Lower your risk, if you are struggling with fear, build your confidence up from there.


GREED

Greed is another significant obstacle that many traders must overcome. Trading’s goal is to generate profit—or, in other words, to make money. You must, however, have the proper mindset. Make a personal target for yourself (for example, a monthly % return) and strive toward it. Never let your actions be dictated by greed. You should have a realistic monthly % gain. This is a great technique to improve your trading psychology


EUPHORIA

This is also a very dangerous type of emotion any trader can give room for. This mostly happens during winning streaks. Just like the human being’s mind is programmed. Say you got dopamine present in your system, it distracts your brain from perceiving risks by causing pleasure.

The same thing happens to traders experiencing long winning streaks, they tend not to perceive risks causing them to over risk or over leverage, this action could lead to a disaster if care is not taken.


DOUBT

In the early days of a trader’s journey, there’s definitely going to be doubts, doubt in ability, doubt in strategy , doubts about the possibility of attaining predetermined success. I can tell you, the longer you stay in the game the more confidence and trust you’d have in achieving your defined goals.



THE IMPACT OF APPLYING PSYCHOLOGY OF TRADING

When the purpose of something is unknown, abuse is unavoidable. Improving your trading psychology can most easily be achieved by becoming aware of your own emotions, biases, and personality traits. Once you have acknowledged these, you can put a trading plan in place that takes these factors into account with the hope of mitigating any effect that they might have on your decision-making.

Traders are sometimes forced to make split-second judgments. Even if you stick to your trading plan, you may find yourself in a scenario where you must make a hasty decision. Having a proper trading strategy and plan in place, on the other hand, will help you manage your emotions and ensure that you don’t make too many emotional decisions.


HOW DO YOU MANAGE THESE EMOTIONS?

Learn to think in probability.

Your ultimate success as a trader is a result of you believing in uncertainty. The first step in getting your mind and the market in synchronize is accepting the psychological realities of trading,

Unfulfilled expectation causes unhappiness and disappointment, you also need to manage your expectations. The human brain is wired to automatically avoid emotional or physical pain. That’s why it’s difficult for most traders to open a new position after a losing streak. Don’t be attached to an outcome of a single trade, you only judge the success rate of your system after a series of trades.


SELF DISCIPLINE

It’s a technique to train our minds to focus on the object of goals or desire. Depriving oneself of instant gratification.

A disciplined trader is a dangerous trader. The market will often reward you for being disciplined and punish you for being undisciplined.

“We must all suffer from one of two pains: the pain of discipline or the pain of regret.” – Jim Rohn


PATIENCE

Practice Patience!

“The stock market is a device for transferring money from the impatient to the patient” – Warren Buffett

If most traders would learn to sit on their hands 50 per cent of the time, they would make a lot more money. – Bill Lipschutz

Patience has been emphasized by successful traders. You just have to acknowledge its importance and take advantage of it.


RECOMMENDED BOOKS ON TRADING PSYCHOLOGY

I. Trading in the zone by Mark Douglas

II. The disciplined trader by Mark Douglas

III. The complete TurtleTrader by Michael Covel

IV. Market mind games by Denise Shull

V. The psychology of money by Morgan Housel


CONCLUSION

Men are like grandfather clocks driven by watchsprings.”

Colin Wilson, The Black Room

Cognitive and personality qualities, inborn talents, and acquired skills all influence performance. Elite performance necessitates a concerted effort to hone our skills. Among traders, creativity is the most underdeveloped sector. We spend most of our time executing transactions and controlling risk, but we rarely work on improving our ability to develop ideas.

Using the best practices framework, traders can identify their strengths in each aspect of trading and combine them into reliable processes. When we turn our best practices into good habits, we succeed.

I hope you find the post helpful? Kindly share, check out previous posts and watch out for what’s coming next on GIT (Global Institute of Trading)


 

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