The stock market may not have emotions, but as a person, you do. In this post, I’ll educate you on what trading psychology is and offer several tips for how to mentally prepare yourself to trade with a level head.
Trading psychology might sound like a made-up phenomenon, but it’s a very real thing.
The stock market may not have emotions, but as a person, you do. To attain and maintain a sustainable and long-term career as a trader, it’s incredibly important to cultivate a mindset where you can stay calm during trades and avoid succumbing to emotional reactions.
But as a human, how do you keep visceral reactions in check so that you can approach trades from a place of emotional strength?
It takes effort. You’ve got to work on understanding trading psychology and guiding your mind to set yourself up for success. In this post, I’ll educate you on what trading psychology is and offer several tips for how to mentally prepare yourself to trade with a level head.
Table of Contents
- 1 What is Trading Psychology?
- 2 How to Improve Your Trading Psychology
- 3 Controlling Your Trading Psychology After Losses
- 4 Conclusion
What is Trading Psychology?
To dissect the meaning of trading psychology, let’s look at both parts of the term separately: trading and psychology.
You already know what trading is, but what does psychology actually mean?
According to Merriam-Webster, psychology is defined as “the study of mind and behavior in relation to a particular field of knowledge or activity”.
In the case of trading psychology, this would be your emotions in regard to trading. After all, successful trading depends just as much on controlling your emotions as it does on your prowess with numbers.
So many losses and bad trading decisions are made because traders get emotional in trades and lose their better judgment. This is when they make stupid decisions, seemingly forget every trading basic, and neglect to follow their carefully thought out trading plan.
Unfortunately, when you abandon your trading plan and try to buck against trading basics like cutting your losses quickly, things usually don’t well.
To attain and maintain success as a trader, you really have to work hard to cultivate a mindset where you don’t let your emotions get the best of you. This is what trading psychology is all about.
Reducing Errors in Judgment and Impulsive Actions
Now you know what trading psychology means. But why does it matter? Why is it worth spending time to develop and refine it in your trading career?
Improving your trading psychology can have incredible effects on your trading career by helping you reduce errors in judgment and impulsive actions.
How so? First off, it’s an opportunity to consider how trading psychology affects you personally. Considering your own reactions during trades can clue you in on triggers that prompt you to make bad decisions.
For instance, you may notice that whenever you begin to lose money in a trade, instead of cutting losses, what you do is begin to panic and rationalize holding on to the position longer in hopes that things will turn around.
As many traders who have done this know, it rarely works out that way. Usually, you end up losing a lot more with that “hold and hope” mentality.
When you become mindful of your personal tendencies and emotional reactions in trades, you’re able to identify shortcomings that are holding you back.
Once you begin to identify such behaviors and what causes them, you can begin to take steps to change them.
By working on eradicating these emotionally reactive responses, you can develop a stronger sense of steadiness while trading.
How to Improve Your Trading Psychology
Ideally, you’d trade as if you were a computer: based on facts and data and without any shred of emotion. If you were able to do so, you’d probably have a higher win rate and wouldn’t have the same emotional gut reaction to things like having to cut losses.
However, as much as you can aspire to that, the fact is that you’re human. You’ll never totally be able to shut off emotions in trading. But you can take steps to improve your reactions so that your suffering can be minimal.
Here are some tips for how to improve and refine your day trading psychology:
1. Get Yourself in the Right Mindset
As a trader, you can benefit from daily pep talks and self-motivation exercises.
No, that doesn’t mean that you need to go all Tony Robbins on yourself. Simply reminding yourself of things like the fact that stock prices are not personal can be powerful reminders.
Of course, another effective way to get in a positive state of mind for trading is to give yourself the gift of time.
If you’re constantly waking up at 8:02 a.m. and scrambling to study and prepare before the trading day begins, you’re more likely to approach trading from a flustered and rushed state of mind. It’s much harder to maintain a level head like this.
Try waking up a little earlier so that you have time to acclimate to the day. It may help to set up a morning routine of working out or meditating before you start your research so that you can approach trades from a calm and relaxed mentality.
Taking a few moments to get centered and make sure your head is in the right place before you start trading can have positive ripple effects all day long.
You might not totally be able to remove emotions from the equation, but it can help reduce potential damage when you find yourself making quick decisions.
2. Have a Great Base of Knowledge
One of the best ways to improve your trading psychology is to increase your knowledge.
Having a strong base of knowledge about how trading works will set you up to make better decisions, both long-term and on the fly.
By gaining technical prowess about how trading works, you can be better able to navigate the many curveballs that will be thrown your way throughout the course of a trade and react in a calm manner.
Think about it this way: You’d never take on a huge home repair without educating yourself about what’s involved with it and the potential things that could go wrong. You’d want to be prepared for all outcomes, which requires knowledge and research.
With trading, educating yourself can prove similarly helpful in allowing you to minimize risk and make smarter decisions.
I make sure to educate you on the basics, but then teach you how to actually use that knowledge and the trading techniques to try to make profitable trades.
A strong foundation of knowledge is always a good thing, and it will help you make more informed decisions as a trader.
3. Imagine Winning
Olympic athletes will do visualizations of seeing themselves winning a race or game. It might not actually get them to win the gold, but it certainly doesn’t hurt their performance.
Why not do the same with your trading? Visualizing how it might feel to make a killing on a trade can be very motivating, and it can help prompt you to try to figure out real steps that you can take toward making it a reality.
Physical inspiration can prove helpful as well, in the form of a physical list of your goals, or a visualization board featuring photos of things that you’d like to buy or achieve with your potential earnings.
Not long ago, Forbes reported on a TD Bank study about the power of vision boards.
According to their findings, “One in five small business owners used a vision board or other visual representation when starting their business; 76% of those business owners said that today their business is where they envisioned it would be when they started it.”
By imagining the best case scenario, you can inspire yourself to achieve more.
4. Imagine Losing
Expect the best, but prepare for the worst.
Visualizing a big win is important, but you should also take a few moments to consider how it might feel or what it might look like to lose big, too.
No, imagining the worst-case scenario isn’t an exercise designed to turn you into a Debbie Downer.
Rather, it’s a preventative exercise that can keep you from making truly foolish mistakes. By considering the worst that could happen, you can take proactive steps to avoid such outcomes and potentially save yourself from blowing up your account.
Often, the element of surprise can work against you in trades, prompting knee-jerk reactions on your part. You may find that making a list of what could go wrong will help you maintain a level head if you are faced with needing to cut your losses or other blocks in the road.
The fact that various scenarios have crossed your mind will make them easier to handle if they actually happen.
By considering what could go wrong in a trade, you can make a more detailed trading plan that has entry and exit points designed to save you from negative outcomes. The more realistic and detailed your trading plan is, the more likely you are to stick with it.
5. Remind Yourself That it’s Real Money
Did you know that some traders actually keep a stack of cash on or near their work area? True story. But why do they do it? For two key reasons.
First, seeing physical cash can be a powerful motivator of what you’re working toward as a trader. It reminds you that as a trader, this is what you could stand to gain: real, cold, hard cash.
However, the second reason might even be more important. Physical cash is a reminder that when you’re trading, it’s real money at stake.
When you’re trading online, it can be easy to forget that the numbers on your screen are actually representative of dollar signs. They represent dollars that actually belong to you. You are purposefully and willingly risking this money in hopes of gaining returns.
Remembering this fact can help you make smarter decisions with your money.
You don’t want to lose that money, after all. So be sure to be responsible: Always do your research, make a trading plan, and approach trades in a meticulous way.
6. Observe the Habits of Successful Traders
Imitation is the sincerest form of flattery, or so they say.
When it comes to trading, you never want to copy another trader’s work exactly. Not only is it bad manners, but it just doesn’t work.
There are simply too many variables in trading to copy someone else’s methods exactly and hope for success. You’ll always be a step behind, and that means you’ll never have an edge as a trader.
However, that having been said, observing the positive characteristics of successful traders and cultivating aspects of them or methods into your own trading can be extremely effective for your own improvement.
Piecing together the successful methods that work for others can make you a stronger trader. It can also help you observe the positive effects of good trading psychology.
So do look at what others are doing well, and try to see how you can incorporate their methods, habits, or traits into your own unique style of trading.
7. Practice, Practice, Practice
You’re rarely good at something the first time you do it. Trading is no different.
In my , I teach my students the skills and strategies they need to know to move forward as traders. Diligent study and hard work will absolutely make you a stronger trader.
However, time can (and likely will) be your biggest teacher.
Practice is also the best and most reliable way to gain the mental strength it takes to trade and to improve your trading psychology.
Every tip listed in this post will be most effective over time and with practice. None of them are intended to be a one-time exercise, otherwise, their effectiveness will be limited.
8. Observe Your Progress Over Time
One of the best ways to improve your trading psychology is to monitor, observe, and document your progress over time.
An effective way to do this is to take daily notes in a trading journal. This might be in a document on your computer, or you might use the one built into this software’s paper-trading functionality. It might be handwritten notes. But keep a record of what you’re doing as a trader.
Document your successes, and try to see if there are trends or things that you are doing that are reliably making you money. On the flip side, take the time to keep track of things you’re doing that are reliably wasting your time and making you lose money.
Over time, this log will act as an invaluable resource to streamline and improve your trading and to make your mental clarity stronger on each and every trade.
Controlling Your Trading Psychology After Losses
Trading psychology can be a fickle thing. When you’re riding high after a profitable trade or two, you feel confident and in control and on track. But when things start going south or you lose money, you can quickly become a wreck and make bad decisions.
These tips can not only help you get back on track after a loss, but they may help you avoid losses in the first place.
Stick With Your Trading Plan
If there’s one exercise that you do to strengthen your trading mentality, it’s this: Make a trading plan, and stick to it.
A trading plan is like a roadmap for the trade ahead. You determine your entry and exit, the size of your position, and your risk and reward ratio, among other things.
Just by making the plan you’re more likely to stick with it, simply because it’s there. But it also helps you mentally prepare. If and when things do shift quickly in your position, you can refer to your plan. If the price reaches your predetermined points, you know what to do.
A trading plan can help provide a feeling of security that can help get and keep you on track.
Follow Stock Market Trends
One of the best ways to improve your trading psychology is to go with the flow. This may seem at odds with my earlier reference to trading like a machine, but hear me out.
Many traders make the mistake of trying to bend the market to fit their needs or desires. However, it doesn’t work that way.
There are cycles to the market, and just because you like a certain sector or a certain style of trading doesn’t mean it will work in every market climate.
Meet the market where it’s at. During some periods, it may be smarter to take longer or shorter positions based on where the action is and what the economy is like.
It’s also important to remember: Sometimes the best trade is no trade.
Look at the market trends and tailor your trading in kind, rather than trying to mold the market. It’s bigger and stronger than you, and it always wins.
Importance of Stop Orders and Mental Stops
Having stops in place can be a great way to ease your mind during trades.
A stop order is an actual order type you can place with your broker. With a stop order, you specify that you will buy or sell a stock if and when it reaches a certain price. That amount is called the stop price. Once the stop price has been reached, the order is executed.
Stop orders can help stack the odds in your favor as a trader. Of course, you never have total control of what will happen. However, by putting the stop order in place, you’re making an effort that can have a positive outcome for your trade.
A mental stop is less tangible: basically, it’s making a mental decision or promise to yourself about when you’ll exit a trade or investment.
With a mental stop, you still have to do the work of executing the trade. So in a way, mental stops will require more willpower to actually make a plan and stick to it. When it’s automated, like with a stop order, you’re less likely to change your mind at the last second.
Both stop order or mental stops can help you cut your losses, so use them!
Be Disciplined and Never Stop Learning
To continue refining your trading psychology over time, consider these your two guiding principles: Be disciplined, and never stop learning.
They go hand in hand. Be disciplined about making and maintaining positive trading routines, and be diligent about following the market and continuing to read, study, and learn.
Be obsessive about learning about how trades work. Study the past behavior of stocks, and try to learn how they act and react the way that they do. Do all sorts of background work, read the news, and become an expert on trading and the sectors you specialize in.
If you keep doing these things over time, you’ll be able to make more educated and tactical decisions about trades.
Knowledge is a sure-fire way to shed light and diminish fear, so it’s very helpful for your trading career.
You’ll find a community of people like you, who want to change their lives for the better with the stock market.
The Challenge doesn’t offer just a trading education, but a resource to communicate with other investors, share and find tips, and to learn from trading peers.
You’ll have access to incredible resources like my library of thousands of lessons and webinars, which enable you to learn all about trading and to find techniques that you can put right to work.
I don’t just want to teach you what I do — I want you to learn how to think for yourself as a trader.
If you try to do it alone, you’ll have to learn things the hard way, and you may lose motivation. But with the Challenge, you’ll have a positive source of support and all-important accountability that helps keeps you motivated and on track.
By taking the time to work on your personal trading psychology, you can improve your overall career as a trader.
So much of trading is mental, so it’s important that you remain diligent and attentive, yet detached enough that your emotions don’t get the best of you.
Following the tips detailed in this post can help you take a big step toward becoming a stronger and more stable trader.
How do you keep your emotions in check while trading? Share your tips below!