Many unprofitable traders think they have psychology problems in their trading. But is it actually the psychology where the mistakes are made?
I am definitely on the side that thinks psychology comes way behind everything else in trading. Although it does not look and feel that way at times, I think that that feeling is a lack of expertise.
In my opinion, the word “psychology” is overused and maybe even a little misplaced in trading. If it is used in the context of not being profitable, I think the words that in most cases should be used are: discipline, knowledge and experience.
The psychology part comes into play when we are actually not doing what we are supposed to be doing and are losing way too much of our capital. But that can be led back to not having discipline to execute your edge and/or knowledge of what you are actually doing.
Also, I think only saying “edge comes first” is too easy.
What is edge?
“If someone or something has an edge, they have an advantage that makes them stronger or more likely to be successful than another thing or person.”
Now sure, you can find some form of edge in psychology; like having balls of steel in certain situations when everyone else is too scared to pull the trigger.
But again, if you really know what you are doing and that situation is part of your system and setup, and you know exactly what your risk is and so on, why would you need balls of steel? It’s just discipline to pull the trigger since you back tested it and know that this is what it takes to make money in trading. Just like running any other business, it’s just executing the business plan.
Many would argue that you need psychology to hold onto the winner and not let the fear of giving back profit makes you close the trade too early. But again, this should be part of your system and if you are not executing it than it’s a problem of discipline. Having fear of giving back is psychology, sure, but ultimately that fear comes from being money focused, and that means that there are other problems than psychology at play.
You are trading too much size for your experience or financial situation. And this then comes down to lack of knowledge or discipline to do the right thing for your situation. See how the psychology doesn’t really play a big role here?
Trading psychology is characterized primarily as the influence of both greed and fear.
Greed drives decisions that appear to be too risky, resulting in bigger losses or giving back profit.
Fear drives decisions that appear to avoid risk and generate too little return compared to the losses.
If you really know what you are doing, you should know:
- How to study to keep improving. (This one is at the top for a reason, this is where it all starts).
- How your trading routine looks.
- What setup/setups you trade and what the positive expected value is.
- How to know the difference in a B or A+ situation for setups.
- How to know what kind of market/environment/sentiment you are in and what setup/size you trade during what situation. (A simple example: breakouts in a bull market and breakdowns in a bear market).
- How to scan for the setups.
- How to organize your watch lists.
- How to size correctly.
- Amount of risk per trade/day.
- How you enter the trade.
- What time of day do you trade.
- How long that trade should take.
- How to stop out of the trade and how does the stop maybe move during the trade.
- How to take profit.
- How to use News/Fundamentals or how this can affect your trades.
- What to do on a cold streak.
- How you deal with a drawdown.
- What to do on a hot streak.
- How and when to wire money in or out of your account
- How you journal for reflection and improvement.
- What emotions you can expect while in trades. <– Guess this is psychology. But it’s experience and discipline that are needed in order to do the right thing with these emotions.
Now if you miss anything of the above, there is room for mistakes you can’t put a finger on and this will lead to doubt and thinking that you have psychological problems.
But in reality it’s just a lack of knowledge and experience.
Should you learn about trading psychology?
In order to create an edge you need a relentless and strong mindset and that is all psychology. So yes, it is 100% a part of trading, but in my opinion it’s a smaller part than some make it out to be. Especially early on in a trading career.
You definitely should learn about it, and it can help you be more successful, but not without actually having a full understanding of your trading system and having a edge in the market.
ScottN made a great analogy about this topic a while ago:
“A car engine is a good analogy for trading. For the car to run, MANY things have to work properly; the Battery, the onboard computer, the spark plugs, the fuel injection, to name a few.
If any one of these things is off, the car won’t run! Trading is similar…..
If your psychology is wrong, you’re sizing, your plan, your edge, your setup, your failure to take a stop, etc.. You will not perform as a trader! To succeed, all of these areas must be on point !”
