psychology of trading


The Psychology of trading – In any competitive arena, whether it be trading, sports, or life in general, the question is often asked: what sets apart the best from the rest? In most cases, success isn’t determined by those who are physically the best – otherwise, the strongest people would be the most successful. Similarly, it isn’t the people who have necessarily come from the most privileged backgrounds or have had the most expensive education. So, what exactly makes the difference between someone good and someone great?

All of us can think of at least one person we admire who possesses specific characteristics and qualities that we would like to emulate – and those characteristics and qualities are invariably psychological. Therefore, any measure of long-term success attained by anybody can usually be linked back to their mindset, for example, an ability to bounce back from adversity, to learn from their mistakes and move on without dwelling on their failures, or have an unwavering belief in themselves and what they’re doing. Nowhere is this no truer than in trading.

Behind all the various complexities, trading is simply the interaction between the neutral reality of the market and the mind of the trader perceiving it. Therefore, with no trader or group of traders being powerful enough to manipulate the markets for long, the only thing we can manipulate is our mind and its ability to perceive market information accurately before acting accordingly. To do this, however, the trader must ensure that two distinct aspects of their mind work in harmony with one other – namely, the conscious mind and the subconscious mind.

Emotional Intelligence (EI) 

In contrast to average intelligence as measured by IQ, which provides a somewhat tentative measure of a person’s conscious ability to process information rationally and logically, Emotional Intelligence (EI) measures a person’s subconscious aptitude in processing their emotions and feelings.

EI is a powerful tool which can help us to do this and is based on 5 key factors:

1. Awareness of your own emotions

2. Management of your emotions

3. Awareness of other people’s emotions

4. Management of other people’s emotions

5. Motivation


Your trading performance will reflect your ability to deal with risk, which is another word for uncertainty. However, despite the market being a seemingly unstructured environment of an endless stream of random events, uncertainty doesn’t arise from the market itself but the individual traders. Therefore, it is vital to understand that although you never know what the market may do next, this doesn’t matter if you are confident about what you will do next.

Even with the most accurate market information and analysis, a lack of self-certainty will undermine even the very best trader time and time again. This gives rise to perhaps the most powerful feeling within the emotional spectrum – FEAR!


Psychologists state that human beings are naturally afraid of only one thing – darkness and that every other fear has been imposed by society, parents or cultural values. Dig a little deeper, however, and this fear of darkness arises because of innately human fear of the unknown. In this content, therefore, it is perhaps not surprising why most people are so reluctant to come face to face with a range of emotions which usually have been repressed or suppressed for many, many years.

Studies have shown that trading as a profession is on par with Formula 1 driving or grandmaster-level chess in terms of the stress it places on the person taking part. In this kind of pursuit, therefore, it is inevitable that the trader will encounter many psychological issues that will arise because of the high pressure faced by traders daily.

Therefore, you have two choices – either continue to suppress these emotions until they escalate to a point where you are no longer able or willing to continue trading or have the courage to accept these emotions and begin managing them.

Trade Execution

Whether you can execute your trades is related to the amount of fear you generate at the time or lack of fear. Fear is always the result of your beliefs and experiences about the threatening nature of the market. What threats do the markets pose? None – of you have the confidence and trust yourself to act appropriately under any given set of circumstances. 

What you fear is not the markets but rather your inability to act appropriately when you need to, without hesitation.

You had to learn what to fear in your dealings with the markets. What you learned to fear resulted from whatever you did that caused you to experience pain. Your pain forced you not to know what to do; next, that gave you a result you neither expected nor intended. In the market, you are free to act or not to act. The markets cannot do anything to you that you don’t allow, even if it is out of ignorance or a sense of powerlessness.

One effective way to minimize this fear and, in some cases, neutralize it is to change your perception of the entire event. The single most significant fear producer is a loss. You enter a trade; you find yourself on the wrong side. What do you do? If you are like most losing traders, you will wish, hope and pray that the trade will turn around, waiting for one more tick, one more tick, while the loss continues to mount against you. In reality, you are doing nothing.

Act fast to get out of a losing position. Keep your losses to a minimum. If you act immediately, once your criteria for a losing trade have been met, your losses will be minimised, and that trade has been executed to the best of your ability.

Emotional Management 

Once this top-level analysis of your core values has been completed, the next step is to conduct a lower-level analysis of the emotions which occur on a moment-by-moment or trade-by-trade basis. The best and most efficient way to do this is to keep a record of the feelings you experience throughout the trading day and especially during the lifetime of a trade. This could be as simple as assigning each trade a score from 0-10 based on how you feel about the trade or as complex as writing a detailed summary of the range of emotions you went through almost on a tick-by-tick basis.

However this is done, some of the most important questions you can ask yourself are:

• What did I feel as I waited for my trade to be executed?

• What did I feel when I executed the trade?

• What did I feel as I managed my trade?

• What did I feel when I exited the trade?

• What did I feel after I exited the trade?

By making this a routine, you will discover that instead of experiencing a wide range of emotions during your trading day, there will only be a few feelings that predominate. Therefore, you will gain a unique insight into your psychological makeup and know exactly which emotional issues you’re required to work on to become a better trader.


Once you’ve learned the specific tools and techniques to align your conscious and subconscious mind, the next step is to use your mind to accomplish specific goals you set for yourself. These goals can be one of two types:

• Performance Goals: goals which focus on doing something well

• Outcome Goals: goals which focus on achieving a specific objective or task.

Whatever the goals you wish to achieve throughout your trading career, however, there are 5 fundamental principles to bear in mind when working with goals which will significantly enhance the chances of achieving them:

1. Be specific about what you want

The mind is not programmed to understand negative statements such as “I will not smoke anymore” The reason for this is because as soon as you articulate this kind of statement, the immediate image is of you smoking! Therefore, state your goals in terms of what you want instead of what you don’t.

2. Create goals which are realistic yet challenging

The mistake that most people make when it comes to setting goals is to set targets too quickly to achieve (which makes them lose interest) or too complicated (which makes them become discouraged and give up). Therefore, it’s crucial that the goals you set for yourself are achievable yet challenging enough to motivate you to commit to them without becoming bored or complacent.

Bet on Yourself

Nothing in this world is guaranteed or certain. In most cases, the difference between a successful man and a failure is not about better abilities or ideas but the courage that one has to bet on his ideas, take a calculated risk, and act. If we wait until we are confident and sure before we act, we will never do anything. Any time you act, you can be wrong; any decision you make can be the wrong one. This should never deter us from going after the goal we want; you must daily have the courage to risk making mistakes, failure, and being humiliated. A step in the wrong direction is better than staying on the spot all your life because once you are moving forward, you can correct your course as you go. Your automatic guidance system cannot guide you when you are stalled, standing still!

Why Johnny Can’t Pull the Trigger

You’ve spent countless hours studying the markets, learned many techniques and tricks of the trade, you’re ready to go get ’em! But wait, what’s happening? Every time you see a perfect set- up you’re hesitating, thinking to yourself,” “Maybe I should wait, this might not be correct, and what if I’m wrong”

You need to eliminate this vexing problem that affects most traders at one time or another. Read and review the information presented on these pages. You will overcome a “Pulling the Trigger” problem by actively participating. We know -we’ve been there too. So now is the time to…

Take Some Action

What makes the difference between a winning trader and a losing trader? More knowledge, more money, a better computer? No, it is simply the ability to take action.

The markets leave clues; we study and analyse those clues and then act based on what we have determined to be reliable indicators of future price action—not acting means you are not in the game. You believe that not taking a trade will be less painful than taking the trade.

If you want to be a trader, you must actively trade; you must leverage yourself to believe with all your heart that not taking a trade (the one you have watched develop and that meets your criteria for risk) will cause you far more pain than taking the trade and perhaps seeing it become a loser. Sitting and watching another winning trade pass you by is more frustrating than a loss. So how do you leverage yourself? How do you change from fearing to take a trade to fear not to trade?

For more on the Psychology of trading and Market Psychology, please see our Accredited Level 3&5 courses in Financial Trading.

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