- Why trader psychology is the most underappreciated element in trading.
- Cultivating self-control and discipline.
- A Practical exercise to improve discipline.
Mastering the psychology of trading is one of the most challenging yet underappreciated elements of learning how to trade the markets, regardless of whether one trades part-time from home or trades professionally for a living. While many books, websites, and resources discuss futures market trading strategies, very little has been written specifically about trading psychology, particularly for active short-term traders. This could be due to the fact that most technical traders, such as day traders and swing traders, tend to be more mathematically oriented and, therefore, less interested in subjects such as psychology. Yet, ignoring the psychology of trading will almost guarantee your failure in learning how to be a consistently profitable trader.
The only time traders and investors turn for help on this topic is after they have blown up their trading accounts and have finally hit rock bottom. However, in this series of articles, we intend to improve your trading education by explaining the key psychological emotions to be aware of and how to avoid the common pitfalls that investors and traders commonly experience while learning to trade.
Self-Control and Discipline
Successful trading is 80% psychological and 20% methodical; self-knowledge is the key to market success. A trading method by itself, no matter how well thought out, cannot be successful if it is not applied in the correct manner. It is in the application of a trading method that many traders end up losing. Consider the analogy of a high-performance-racing car. No matter how aerodynamically or technically advanced, it needs to be driven. A cutting-edge piece of engineering, such as a racing car, needs to be driven by a person who can drive it with care. Just as a disciplined driver is needed to race a car, a disciplined trader is needed to apply a trading method. All traders have heard the word “discipline,” but few really understand what it is and why it is vital to develop it.
To improve our discipline in trading, we must focus on sticking to our trading plans no matter what. There will be times in the market when we will be tempted to take a trade that is not in accordance with our plan. We must resist the temptation by all means necessary. Remember, even if the trade works out, it’s not a long-term prospect to constantly deviate from our trading plan. Ask yourself every time you place a trade, ‘Would a professional trader take this trade?’ The answer is yes, only if it aligns with your trading plan. Be honest with yourself and understand that your trading plan must be honored if you want to be successful in the long run.
Read over your trading plan daily for 15 minutes before the start of the trading day, and remind yourself of the importance of following the plan and renouncing any temptation to take trades that are not in accordance with your plan.