Trading Psychology – The Elephant in the Room

During my time sports trading, I have often heard experienced trader talk about the importance of trading psychology. I have never been against the concept per se, however for quite some time did not understand or appreciate what they were trying to convey. It was the elephant in the room – or more accurately in my head. I knew it was there, I knew it must be important (otherwise why would the experienced traders keep talking about it?) but I was not sufficiently willing to actively understand the notion. I felt that as long as I had a strategy that appeared to work, then all the other pieces of the trading jig-saw-puzzle would just fall into place. How wrong could I be!

Devising a trading strategy that you believe in, have confidence with and has a proven track record over time is obviously essential. Although without the correct psychological mindset in place within which the strategy will be implemented, it’s like casting seeds onto the road. Put another way, the correct psychology of trading is the fertile ground for my trading strategies. The environment within which my trading will grow. Without which my trading will be doomed to failure.

As with many things in life, we often don’t appreciate the scope and significance of a subject until we start to understand it. In fact, more often than not, the more we learn the more we realise how much there is to learn. However, to get the learning process ball rolling, we must be willing to, a) see value in the topic, and b) commit ourselves to understanding it.

Now the topic of trading psychology is huge, and way beyond the scope of this blog (and me!) to covey in a single post. Although I will almost certainly return to the subject – given its importance – in future blogs. You only have to type in ‘trading psychology’ into Amazon to see how many books have been written on the subject by far better authors than me.

However, by way of a brief summary, I thought I would provide what Mark Douglas describes as The Fundamental Truths, which underlay the mindset of successful traders by way of a useful check list.

  1. Anything can happen.
  2. You don’t need to know what is going to happen next in order to make money.
  3. There is a random distribution between wins and losses for any given set of variables that define an edge.
  4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
  5. Every moment in the market is unique.

Failure to put the above in context of the subject of trading psychology as a whole, risks lessening their true value. However, I find it a useful reminder that I use before I start trading each day – I have it pinned to the wall above my trading screens – to help set me up for the trading day and keep me on track throughout it.

Win or lose, it’s always worth a reminder!

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