Mindset and the Importance of Psychology in Trading

September 10, 2020
Philip Salloum

Understand the importance of trading psychology and its influence on day trading

Psychology & Trading

If you’re reading this article, chances are you’ve had some trading difficulties, or have attempted but haven’t been able to take your trading to the level you want. For something that I believe makes up the bulk of trading itself, I believe it is also the most overlooked. Trading psychology is what I am talking about, and it is definitely the most important aspect of trading that every trader needs to develop and master to become successful.

In the most basic way to put it, trading psychology is the term that defines all the feelings and emotions experienced day to day by traders. It is not something that can easily be controlled, however with time and experience it is definitely something that is needed to master in order to move forward in your trading journey.

Why Mindset Matters

There are crucial skills to develop in mental agility, and mindfulness is an incredibly powerful and important tool for all traders. The subject has become increasingly relevant in scientific studies, showcasing its ability to positively impact us psychologically, and once implemented, it can bring high value to your trading, allowing you to control unwanted thoughts and feelings, and redirect you into what's most important, your trade.

To achieve greatness in trading however requires us to develop the trading knowledge, skills, and abilities amongst our psychological-based training to perform in the markets. The best and most consistent performers in trading have taken forex trading courses with additional guidance by coaches, mentors, and specialised training to further their education. There is a reason the top traders stay at the top, because they are harnessed with the right skills, tasks, mindset, and continuous training to do so.

 

Emotions that Drive the Markets

The two emotions that drive the markets are fear and greed. Based on these two emotions, you can find that mental blindspots occur very regularly in trading psychology.

Based on the emotion of fear, the following can occur:

  • Fear of missing out (FOMO), leading to bad entries
  • Exiting a trade too early
  • Exiting a trade in a drawdown only to see it going their original direction
  • Adding to a losing position in hope of recovering the drawdown
  • Constantly checking your trade
  • Finding yourself glued to the charts

Based on the emotion of greed, the following can occur:

  • Moving your original TP in order to gain more profits
  • Adding large positions after seeing gains in a position
  • Over trading and over-leveraging to chase big returns
  • Risking big on a single trade
  • Confirmation and optimism bias

Mistakes and Losses in Trading

Another important thing that needs to be understood is the difference between mistakes and losses. Before truly finding out about what forex is, people think that trading mistakes and trading losses are the same thing. However, a trading loss is simply a trade that hit your stop loss and did not go your way. Until the day you learn to accept that losses are just as much a part of trading as winners, you will not become successful. A trading mistake on the other hand is  simply not following your own rules. You have to understand the importance of being disciplined, following your daily essential tasks and how it is possibly the single most important aspect of lasting in the markets. Never break your own rules just to be right, because as said earlier, you need to learn that losses are completely normal and expected.

 

Emotions are a normal part of everyday life, however it cannot be stressed enough how important it is to leave them completely out of your trading. Many others believe that negative emotions should be shut off, however positive emotions are great to have, however I think otherwise.Emotions should not be attached in any way to trades, whether positive or negative. If emotions are attached to every single trade then what can happen is that you could have a great week and make a certain amount of money that week. Now by attaching an emotion to that trade, you are programming your mind to believe that the following week even if half that amount was made, it is not good enough as you do not have the same intensity of positive emotions. In trading you have to be emotionless towards both wins and losses and strictly follow your rules.

 

Constantly working on your psychology and mindset is key to developing and succeeding as a trader. Something as simple as developing a daily morning routine, keeping a journal, meditation, exercise, and visiting a mindset coach, are great tools to constantly develop and keep your psychology and mindset at its best. Meditation alone has helped me to develop as a successful trader by improving my focus and attention, reducing stress, reduced panic, improved my information processing, increased mental strength and emotional intelligence, and increase in my focus.

 

If there is one thing that cannot be stressed enough, it is that the aim of forex is to gain pips, not money. Chasing money, especially fast money, is gambling and you will never have control as long as you remain with that attitude.

 

Philip Salloum