Trading Psychology 101

As you may have read in the section on why many new traders fail to make money, I think there are far more important topics to get right first, such as money management and developing an edge. Once you have those elements in place you have to pay attention to psychology as it can undermine your performance.
As you may have read in the section on why many new traders fail to make money, I think there are far more important topics to get right first, such as money management and developing an edge. Once you have those elements in place you have to pay attention to psychology as it can undermine your performance.

The Number 1 Psychological Challenge
I think the biggest psychological challenge when starting trading is “the need to be right”. The need to be right can drive a trader to: close trades too soon, leave failing trades open way too long, over analyse the market and sit there paralysed unable to open any new trades, etc. The best way to overcome this is through more trading. Assuming you have a reasonable edge and money management plan in place, once you have pulled the trigger enough, you just lose this need as you watch the money slowly trickle in. However, if your trading plan is crap, then this need to be right will plague you as you will constantly fear losing money.

Common Problems
Beyond ”the need to be right”, the other usual things that affect most traders include: fear, greed and boredom.

Boredom is probably the one that many traders struggle with the most. There is nothing worse than not doing anything. You just want to trade, so you pull the trigger on a trade you had no business being in in the first place.

Fear is a common problem faced by many traders. Fear affects traders in the same way as the need to be right. Fear causes traders to close trades too soon, leave trades open hoping they will come good again, over analyse the market, etc.

The last most common is greed. Greed causes traders to over leverage their positions and over trade. When greed strikes your whole money management plan just goes out the window and usually a day, or a week or a month later, your trading account goes up in smoke.

Fear, greed and boredom are emotions that are a normal part of trading and issues related to them start to diminish as a trader matures, learn to drop their need to be right and develop a higher level of trust in themselves and the discipline to follow their trading plan.

Other more Serious Issues
The last category of psychological challenge you may be unfortunate to face are genuine psychological problems, such as anxiety, depression, phobias, uncontrollable anger, gambling addiction, etc. These issues can destabilise you from doing well in any activity, trading included. It is probably best to seek professional help if you think these things are affecting you.

Macrotactics is a blog devoted to recording a part time trader's journey into the world of trading currencies. In my day job I work as a manager in an Information Technology company. I live in sunny Queensland, Australia with my wife, a cat and a baby on the way. I have been banging my head on this trading thing for at least 3 years now and the deeper I dig into the topic of trading, the more I realise there is to learn. Trading for me has become... More