Monday, September 5, 2011

Tips for Improving Your Trading Psychology, Part I

If you ask any successful trader what is the most important factor to a long and prosperous career in the markets, invariably the answer is discipline. You simply must have the proper mentality or you will be like the 95% of traders who lose over time.

Those who wash out do so for many different reasons on the surface:

Insufficient starting capital
Trying to get rich quickly
Holding onto losses too long
Trading too frequently
Burning out

But, scratching beyond the surface, all of these are just symptoms of a trader having the wrong psychology. That leads to emotional trading, which over time will be the death of one's account. Being emotional is one of the best parts of being human...but believe me when I tell you it has NO place in your trading. You need to flip that switch into the off position from the time you do your research to the time you exit your position.

The good news is attaining the right trading psychology is entirely possible and ultimately quite enjoyable. Following these tips will yield bottom-line results and reduce your level of stress...and that is precisely what will keep you trading in the long run.


People in this industry will tell you such bromides as "money never sleeps" or "you need to eat, drink and breathe the market". Please. What they are saying is they are slaves to the markets and thus to fear and greed. I've worked with people like this. Even if they made money over a short stretch they've usually given it all back in time because such a mentality leads to short attention spans, stress and a lack of proper sleep. This is a breeding ground for impulsiveness. They are in no condition to make prudent decisions, yet they trade way too often trying to greedily catch every move. They are usually nervous wrecks, coke addicts or on the verge of a coronary.

You, on the other hand, want to be a free human being who uses the market judiciously to achieve your long-term objectives. You do this by trading longer time horizons (swing or position trading instead of day-trading) and placing smaller trades risking less than 2% of your capital. You get to relax and see your friends and family when your day is over while they are worrying endlessly that their highly leveraged account could be blown up by after-market news. They are following every intraday gyration in Asia and Europe on CNBC at 3 a.m. while you are sleeping soundly. They are the hare whose heart will fail. You are the tortoise built to last.


Poor traders and novices chase price moves impulsively through fear and greed at the same time: fearing a stock will take off without them aboard and greedily hoping it will go straight up without a hitch. They do not know the Fibonacci retracement and support/resistance levels of the stock they are chasing. They do not realize that a stock will often come back to a targeted price. All they think is they have to get in NOW. They make their pricing decisions in the moment with lights flashing and the CNBC white noise blaring. They use market orders with no stops or exit strategy. They don't read charts correctly if at all. They don't prepare. Over time, they fail.

You make your pricing decisions when the market is closed, away from noise and hype. When you are serene. You've pored over your charts and know key support/resistance numbers. All trades are filtered through your pre-trade checklist. You place limit and stop loss orders and use trailing stops and/or adjust your stops manually when the trade is going your way. You're confident when you hit that Buy or Sell button that you have done all you reasonably can and that the risk-reward ratio was there even if the trade is a loser. You are prepared. Over time, you prosper.

Click here for Part II:

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