When someone says the term "Trading Psychology" they are referring to the emotions and mental state of a trader that may dictate the success or failure when trading any financial market. This trading psychology is unique to the individual trader. However, in general, it represents various aspects of an individual’s character and behaviours that influence their trading decisions and consequently, the actions they will take in the markets.

Trading psychology can be as important, if not more important, than other attributes such as Fundamental Analysis, Technical Analysis, Price Action Analysis and Sentiment Analysis and trading knowledge, experience, and other general skills that are important in determining if a trader will be successful in the markets.

Discipline and risk-taking are two very important aspects of trading psychology since how well a trader will implement them are essential to the success of their trading plan and ultimately if they can make a profit or not. Fear and greed are commonly associated with poor trading psychology. Hope and regret can also be a part of negative trading behaviour.

In the following Wiki, we will explore many aspects of Trading Psychology as well as strategies to help cope with negative trading behaviour. This is a large Wiki so take your time in the table of contents and pick what seems right for your situation.

This Wiki is a part of our Essential Forex Trading Guide. Be sure to check that out HERE.

Introduction to Trading Psychology

You may have heard that the failure rate for new traders is extremely high. However, this is especially true in the case of retail traders. But why is the case? The answer lies in the focus of what retail traders tend to focus their learning on. Let's use two traders as an example:

The first trader is a complete newbie who has decided to trade from home utilizing the information from a bunch of different courses he found on the internet for his training. It’s highly unlikely that this trader will ever get exposed to enough training on the topic of psychology. He/She may hear some famous clichés or even read a book or two but generally, the focus on psychology will be very low when compared to the other elements of successful trading. In fact, he will probably only be exposed to Technical Analysis alone for his training because that is what most training packages on the internet chose to focus on.

Therefore most retail traders will focus the vast majority of their training on Technical Analysis. Technical Analysis is the choice of almost all retail traders to use with their trading efforts. The reason for this is that Technical Analysis is sexy, very visual, simple, and interesting. It's also very black and white because if this pattern occurs you do this, if the indicator says this then you do that. Unfortunately, it’s also fairly useless without the other elements of professional trading such as Fundamental Analysis, Price Action Analysis and Sentiment Analysis, Trading Psychology and Risk Management.

Choosing to focus on Technical Analysis alone is the most common mistake that retail traders make. However, it’s not necessarily the retail traders' fault. 99% of all the training programs on the internet are all based on Technical Analysis. So how is it possible for them to get all the info they need to succeed when it’s virtually impossible to find it all in one place? There are some courses that will teach some risk management skills and others that will talk about having proper trading psychology but this will likely be a small component of the training.

On the other hand, if we look at a trader who has just completed and graduated an institutional level training, they too will have received much education and training. They will also learn about Technical Analysis but the biggest thing we want to point out here is that the institutional trader will have extensive exposure to training and development on their trading psychology. This will not just be a course; rather, keeping a healthy trading psychology will be an ongoing process over their entire trading career. There are plenty of trading firms that pay big bucks for in-house trading psychologists. The reason they would do this is because the traders are the firm's money makers and making sure these traders are making sound trading decisions and not allowing outside influences to affect their trading is a major priority. Paying a good trading psychologist a couple of hundred grand per year can save the firm millions so it's a no-brainer for the firm.

The Importance of Trading Psychology and why you can’t Stay in the Game without it?

Let’s now look at an illustration that will help you not only understand the importance but also why so many people tend to overlook having a proper trading psychology.

The Right Way to Aquire Skills:

Let’s imagine that you are starting to learn how to play the sport of golf. What are the first things that you need? The latest and greatest set of golf clubs, a membership to a prestigious golf club, or maybe some really expensive golf shoes so you look good on the course? No! It’s obvious that anyone needs some proper training before getting any of that other fancy stuff.

So the question is; what is training? Well, training in this example is simply working with an experienced golfer who can show you all of the mistakes that golfers make so that you don’t make them. They will also show you what you need to do correctly in order for you to be successful. You will learn things such as how to have the correct golfing stance and a good swing.

The next thing you need is practice, and lots of it. Your training should be ongoing, maybe a couple of times a week, but in between, you will be trying to get as much practice as possible. After all, there is that old saying that "practice makes perfect". This is true of pretty much anything you attempt to do in your life. The saying may not be 100% accurate because most people will never become perfect no matter how much practice they get but they certainly will never be any good at golf without any practice. Following this routine with great dedication will lead to success over a sustained period of time because those are the things you need to do that will make yourself good at golf.

Eventually, you will get to a level in golf where you won’t have to constantly be thinking about your swing or stance because all of your practice and training instilled those habits in you that you need to be good at golf. Being able to play golf naturally without thinking will be your main edge over your competition. Professional sports players refer to this process as "getting into the zone".

There was once a famous American football coach who said that "in times of adversity you sink to the level of your training". Well, if your training is not very good then when you get stressed out or are in a tough position you will likely golf poorly. On the other hand, if your training is extensive then when you come under pressure you will perform well. This is as true in trading as it is in golf or anything else that requires training and practice to be successful.

After you have mastered your edge the next thing to do is increase and refine your edge using the smaller things such as the latest set of clubs or better shoes that we spoke of earlier. However, no matter what clubs or shoes you use your core skills will always be there and you will perform better than other people who do not have their core skillset properly developed. You are way ahead of your competition if you practice the correct things over and over.

The Wrong Way to Approach Acquiring Skills:

Now imagine that instead of going down the path of working with a professional golfer and practicing until you are highly skilled you instead went down the first example and joined the best club and bought the most expensive shoes in the hope of improving your performance. This surely sounds ridiculous now that we have pointed it out in this way but this is exactly what most retail traders do when they focus all of their education on the “system” they are using, Technical Analysis, the broker they are trading with, or even information they purchase and use for their trade analysis.

One of the true keys to trading does not lie externally with any system but rather the key lies firmly inside your mind. The way that you develop your trading skills are exactly the same way as you do in the sport of golf. You start by focusing on the skill and the actual process of trading. Then, at some point in your learning, the importance of these items drop dramatically and the most important thing will then become your inner game.

The mistake that most new traders make, and this is particularly true of retail traders, is that they focus all their efforts on the skills of technical trading. They continue to do so thinking that they need more and more skills to improve when in reality the basic skills of trading are actually quite simple. There are more skills needed than just Technical Analysis. Traders should also become skilled in Fundamental Analysis, Sentiment Analysis, Price Action Analysis, Risk Management, and Trading psychology.

Once you have all these concepts firmly cemented in your mind it's simply practicing and working on your inner game that will improve your results the most. The true key to successful trading is being able to get into the zone and trade in your natural state without thinking too much about what you are doing. Professional trading coaches call this "emotional state mastery".

Emotional States

It’s important to understand that some states are perfect for being able to perform at your peak potential while other states do the exact opposite. This means that some states will actually stop you from performing at your highest ability. It goes without saying that when you are trading you want to be in the best and most positive states that will help you achieve your goal of performing at your peak potential. We all ultimately want to end up making money, and being in a positive state to achieve this is absolutely vital to your success in the financial markets.

A way for you to gain some good insights into how to perform under pressure is to use the example of military Special Forces. These highly trained soldiers have a combination of endurance, navigational skills, determination, persistence, problem-solving, decision-making strategies, and emotional state mastery.

In the Special Forces, it is recognized that they need highly skilled soldiers and a good mission strategy. However, what is considered to be most important is being in the right state of mind to deliver effective results. Even the best soldier will be less effective if they are not in a fit mental state to perform. Therefore, creating the right state for those soldiers is really important for successful combat operations. The same applies to trading.

You could have taken all the best courses, know all of the correct theories, and have all the best strategies up your sleeve but if you are not in the right emotional state you will find that failure in the markets is just the beginning of your problems. The fact is that your psychological state is the most important thing of all because without it you will not be able to use any of the skills you have worked so hard to develop. In trading, it is common to see really smart people do incredibly dumb things because of some emotional challenge. We are all guilty of doing things that we know we shouldn’t.

Just like a soldier, we need to have three main components of a positive state, excellent strategy, and great skills to be well-rounded as traders. All three are required but the one that will control your final outcome is your state. The importance of state cannot be understated.

When you sit at your trading desk you will need to have a strategy to make money. You will be utilizing your skills such as market analysis, identifying trade opportunities, and filtering out bad information. However, everything else aside, what truly controls and influences your overall performance is the state you are in while you are trading. Let's explore more of this now.

What is State?

States are the effects and the consequences of whatever is happening in your mind at any specific time.

States are dynamic processes. What this means is that your state will change regularly throughout the trading day, and can fluctuate minute by minute. For traders, it sometimes feels like our states can change almost every second because we are dealing with real money and money can often be the main driver of emotional states. States are emotions like confidence, anger, motivation, anxiety and so on. All of these things are dynamic processes or feelings.

Your personal performance in everything from trading to relationships to sports and so on is for the most part influenced by your feelings. How you feel will affect how you will perform in the moment. These feelings don’t just happen to you. They are actually choices that we choose to make on a second-by-second basis.

Professional sports stars have learned how to choose which state they want to perform in order to succeed and we can look to draw some parallels for us to perform in our peak state as traders. These highly paid athletes will go over the entire game or race in their heads long before they ever set foot in competition. They do this so that they will be prepared for any situation that is thrown at them because they already have an action plan for how they will react to get the best possible outcome.

A lot of what state is all about is the fact that thoughts are things and the more positive or negative things you hold in your mind the more positivity or negativity you will feel. Now, this may sound a little out there but it is true that the more you focus on something, whether positive or negative, the more you make that real in your mind. This is because your mind cannot distinguish the difference between something that happens in real life or something that has been vividly imagined. So if thoughts are things then we can choose to focus on the things that will put us in the best state for trading.

Potential and Performance

To understand this concept of state a little better we are going to look at two words, potential and performance:

How often do you perform to your peak potential? The ultimate goal for us traders is being able to reach the point where we can consistently perform to our maximum potential.

To quantify performing to your maximum potential we can use a famous equation that helps us explain this process of performing to our potential:

At any specific time, we are performing to our potential minus any interference.

What a powerful sentence that is: at any specific time, we are performing to our potential minus any interference. Obviously, in the ideal scenario, there is no interference and this is the state that many authors talk about. When it comes to the subject of performance these authors have coined this state as the state of zone or flow. You might recall a famous trading book on psychology called Trading in the Zone by the late Mark Douglas. This is definitely a book worth checking out.

A prominent US psychologist and expert on performance and flow found from his extensive research that there are eight key factors evident when someone is in the zone:

A challenging task at which you may succeed. This is matching a challenge to your capability.
A merging of action and awareness. This means you are in time, tuned in, and losing track of time.
Your task has very clear goals.
Your task provides immediate feedback.
You have total concentration on the task at hand.
You have a distinct feeling of control over your actions.
You have a complete loss of self-consciousness.
The transformation of time from slow to fast.

How true these points really are. Have you ever started reading a great book and then realized 3 hours had passed? What about times when you were enjoying playing a sport or game so much that you completely lost track of time? This can happen in trading as well.

From this research and other studies we can breakdown the process of getting into the zone into three key elements:

Matching the challenge to your capabilities.
Ensuring that you have clear goals.
Focusing on the task at hand which in turn will give you a feeling of control over your actions.

The other point we looked at in an illustration earlier is the importance of practice. Remember, in order to become truly skilled at golf, or anything for that matter, it’s not only training we need but also a lot of practice. From a psychological perspective, the reason this is so powerful is because being in the zone is automatic and performance tends to transcend consciousness. In order to achieve this automatic performance you need to have a high level of skill. In order to get that high level of skill you need to have a lot of practice doing something consistently successful over a sustained period of time.

To summarize this point, in order to trade in the zone we need to have a high level of skill and in order to get that high level of skill we need to practice.

To illustrate this further we can look at the 4 stage learning model of competence. In this model, there are 4 stages to becoming extremely skilled at any task or process and this is called the 4 stages of competence.

The 4 Stages of Competence

Most traders desperately want to become profitable instantly and not have put in any of the work that is required to become a consistently profitable trader. We understand why this is. The human brain is designed in a way that it will do almost anything to avoid any kind of short-term pain. This is a self-defence mechanism that has been ingrained in our unconscious minds since the beginning of thought itself.

This reality is unfortunate because science tells us that it’s the process that you go through, the challenges that you face, and how you react to those challenges that will determine how successful you become as a trader or anything else in life for that matter.

It has been proven with a high degree of certainty that in any endeavour in which you as a human embark you will go through 4 stages of competence. You will only gain this high level of mental development if you see this skill through to proficiency which takes a lot of practice. The 4 stages are:

You can read more on the dedicated Wiki page for The 4 Stages of Competence HERE.

What Exactly do you Need to Practice with Trading Psychology

We have just touched on the importance of your state when trading. Being in the correct state is far more important than your skills, system, or the broker that you use.

There is a fairly famous author in the trading world named Mark Douglas. He specializes in trading psychology and has authored some of the best-selling trading books of all time such as 'Trading in the Zone'.

Let’s now look at some of the more interesting findings in a little more detail and see how we can apply these findings to our trading.

In one of his books, Mark Douglas talks about the fact that when trading in the zone you operate with a complete lack of fear because fear is mostly retrospective based on what has happened in the past. Fearcan also be predictive based on some future event that has not actually happened yet. This means that we are creating fears with our thoughts that are not our true reality or experience.

Think of a time when you had a fear that was never realized. Maybe you have experienced fear prior to giving a presentation that someone would laugh at you. This caused you real anxiety before the presentation but it likely never happened. Your mind created that fear but it never actually happened in real life. It’s very rare that fear is in the here and now other than in extreme events that catch us off guard.

Another thought from the book is that entering this zone is achieved much more easily when certain beliefs are in place. These beliefs are as follows:

Your edge is strong and you have an unshakeable belief in an outcome with an edge in your favour.
You truly and deeply accept the loss.
You know that once you are in a trade anything can happen and anything is possible but you remain neutral and flexible in your approach.
You expect positive results for your efforts with an acceptance that whatever results you are getting are a perfect reflection of your level of development as a trader. Your results are also a reflection of what you still need to learn.

Aside from these beliefs for getting into the zone, there are also some barriers to getting into that state.

Trading psychologists suggest that the majority of trading setbacks are a result of performance anxiety. Performance anxiety is things such as anxiety, stress, fear, anger, and frustration. These are all states that most traders feel but at the same time, they are also states that work against them from achieving peak performance.

Anger causes our perception to change.
Frustration causes us to feel like no other positive possibilities exist.
Fear stops us from seeing any opportunity at all.
Anxiety either causes us to freeze up or to run.
Stress narrows our attention and eliminates our focus.

These negative states cause the interference that we mentioned earlier and stop us from performing to our potential. Remember, at any specific time we are performing to our potential minus any interference.

Mark Douglas goes on to state that there are 4 main trading fears:

Fear of being wrong.
Fear of losing money.
Fear of missing out.
Fear of leaving money on the table.

These 4 fears can be broken into the 5 core obstacles that stop us from getting into the zone:

Fear of being wrong: In order to combat this we must accept that losses are and always will be a part of trading, there is just nothing that can be done to change this fact. We also need to recognize that it’s not losing that really hurts our feelings. It's trading badly that causes our issues.
Fear of losing money: To overcome this you need to realize that no matter how great a trader you are, you will always miss opportunities. You don't need to get in on every single opportunity to be profitable. It’s all about consistency over the long run. If you miss a great trade then this gives you an opportunity to study the outcome. You simply move on and look for the next trade.
Focus on profit and loss rather than the trade: To stop this you need to start measuring your success on how well you traded and not how much money you made or lost. Successful trading is all about the correct process of trading. Remain present and in the moment, be task-focused, and control all that you can control.
Losing objectivity: Challenge this by constantly asking yourself, “If I was not in this trade right now what would I do, buy, sell, or do nothing?” You need to be able to view your trade as if you were a third-party observer. If you determine there is no good reason to get out of a trade other than you are fearful of a profit evaporating then you need this third-party perspective to help you gain control over your emotions.
Taking inappropriate risk: Combat this by thinking in probabilities while considering the risks and rewards involved. What are the odds of this trade working? How much can you make or lose? You need to trade a position size that matches your capabilities and also your account size and allow yourself to trade to your potential. You must not trade like the current trade you are in is your last trade because it might very well be if you have taken on enough risk. In other words, you really need to remove your ego from your trading.

These 5 areas are the main barriers to entering the zone but there are also some lesser things that get in our way if we let them:

Lack of preparation.
Lack of practice.
Lack of discipline.
High levels of stress.
External distractions such as life away from trading.

As you can see, a lot of this inner game is about creating the correct beliefs. Now we come back to the beginning of this section by mentioning how absolutely imperative it is to operate in the correct state. This is a state that allows us to operate under those proper beliefs and ultimately trade in the zone of psychological success. This is essential to making it as a professional trader for the long haul.

How to Create the Optimal State for Peak Trading Performance

In this Wiki, We are going to highlight 14 different strategies that you can implement to achieve your optimal state for peak trading performance. They are:

This is a comprehensive Wiki that is sure to help you find a technique to support you and your trading for peak performance. You can access the main Wiki for How to Create the Optimal State for Peak Trading Performance HERE.

Introduction to Trading Psychology Summary

Let’s now remind ourselves what we have covered up to this point so that you can formulate a clear plan and manage your trading psychology in a way that gets you in the zone to help create the emotional states that will lead you to success.

First of all, we looked at how all of our emotional states are dynamic processes that change constantly throughout the day.

Next, we discovered how emotional states are what drive our feelings and ultimately how we perform. Some of these states are good for peak performance and others actually work against us.

Energy management is just as important as psychological elements. You need to use the information and exercises here to actively identify your personal ideal state for trading. You then need to learn how to create that ideal state which will enable you to get into that state quickly and easily when you need it.

Being aware of your state is equally important, particularly so that you are instantly aware of when you are in the wrong state for trading. We then learned how we can create triggers and anchors to access peak performance on que.

We learned about negative states that affect us while we are trading which include:

Fear
Anxiety
Stress
Anger
Frustration.

These negative states affect our perception which affects our ability to spot an opportunity, our overall thought process, and narrows our attention. Every single state, good or bad, is influenced by our own beliefs, perceptions, and attitudes.

Managing your states can be both proactive and reactive. Performing to your potential is directly influenced by how many interferences you experience. Remember that at any one moment you are performing at your potential minus any interference. Getting into the zone is the perfect state that you want to get into for trading.

Several things can influence you from getting into the zone which includes:

Your level of skill
Your ability
How much enjoyment you get out of the task
Control over performance
The feedback available
The beliefs that you have.

Training and practice of the correct methods is the first starting point, followed by working on your inner game using the techniques outlined in this section.

Interestingly, thinking about getting into the zone will actually stop you from getting there because “trying too hard” moves you away from the natural state of the zone. It all has to be unconscious and natural which takes time and practice to achieve.

Positive states such as concentration are created by things such as physiology, thoughts, self-talk, and what you choose to focus on. Changing any of these things, positively or negatively, will directly affect the state that you are in.

The key techniques for creating and sustaining positive states are as follows:

Positive physiology.
Utilizing sound energy management techniques.
Centering techniques.
Focus on the task and the process in the present tense on a trade-by-trade basis.
Your thoughts, keep these minimal by using simple performance cues rather than overthinking things too much.

Interferences are one of your biggest enemies when trying to perform to your potential.

There are two types of interference that you need to avoid:

External Interference: Items such as cell phones, instant messaging programs, social media, email, people, and software games.
Internal Interference: Items such as negative self-talk, hunger, dehydration, and tiredness.

We then looked at how winners handle losses and the fact that they fully accept losses as part of the nature of trading. Winners keep their perspective of the bigger picture in mind, gain feedback from every trade they take, and review their trades from a third-party perspective. They also put losing trades behind them and move on using the ARIA method. They also separate losing trades from them being losers themselves.

Finally, once you have mastered these other items you will need to have the ability to re-focus from time to time. You know how to get into the zone but when you lose that focus you will need to have a strategy to get back in the zone. To do this we gauge our awareness on a scale of 1 to 10. We then use the performance cues and take regular time outs when needed.

Before we complete this section we are going to leave you with some suggested follow-up tasks that you can take away and practice in your own time.

First of all, remain aware of your own state, check it on a 1 to 10 scale, and identify what states are perfect for you to personally perform to your potential. Practice and explore your own strategies for managing your emotional state, especially in terms of your ideal trading state.

Finally, add some of these strategies into your daily routine so that you can begin automating the entire process of entering the zone. It doesn’t have to be all of the strategies, just something that gets you into a rhythm.

As was mentioned at the beginning of this section, trading psychology is a huge subject and something that will make up a large part of your trading. This section has hopefully given you a good grounding in the overall principles so that you are ready for upcoming sections.

Advanced Trading Psychology

Welcome to this section on advanced your trading psychology. Trading psychology is one of the most important elements of your overall trading process once you have acquired the correct training, experience, and skills.

The initial stages of trading are learning the correct skills in the first place because incorrect learning is like trying to play golf using a hockey stick. No matter how hard you practice you will never be a good golfer.

The first stage is to study all about what drives the markets and how you can plan and execute your trades using the same skillset that institutional traders use. This is the equivalent of learning the correct swing and stance and what clubs and balls you should be using as a starting point for learning the sport of golf.

After this, from that moment on your development is all about 2 things:

Practice.
Your psychological approach to performing.

What we will do in this section is take you through all the major psychological concepts that will be key to trading successfully so that you can begin setting up these processes into your routine until eventually, they become your natural trading habits.

A trained trader who is performing badly does not necessarily need to learn new skills or find a better strategy; they simply need to hone their psychology to improve their overall performance.

Once a trader has practiced the correct skills and developed them to a point where they can compete then their number one priority is to ensure that they are trading in the zone whenever they are in the markets. Getting into the zone is the absolute key to trading successfully. This is also the reason that banks, institutional trading firms, and funds spend thousands of dollars coaching their traders in this manner.

Conviction in your Trading

Conviction goes beyond just thinking that you might have a good trade plan. True conviction in your trading comes from practice and experience of being successful over a sustained period of time with your edge.

For new traders, conviction doesn’t happen overnight. If you want to be successful as a trader then you will need to understand and accept that making money will only come when you have gained enough experience following your edge over a long enough period of time.

In the following Wiki Conviction in your Trading we will explore:

CLICK HERE to access the Wiki on Conviction in your Trading.

Trader Psychology Problems

Whether you win or lose in trading, at least 80% of the final results you get are the result of your psychology. trading is a huge undertaking and the reason most people fail is because of poor trading psychology. They simply approach the markets or have beliefs about what is possible in the markets that are completely false.

The real reason that traders have poor psychology is mainly that they lack complete conviction in their trading methods. Conviction is directly related to how confident you are while in a position. Knowing the reasons why you are in a trade is vital to staying calm if the market moves against you.

One of the main aims of trading is for the trader to gain complete conviction in his trading so that he will never suffer from any psychological ailment with his trading. In trading it is never the psychology that is the problem, it is the conviction. Conviction, or lack of conviction, is the root of all good or bad trading psychology.

In the following Wiki we will explore:

CLICK HERE to access the Trader Psychology Problems Wiki.

Solutions for Trading Psychology Problems

Following on from Trader Psychology Problems, we will now take a look at some solutions including:

CLICK HERE to access the Solutions for Trading Psychology Problems Wiki.

3 Keys to Mastering your Trading Psychology

Psychology has a lot more to do with success in the markets than most traders will give credit. Proper trading psychology can be broken down into 3 key areas in which traders may focus their efforts on improvement. These 3 Key of success is what we will focus on in the following Wiki:

CLICK HERE to access the 3 Keys to Mastering your Trading Psychology Wiki.

General Trading Psychology

In the following Wiki on General Trading Psychology we will explore:

CLICK HERE to access the General Trading Psychology Wiki.

The Psychology of Money Management

In the following Wiki on The Psychology of Money Management we will explore:

CLICK HERE to access the The Psychology of Money Management Wiki.

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