Everyone talks about that important factor in trading called psychology. How exactly does it help in trading? And if it is that important, how does one improve the same?

Pranav from Headville


Every single day of our lives, we make decisions. Some are easy—what to have for lunch—so we roll right through them with an ease. We choose and move on. Life is about the choices we make. Trading, as well, is about the choices we make, but what makes it different from the easy choices in life is that it is about making or not making money.

The main thing about money, Bud, is that it makes you do things you don’t want to do.

The above quote from the movie Wall Street goes right to the heart of why “psychology” is important in trading—money—but it doesn’t quite go far enough to illuminate the importance of the choices we make when dealing with money. You see, money is not the culprit here; it is the idea of money and the value we place on acquiring as much as we can (greed), which puts the issue squarely in our head. Acquiring as much as we can is the problem. This “value” is what makes us do things we don’t want to do, not money itself.

Thus, to be a successful trader, you have to master your head (psychology); you have to master greed, the urge to acquire as much as you can. Now, the corollary of the greed factor is fear. A successful trader also has to master the fear of loss. If you, as a trader, operate in these two realms (greed and fear), then you will make bad choices. It is inevitable.

Successful traders are emotionally level. They get into a trade, take their profit or take their loss and move onto the next trade. They make reasoned choices based on facts, knowledge, and experience. Every gain and every loss is expected and accepted with equanimity. It is not about greed or fear; it is about business, and good business is good choices.

Yes, acquiring money is the goal of all traders, but that fact never makes successful traders do things they don’t want to do. Successful traders do exactly what they want to do, and they do it when and how they want to do it. They make good decisions in their head (psychology). How one gets to that place is particular to who they are, but one thing is common to all who do—they know they need to get there, and that means mastering the emotions of greed and fear, which is difficult and focused work. Practice getting in and out of small trades emotionally level. Do this over and over again, keeping in mind (psychology) the goal is not the win or the loss; it is the lack of emotion you have when one or the other occurs. Mastering greed and fear is harder then deciding what to have for lunch, but in the end, if you master them, you can start choosing more expensive items on the lunch menu.

Trade in the day; invest in your life …

Trader Ed