Question:
Everyone talks about that important factor in trading called psychology, but what and how exactly does it helps in trading? And if it is that important how does one improve the same?
Pranaw from Mental WA.
Answer:
Pranaw, you have hit the mother load with your question, but allow me to refine it just a bit before I answer it. Instead of “psychology,” use the phrase “mental / emotional state.”
The reason everyone talks about how important the mental / emotional state is to trading is because, well, it is incredibly important to successful trading. In fact, many, such as Mark Douglas, argue that how you behave in this state is actually more important for success than what the markets do. I agree. You see, my early trading days looked somewhat like a top wobbling at the very end of its spin. Yes, I understood the mechanics of trading, but I knew nothing of how to manage my emotions, nor did I have the confidence that comes from having a plan. Mark Douglas’ book, Trading in the Zone, changed everything for me. Once I understood that the markets are the markets, meaning they do what they do without reference to you or anyone else for that matter, and that success depends on how one responds to the impersonal market flow, that wobbling top straightened up and began spinning faster.
Simply, your mental state is about how you approach the market intellectually. Do you have a plan? Does that plan include entry and exit points. Does it include money/risk management? Does it include research to understand your trading markets? Do you understand the big economic picture? Do you know how to find the information that will give you an edge?
Your emotional state is about how you “feel” when you both win and lose. Winning can produce hubris (too much pride), which as the ancient Greeks understood can bring on disaster, If you trade as if you cannot lose, you will lose repeatedly in your attempt to prove it. When you lose (and you will), if you come back at the market angry or with the idea you will get “even,” you won’t. You will only make mistakes. The best traders understand the impersonal nature of the markets, thus they understand successful trading is not about the markets; it is about you and your mental / emotional state when trading.
I can’t tell you how to improve your mental / emotional state, as I don’t know you. I can, however, tell you generally that having a detailed trading strategy that is adaptable and eliminating as much emotion as you can from your trading will go a long way to making you a better trader.
Trade in the day; invest in your life …
