The Importance of Trading Psychology

Why is trading psychology so important? Trading psychology is so important because day trading can be a very emotional business. The wrong emotional state can make it difficult if not impossible to trade effectively.

Trading psychology is critical because there is so much emotion in many of us that is linked to money. We also know that many who enter into the trading arena fail. Why is that? There are numerous reasons why a large percentage of traders fail. The main reason has been cited as lack of discipline. Discipline is defined as, orderly or prescribed conduct or pattern of behavior, or, a rule or system of rules governing the conduct or activity. Discipline is necessary to accomplish any goal.

Discipline comes into play when combating fear and greed. Fear is typically based upon a fear of loss. No one really wants to lose money in the market. We've all heard the horror stories of people losing the money in their trading account or their entire trading account.

Fear of loss or fear of a further loss makes traders scared. Scared traders are very typically not profitable traders. The objective is to be a profitable trader.

Fear in many situations is triggered by not knowing what is going to happen next, basically this may be fear of the unknown. We feel much more confident when walking down a familiar street in our neighborhood than if we walked down an unfamiliar dark alley in a strange place. We can eliminate or minimize a great deal of fear by becoming more familiar with exactly what we are to expect. In other words, we need to have a trading plan, basically a trading roadmap so that we can know what we are to do each and every day. With a plan we also what the likely outcomes of those actions may be each and every day. In this way, we'll be met with far fewer surprises, and unknowns, which may trigger the fear.

The trading plan is a great way to start and maintain trading discipline. With this plan as a roadmap it will be much easier to get from point A, which is where we are now, to point B, which is where we want to be.

In your trading plan you may have notes written to yourself about what to expect. It is your expectation level that will dictate your satisfaction with your progress. Expecting a consistent return of 1000% per month will have you abandoning your trading very, very quickly. Having realistic expectations about the returns of your trading system and it's ups and downs will help you to maintain discipline in the long run.

One of the most difficult things for a trader to do is to continue to trade his trading system when it is going through a series of losses. A series of losses is a tough period of time for many, many traders, especially those who are unprepared or unwilling to accept the fact that all trading systems and methodologies have losing trades. If you do not have faith in your trading system when it does start to go through a series of losses it will make you nervous. If you had not studied the previous trades and do not have faith in your trading system fear will lead to a lack of discipline. Lack of discipline will eventually lead to not following your trading system. Not following your trading system will eventually lead to loss. This is another reason why carefully choosing a trading system is extremely important.

Conclusion

Controlling your emotions is critical to maintaining discipline while trading. Maintaining trading discipline is essential long-term trading success.