Trading Psychology – The importance of the right mindset, discipline and winning attitude while trading

Control your emotions like anger, fear and greed to become a successful trader

In this article we’re going to talk about trading psychology. Trading psychology is about the big emotions, the big mental battles that every trader goes through. These emotions often are the reason why many traders who are starting off will grab the first bit of profit they see and refuse to take a loss. Traders with that behavior often will experience failure, rather sooner than later. The internal battles with yourself in order to become a profitable trader are going to be a lot more important for your trading career than what’s actually happening on the screen.

Trading Psychology - Cycle of Stock Market Emotions
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The fundamentals of discipline are going to shine through as you battle with each of these emotions. Your control over your emotions is going to reflect itself eventually in your P&L and your consistency. So it’s very important to get an understanding about what these emotions look like, what they feel like. Become aware of trading psychology. Try to find solutions to your emotions as early as possible in your learning process to become a successful trader.

Trading psychology: How emotions can affect trading results

As a trader you’ll experience different emotions in many ways. For example beginner traders often are afraid of getting involved in the market. They’re looking for the perfect entry and as a result they’re too cautious. We’re going to start by looking at the S&P and just talk through a couple of examples of the big emotions. Let’s say you were watching the market in late 2016, after about a two-year consolidation from 2015. The market starts breaking out, has a bit of a sell-off and looking back in hindsight you can tell that it was a pretty hard move up.

SPX Chart Uptrend 2016 - 2018
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Let’s say that you’re just trying to get involved at some point. You wait for the market to pull back a little bit. You wait for a better support line to get involved. Every time when you miss the entry, you hope for the market to come off over a few days for a sell-off. But you keep missing the entry. You’re getting angry that most of the year’s gone and you are missing entry after entry. Your fear is starting to turn into greed and FOMO (fear of missing out).

Now you’re active on Twitter, you’re active on Facebook, you’re active on Reddit, you’re watching CNBC, you’re talking with your friends who are trading themselves. You’re seeing the big numbers that they’re putting up, you’re seeing how much activity, how much growth they’re seeing in their trading accounts. You feel that you’re losing out on this. You’re not getting part of it. Even though you’re not losing money, the fact that you’re not making money like they are is giving you this kind of anxiety, fear and frustration.

The point where you start losing control

This is the point where you’re asking yourself why you’re not getting involved, why you’re not getting a piece of this pie. Then there is this massive pop up in January 2018. This is the point where your fear finally turns into greed. It turns into chasing an entry. So now all of a sudden you’re just paying up. You’re just paying the ask to get involved. You’re breaking out of your initial trading plan, you’re starting to lose control at this point.

SPX Chart Pullback - 02.2018
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Whenever you were not getting involved, you were definitely not losing any money. But once you start getting greedy, chasing your entry, just slapping the ask to get in, that’s when you start losing control. Typically once you start losing control of a trade, this is where anger sets in. Especially if you were chasing the entry up as the S&P rallies to all-time highs just after Christmas. You finally get your fill after a small pullback and you’re absolutely slammed over the coming days and weeks. You’re slamming the market, you’re hitting your mouse as hard as you can.

Ignorance, disbelief and irrational thinking

Scared Trader
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You’re in disbelief that the price has turned against you, just as you finally get your fill. So if you were starting to lose control of the trade and break your plan as you were chasing the entry, this is where you fully lose control of the trade. You’re not aware of your trading psychology and you disregard any trading plan or strategy you ever had.

You’re not puking, you’re refusing to sell. This is where you’re going to take that hit and hold on because you know if it ran this much in the last few months, it can do the same again. You’re just not thinking straight, you’re totally irrational and that’s when your account is going to get wiped. You’ve forgotten your trading plan, you’ve disregarded it. You allowed the emotions to control you, instead that you are controlling them.

Realistically at this point, if you can manage to get some capital together to get involved again in the future, you’re going to be too afraid to get involved based on this experience. You find yourself back in this situation, looking for the perfect entry, missing it all the way. It’s a vicious circle of revenge trading that you’re opening yourself up to. Refusing to get a handle on these three big emotions (fear, greed and anger) is setting you up for a career of frustration and ultimately failure in the trading game. We’re now going through some solutions to these emotional trading issues.

How to control your emotions and become a better trader

Trader / Modern Technology
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You may be asking yourself how to better control your emotions. First, you have to acknowledge that your emotions are there. They’re always going to be there. However, you can control and move past them, accept that they’re going to be part of the trading career that you’re looking for. You can utilize your emotions, understand and control them. This will filter through into your consistency, which will filter through into your trading profits at the end of the day.

As we move through the solutions to each of these emotions, you’ll notice that the primary base to each one is having the right trading plan in place. This is something that we’ve already covered in our article about planning your trade and trading your plan. As an active trader you’ll notice rather sooner than later that whenever you deviate from your trading plan, whenever you forget about it, that’s when your trade starts breaking down. That’s the point when your emotions start taking control of you. Ultimately, the primary step to control your various emotions is having a better trading plan at the beginning and the determination to stick to it. We’ll now go through the three big emotions:


Stressed Trader
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Let’s start off with fear. This is the emotion where you’re too afraid to get involved. You’re too cautious and you find that you’re missing all your entries. The stock is running away from you. You’re just not getting involved. What you might want to start doing is just taking a step back from the particular stocks that are on your watchlist. The stocks that you’re trying to get involved with. Instead, go for something that’s a little bit calmer. Something that has a lower average daily range and that you’re not going to be too afraid to hold overnight or over a week.

You want to start getting used to the feeling what it’s like to be in a position for more than a day. What it’s like to be in a position for more than two weeks, for a month, for six months. You’re going to start building that trading experience rather than chasing immediate results. It’s especially important for your trading psychology if you’re just starting off and if you find that you are getting that kind of fear and caution that is detrimental to your initial entries.

Tiptoeing into a trade to build trading experience

Trader / Rear View
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So find a stock that’s moving a little slower. Just try and dip the toe in. Go to the absolute minimal size, be it one share, two shares or whatever it is that makes sense for you. Just get involved, start holding it overnight, assuming that it’s going to stick to its average daily range and not going to be too offside one way or another, unless there is breaking news. That’s something you obviously should always be in touch with and be aware of.

Now once you’re involved in the market, it’s very easy to take off some size. For example, buy two shares and take one off after a day. Likewise, buy 100 shares and take 50 off the next day or whatever makes sense with your own capital amount. But you need to start getting involved if you want to be a trader. You need to start building that trading experience. Find a slower kind of stock, go in with the minimal size and be willing to take half off straightaway as you build that experience. This can help you gain more confidence when getting involved in the financial markets.


Money / Greed
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The next emotion we’re going to deal with is greed. While Gordon Gekko in the movie Wall Street is telling us that greed is good, it can also heavily impact your trading results, in a negative way. But how do you recognize greed as a trader? How do you get over this part of your trading psychology? How do you avoid greed hurting your trading strategy, your portfolio and your overall account size? It’s pretty simple! If fear is where you force yourself to get involved by tiptoeing into the market, greed is really forcing yourself to stay out by acknowledging that it’s there.

A perfect example is that 2017 run that we saw earlier in SPX, in the S&P. If you’ve been missing your entries and you’re watching this huge run in January 2018 happen, this is where you’re going to be super frustrated. You’re going to be super angry. You’re just going to be slapping the ask to get involved. This is where you’re going to be breaking your trading plan, assuming that your plan has a perfect entry point.

When your trading plan is starting to break up, you’re losing control and you’re chasing the entry. The minute you find yourself stepping out of the paradigm, out of the perimeter that you created, that’s when you got to realize that it’s happening. Take a step back, exit your positions, certainly start reducing size and get your emotions under control.

The fear of missing out (FOMO)

Successful Traders / FOMO
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Greed often results from a fear of missing out (FOMO), from seeing what other people are doing. Your friends are making money in their brokerage accounts, you’re seeing all these results posted on Twitter, Facebook or Reddit and CNBC is just running special after special on this amazing bull market.

It’s very important that you don’t care about what other people are doing and the success they are having. The biggest and most successful trader I ever knew did not talk to anybody on the trading floor during market hours. He was a day trader, he cared about nothing but his own plan, his own trading and his own trading results. He didn’t want to know what you’re involved in, what you thought of that break out in the S&P or whatever. The only thing he was following was his own day trading plan and he was absolutely killing it.


Anger / Stock Market Crash
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If you haven’t been able to control your fear. If you’ve chased entries as a result given in to your greed, your fear of missing out. The next emotion you’re probably going to experience is anger and frustration. How is this happening? Why is it happening to me? What are top traders doing differently? This isn’t fair, I don’t deserve this!

We’ll stick again with the previous example in the S&P. So you’ve missed all this move, you’re chasing it, you’re jumping in and then you’re hit with the big sell-off. You’re thinking the market was just waiting for you to get involved. This is where you start slamming the mouse or start hitting your screen. I’ve actually seen it happen, people start hitting their desks. It’s not good to see and it’s not good for anybody, including the person themselves or yourself if it’s you who’s experienced this kind of anger as a trader.

The market has turned against you, just after you were getting involved. This is where you finally start giving up your trading plan completely. If you are breaking the plan just to get involved, going for entries above your optimal price, this is where you’re likely just start to absolutely disregard any puke points you had. You’re completely losing control of your trading. Whatever kind of risk control you had, for example that you won’t lose more than 1% of your account value per trade, that’s out the window straight away, particularly on huge red days that happen in the blink of an eye.

The importance of rational thinking

SPX Chart - Irrational Thinking / 02.2018
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If you’re missing your puke point and all of a sudden the market closes much lower, this is where you start thinking irrationally like: “Oh, there’s no way it’ll open lower. It should bounce back tomorrow, I’ll just hold for one more day”. The next day there is a massive sell-off and you’ll be thinking again: “Oh, there’s no way it’ll go down a third day in a row, let me just wait for a green day and I’m out of the woods”.

You’ve completely lost control over your trade the minute you’ve missed your puke point. This is where you’ve abdicated a responsibility for your trading plan. Your account is likely to get absolutely wiped in this kind of scenario. So again, this is all happening because you’ve broken your trading plan. You didn’t get out when you said you would. You’ve lost control over your trading psychology and as a result you’re thinking irrationally.

Your brokerage account balance is just going down and you don’t know how to turn it around. The best thing to do here is just to get flat. Exit everything, shut your computer down and get away from the screen. You’ve done damage already, you’re not thinking right. You need to step away and get out of the market. It doesn’t matter if the market bounces back tomorrow, you’re not going to get involved at this point because you’re not thinking straight. You’re on tilt and you’re starting to come off the edge completely.

What to do when you’re on tilt and lose control

Trader / Emotions / Drawdown
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As a trader you’ll go through some of the mentioned emotions, particularly anger. Be prepared that you definitely will experience this at some stage in your trading career. It can happen just as a sell-off comes out of the blue or if you’re on a very bad losing run where you’re just having consistent red days. When absolutely everything you’re touching turns to dirt, the same emotions are going to be creeping up. The same anger is going to happen, you’re clicking the mouse aggressively, punching the screen or whatever else you usually do in that situation.

When that happens you just got to get away from the screens. Don’t even check closing prices, get flat, take a break or a short holiday and realize that trading is not the be-all and the end-all. There’s more to life outside of trading full time. It’s always worthwhile taking some time to do self-analysis. Get your trading performance from the last couple of weeks or the last couple of months and try to identify when your trading started going downhill. What are the reasons behind your trading losses? Did you start breaking rules? Maybe the product itself has changed?

Self-analysis can help you get back to profitable trading

Trader / Self-Analysis
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Whatever surprising findings you might get from self-analysis, once you start getting back involved in the market, it’s so important to take the very similar steps that we talked about when controlling fear. Go minimal size, stay away from volatile products and be not afraid to take half position off straightaway. You’re looking for baby steps back in. Consistency is going to be the name of the game. Habits are going to drive discipline, discipline is going to drive a better mental space and a better mental space is going to drive better trading results.

You can set small daily P&L targets or a monthly profit target if you’re on a longer-term timeframe. You should put in rigid rules. For example if you have three losing trades in a row or if you miss your puke point, you’ll take a break. Active trading rules like that can really help you lock down the discipline and get back to consistency. Once you start hitting those daily targets, don’t be afraid to step away from the screens.

Successful Trader
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You’ll have more confidence and a stronger trading psychology as you got to know that you’re profitable for the last seven days or whatever it is. You got to build the consistency and get your confidence back up. After that you can start increasing size and getting back involved in the market with a strict trading plan and risk management. Trade journals can help you stay on track while working on your trading success.

Conclusion: Learn dealing with emotions as a trader

Having emotions is human, this is no different for professional traders. Ultimately, having the right process to control your emotions is going to be more beneficial than getting the right results, particularly when you’re starting off. This is where you’re going to lock down your discipline, lock down your consistency and your own self belief. The right trading psychology and discipline will help you handle bad runs and put in the bedrock of the foundation for your future trading career. What are your thoughts on trading psychology? Please let us know in the comments below.