The trading mindset (or trading psychology) is all about our mental approach and attitude to financial trading. It can mean the difference between success and failure and is something which all profitable traders pay great attention to.
In this article we will cover a variety of aspects concerning the role of the mind in trading activities, starting with some of the basics.
Introduction to the Psychology of Trading
It goes without saying that the goal of any form of market trading is to make a profit, but often the ability to make that profit is threatened by a variety of market forces over which we have no control, and which at times appear to be acting randomly.
In this sense, trading can be equated to gambling where success depends on a cool head and following your system.
Trading is a solitary activity where you are very much in control of what you do. Your decisions may be based on the additional knowledge and advice of others, and indicators from automated systems, but ultimately you are on your own. This requires a strong sense of motivation and belief in yourself.
Know Your Market and Focus on It
In any business, you need to know your patch and market trading is no different.
This may not sound like a psychological component of your trading makeup but it is. Too many people become complacent when they have been active in a territory for a long time and will often miss the obvious.
The trading market is a very complex environment and represents the accumulated behavior and actions of countless numbers of people, many without any direct involvement in the markets at all. Consequently you can never study your market enough – there will always be subtleties and nuances which only close and prolonged market observation will recognize.
Remember that the more market knowledge and experience you accumulate the better placed you will be to pick up on those shifting patterns and other indicators which no text book can teach.
Understand and Manage Opportunity and Risk
A key element to trading psychology is being selective about the opportunities to follow. It is impossible to pursue every chance at profit so you need to choose carefully.
Whilst you need to act with care you will often need to act fast or else a fleeting favorable situation will be missed. The key to making quick decisions is to be well informed about the market area you are focused on.
Being as knowledgeable as you can be in your market will give you the best possible shot at recognizing an unusual occurrence which may temporarily influence prices and offer a brief moment of opportunity.
You will rarely (if ever) have these moments to yourself – there will be others cashing in too and you also need to factor this into your mindset.
Assess the Risk and Make a Decision
The market knowledge you have is crucial to your decision making, but so is your wisdom and maturity a key element in the psychology of trading.
Being mature in your trading means you will readily recognize an offer or scenario which is dubious. These are times when your best course of action is to do nothing, but doing nothing is a decision and often a wise one.
We made the link above between market trading and gambling, and in both cases the strong mindset realizes that the difference between luck and success rests with the level of risk managed.
Of course not everything will always go your way – sometimes there will be setbacks and it is important for your state of mental health to bounce back quickly when this happens. By doing your risk assessment properly you will never have all your eggs in a single trade basket, which in itself is a positive indicator of your trading judgement.
If you would like to learn more about the role of the mind in successful online trading, please have a look at these recommended books from Amazon: