Trading Psychology

Trading Psychology

Trading psychology is one of the most important areas trader must understand. Most traders often overlook this crucial area, believing that trading systems are the most important aspect of trading successfully. However, when you think about it, your beliefs about the market can have a significant effect on how you trade.

To illustrate the importance of psychology, the following quote from a famous commercial coach Dr. Van Tharp:

"When I had discussions about what is important for trading, three areas usually come to: psychology, money management (eg, position size), and the development of most people emphasize system development and de-emphasize two other themes sophisticated .. people think that all three aspects are important, but that psychology is the most important (60 percent), position sizing is the next most important (30 percent), and system development is the least important (around 10 percent). "When it comes Trading one of the most neglected subjects are those dealing with trading psychology. Most traders spend days, months and even years trying to find the right system to suit. But there right trading system is only a small part of what is really needed to trade forex, or any other financial market successfully. Do not get me wrong, it is still important to find or develop a trading system that suits you, but it is also important to have well-defined money management plan, and understand all the psychological barriers that may affect making the trader when trading. In order to succeed in the business of trade, there must be balance between all these important aspects of trading.

The trading environment, when you lose a trade, the first thought that pops to mind is likely to be, "There must be something wrong with my system" or "I knew I should not take this trade "(even when your system signals). But sometimes you have to dig a little deeper to see the nature of our mistake, and then work on it accordingly. That means looking at the possible psychological biases can have when it comes to developing and executing trading system. This is explained in more details below.

When it comes to trading the Forex market and other markets, only 5% of traders achieve the ultimate goal: to be consistent in profit. From my research I believe that the main reason for this is lack of understanding of what it should be a trader taking into account what could be largely attributed to their own psychological biases have on trading.

Psychological biases best explained as trading psychology is not just about positive thinking, here is an example of how your psychological biases can cause your trading.

Consider a new merchant that has an interest in trading the Forex market. They likely believe the trading system is the place to start, so I go online and search by keywords such as "forex trading system", or "trading system". They will also be likely to want to find a trading system that is very accurate, say 80% + accuracy. The reason for this? So from my research I discovered that this way of thinking is taught to us at a very early age in most of the educational system. School teaches us to be right 80% + of the time, and if we are not, we considered a failure. The Internet can also be blamed for it. If you were to look for anything related to trading system, will soon be bombarded with ads like "system produces 90% correct trades" or for those advertisers who are really pushing their luck: "100% win, 250 + crafts, NO losers Consider BUY NOW! "All these ads cause to believe that it is necessary to be right most of the time in order to succeed at trading.

Now the problem here is two fold. First, their belief that the system of trading is so important is not actually true. There are other factors that are actually more important as, money management and psychology. And second is the belief that they should trade system that produces profits very high percentage of time is not absolutely true either.

These are bias you have to develop a trading system because we still do not understand what is really involved in the development and implementation of a system that actually works over time.

This is where "mathematics" of trading system development and implementation come in. To illustrate how not necessarily have a trading system that wins 80% or more of the time, consider the following:

You have a trading system that is accurate and makes money only 50% of the time. On average make three times as lost. Suppose your average win is 60 pips, and the average loss is only 20 pips. The following equation will work as you can expect to be average:

(PW multiplied by the average winning 60pips) minus (PL multiplied by the average loss of 20 pips) = 20pips.

Key: PW = percentage of time to make money (or Victory), PL is the percentage of time you lose money.

This means you can expect to make 20 pips on average, even with a win rate of only 50%! Now it is important to bear in mind that the purpose of this article is to explain the specifics of trading system development, no math involved. It was to explain how their trading psychology can affect the way trade in financial markets.

Conclusion By understanding areas such as trading psychology and money management at an early stage of your trading career, you will be able to develop a system that produces profit consistently, and be there with the top 5% of traders who actually succeed in trading of financial markets.


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