For a trader just starting out, here’s a tip you should remember: the markets do not punish strategy, they punish people. Even with the most carefully constructed strategy, if you’re unable to execute it consistently and correctly, your success percentage will crash.
For you to be able to execute strategies correctly, it all begins in the mind. There are a lot of psychological forces at play – cognitive biases, emotional reactions, habits – that dictate your trade structure selection, position sizing, and your willingness to cut losses or cash in on wins.
Emotions are More Important Than You Think
Decades of research in behavioural economics show that we don’t have the same intensity in reaction to equal amounts of wins and losses. That means we react more negatively to losses than we do to equivalent wins. The Israeli-American psychologist and Nobel Prize winner, Daniel Kahneman, in his groundbreaking research, noted that traders hold losing positions for far too long, while closing winning positions too quickly.
Seminal work on neuroeconomics and somatic markers shows that your current bodily state and previous emotional experiences guide your decision-making. This proves that trading choices are not always purely rational, making emotional regulation key to successful trade executions.
What Consistent Performers Do Differently?
Experienced trading psychologists and coaches have found that consistently successful traders operate with clear rules and treat trading as a skill that can be practised and improved upon.
Successful traders don’t try to eliminate emotions or weaknesses. Instead, they learn from their reactions, build on strengths, and rely on tested routines. They also use effective techniques such as pre-trade checklists, enforcing clear risk limits, and journaling their performance, so that they can always compare their performance with written data as opposed to relying on memory or personal narrative.
Risk Control is Psychology in Action
Risk management is both technical and psychological. Position sizing, stop-loss limits, and diversification are all technical strategies to limit your losses. And when you know the maximum loss in a trade, your emotions are in check.
With that, you can avoid risky and emotional decisions like revenge trades or even doubling down after a loss. Therefore, with good risk rules, you can create the right environment for your brain to make consistent decisions.
How to Fortify Trading Psychology
Here are a few practical tips to help you become a more consistent trader.
Build a rules-based plan
You must define your entry, exit, and maximum loss before the trade. It’s crucial to write it down, as that creates self-accountability and is likely to reduce random spur-of-the-moment decision-making.
Keep a trade journal
Record everything. It’s one thing to have numbers written down; it’s another to provide written context to those numbers. Write down the macro investing environment of the day, your feelings, and of course, the numbers and figures. Keeping track of the emotions and the outcomes will unearth patterns that will help you in the long run.
Regulate your emotions
During stressful moments, practice emotional regulation techniques such as mindfulness, slow breathing, or short breaks. They help keep your emotions in check, ensuring you are in the right state of mind to execute what you set out to do.
Focus on the rules, not the profit
Instead of obsessing over how much profit you raked in, focus on whether you followed the rules. Sticking to the process will yield better outcomes in the long term than isolated wins.
Use coaching
If needed, find a coach to help iron out self-justification tendencies and accelerate your development. With a coach, there’s another person you are accountable to, which always helps with staying on track. Furthermore, you can learn trading psychology to identify and break negative trading habits.
Common Cognitive Traps
The brain is constantly adapting, so even with the best practices, there are common cognitive traps you can fall into.
- Overconfidence is quite the red flag. It will lead you to excessive position sizes.
- Anchoring bias – where you rely heavily on just one piece of information, usually the price levels, causing you to place irrational stop-loss limits.
- Confirmation bias can lead you to ignore vital information that you may not want to hear.
The way to defeat them is by taking countermeasures. Keep fixed risk per trade and be strict with your pre-trade checklist.
Conclusion
Human behaviour can be stubborn, but it can also be moulded with the right structure. To improve outcomes, start by beating temptations before you try to beat the market. For this, you can enrol in online stock market courses from Upsurge.club.