Understanding and Controlling Your Trading Psychology

What is your Trading Psychology?

A trading psychology, based upon how well you know yourself and are able to profit from your strong points, as well as control you weak ones, has a lot to do with how successful of a trader you will be. When you truly know yourself, then you are aware of how you are going to react under certain circumstances and you can protect yourself from self-damaging actions or decisions when it comes to managing a trade.

Your biggest enemy when trading is YOU. It's not the market, or the market makers, or world events. It's You! If you do not have a professional psychology then you will make the wrong decisions and lose money on a consistent basis. Here are the keywords, and concepts that you need for developing a professional trading psychology:

Caution.
Examine all of the facts carefully before you make a trade. Don't let excitement, fear, or someone else's influence cause you to enter or exit a position before the circumstances match YOUR guidelines.

Patience.
What goes up must come down and what goes down should eventually come back up. A good trader understands that there are times when it's better to be in an all cash position and watching the market from the sidelines.

Conviction.
Don't let temporary circumstances erode your convictions. You know that you should take steps to protect your profits when a trend is weakening, so do it. Likewise, you know what to do when the stock resumes trading up, so do that to.

Detachment.
Don't fall in love (or hate) with your stocks. The stocks don't care that you own them, and they are not your friends. Your only friend is your trading psychology. Pay attention to the technical aspects and do the right thing based upon your own system.

Remain emotionally detached from the market and the excitement that its movement creates. Don't constantly check your share prices all day long (unless you're day trading). If you get caught up in "tick" watching then you are going to make wrong decisions based upon greed or panic. There is no valid psychology that includes greed or panic.

Focus.
Unless you are a day or swing trader, the day-to-day prices of your stock are not that important. Stay focused on the large trends and do not try to react to every market move.

Expect the unexpected.
Things happen. Unexpected things, both good and bad. Understand these events, be prepared for them, and take the appropriate actions. A good psychology takes into consideration that you can not predict what is going to happen in the market.

Average up, not down.
Unless you're trading in short positions, only increase your position when prices goes up, not down. Generally, when a price starts to move it usually continues in that direction for a while.

Limit your losses.
Establish and honor stop-losses to protect your money. When the stop loss is triggered, act immediately, don't have second doubts. Avoid holding on to a losing position because you "hope" that things will turn around. Falling stocks will usually continue to fall until something positive happens to arrest the decline. You could get wiped out waiting for that magical moment. Get out of a bad trade and use the money to execute a different trade.

In Summary

Your psychology is a tool that enables you to predictably control your emotions and make decisions based upon cold, hard facts. Without this, you are going to be swept along with the stock market currents until you are eventually washed away in a tide of red ink.

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