The Psychology of the Winning Trader

It is said that nine out of every ten traders lose money. It is also said that seventy-five percent of day trading is split between psychology and the other twenty-five percent between your trading system and proper money management. Now I don’t know if these facts are true or false. I haven’t seen a published survey on this subject, maybe someone can help me with that, but let’s assume that if it’s not true, it’s almost true. This means that most traders lack the proper psychology for trading.

Therefore, we need to look very carefully at our thought patterns, and what we think about when we trade. All our actions are governed by either pleasure or pain. Whatever we do, we do it either to experience pleasure or to avoid pain. We need to avoid pain and a desire for pleasure. We have to do some introspection and decide what drives us when we trade, is it pleasure or pain? Do you jump into every trade even if the setups are not exactly right because you can’t bear to miss the next big move, you don’t have the pleasure of the winning trade? Fear will probably cause you not to enter trades when everything looks perfect because the chances of losing money are too great for you. So you sit there paralyzed or you enter the trade but your stops are so tight that you hardly make any money. I believe most traders associate trading with pain. They are ruled by fear. The truth is, every trader loses money. This is part of the game. What matters is how you deal with it.

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If we associate pleasure with every winning trade and pain with every losing trade, our trading career will be a roller coaster ride of emotions with ups and downs. This is the very heart of the problem. Most of us are emotional traders. Our psychology has associated winning with pleasure and losing with pain. The problem with this is that in day trading we will experience a string of winners and losers every day. If you start the day with a couple of losers, you start to get hurt, which causes fear and when the next setup comes your fear level is very high and it stops you from entering the trade, This trade was just a winner and you missed it. Now you are going to fall apart. What can we do to overcome our emotions?

We have to change our psychology, we have to change the associations that we have created that pleasure equals winners and pain equals losers. The first thing is to set goals for our trading and our goal should be consistent profitability. What are our monthly and yearly goals? Use points or pips instead of money. Secondly, we need to know what prevents us from achieving our goals. Fear of losing, wrong position sizing, etc. Look at what you are doing and why it is not working. Now we need to break this behavior pattern and create a new one. How are we going to do this?