Last Updated on Wednesday, 16 July 2014 00:52 GMT
Tuesday, 10 February 2009 10:52

Trading Psychology and Trading Discipline

Psychological Factors in Trading

Psychological factors can make or break a traderSuccess in trading Forex, Stock and commodity markets is not only about the knowledge and understanding of the fundamentals or technical analysis but the trading psychology plays a vital role in the success or failure of our trading.

when we say trading psychology, it means our individual psychological traits as well as an understanding of mass psychology.

Trading is an art in itself. Even with a great knowledge and understanding of the market, you may find yourself continuously losing in your trades. You may know that the market will go up and you buy. After you enter the trade the price starts falling instead of moving up and the stop-loss order closes your trade. You end up with a loss in the trade and now you are worried to go long again even though your analysis is still telling you that the prices will go up.

Now you see that the price suddenly reversed and starts moving up, exactly as you had analyzed. It brings in the feeling of frustration because  missing the opportunity and also because of the unnecessary loss on the previous trade. Fueled with that anger and the frustration you enter the market with a bigger long position to make up for the previous loss as well. Not only that but because of the unnecessary loss because of the stop-loss order you put a stop-loss too far. The prices had already moved up quite a bit and as soon as you entered the long position the market does a free fall. Our stop-loss was too far and Oops!!! Your position goes with the wind again. And this time with a bigger loss as the stop-loss level was too far.

The emotional feelings, fear, greed and many times the addiction to trade can just kill what we have in terms of market knowledge. Psychological factors and sentiments negatively affect the performance because of the dynamics of the market.

The above was just an example of how the right analysis, knowledge and intellect become completely useless because of psychological factors and trading discipline. We hot scared and that fear overcame our senses and then we became greedy and lost  the discipline for money management. A perfect trading discipline is required for ultimate success.

As we mentioned above, when we talk about trading psychology, it’s not only our individual psychology but also the mass psychology of the traders around the globe.

Mass Psychology

We do not have any control over the mass psychology but an awareness and understanding of it can help in what decisions we take in different situations. In this sectionTrading psychology and control on emotions and the section "Trading Mistakes" we are only covering individual psychology and discipline but the following are some points where a sense about mass psychology helps:

1) Number psychology: We have covered this in an eBook on "Winning Strategy" page but in a nutshell it's all about where we can expect the support and resistance levels. Whole numbers always tend to be resistance and supports but it is not only whole numbers but in decimals also we find supports and resistance at some particular decimal places very commonly. 

2) Chart patterns: The common chart patterns which work very often are nothing but a result of the mass psychology.

3) How the mass behave in panic situations even if those events are not really big and how and to what extent it can affect even a very strong ongoing trend?

4) How the market may not move to great heights even after some surprisingly positive results for a major economic event? We may take a big position thinking that the prices will rally but what we may ignore that the traders might have already taken long positions with the anticipation of good results, as it happens all the time, and the news might have already priced in.

5) After an unexpected price action during the week in the Forex market, how the prices may close for the week? This is because the traders in the U.S. would know that they may not have control during Monday's Asian and early European session. Because of that they may close the positions and the market may close with unexpected results again.

Individual Psychology

Let’s start with the most common trading mistakes which can either wipe off our profits or even prevent us from going into profits ever. We all can make one of these common mistakes in our trading career once or even more than once. The killer of a trading career is to make one or more of these mistakes as a pattern. An example of the pattern can be the fear and greed and then fear scenario as motioned in the beginning of this write-up.

To kill that pattern, we need to understand the pattern itself. This can only be done by the thinking and analyzing with a completely open mind because knowing ourselves, proves to be more difficult than understanding others . We need to understand ourselves first to understand our actions and reactions and then make an effort to control those undesirable actions and reactions.

Trading Discipline

Whatever are our psychological traits we all, at times, make some common mistakes. A strict control to avoid these is what the trading discipline is all about. Bringing discipline in our trading career is the most important aspect and the foundation stone for the success. Let us check what are the factors which need the attention for improving the trading discipline.

Killer Psychological Aspects in Trading

  1. Always entering the market against the Trend.
  2. Entering the market in the direction of the trend when its too late.
  3. While losing, increasing the positions in the same direction.
  4. Trading addiction and trading by feelings.
  5. Stop-loss orders too close or too far.
  6. Take-profit orders too close or too far.
  7. Learning from the past mistakes and then making a bigger mistake.
  8. Loving our trades and bias for the figures.
  9. Trading too big for your account size.
  10. Varying the position size of your trades.
  11. Not looking at the both at the long-term and short-term picture of the market.
  12. Not using the stop-loss order- THE ULTIMATE KILLER (you can do all mistakes and still survive but you do this and you have invited the death of your account).

To summarize, a strict discipline is must for successful trading and for that understanding our psychological and personal traits is the first step.

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