We strongly believe that Trading Psychology is with Risk Management the most important things in trading.
On the other hand, it is also the least popular topic to talk about.
Many people are able to spend countless hours looking for that perfect strategy, but if they are not able to set up their minds the right way, they will never become profitable traders.
In this article, we are going to show you a handful of tips and tricks that will help you on your way to becoming a better trader.
We are going to talk about things like FOMO, revenge trading and many more.
If you experience these problems in your trading and want to use your potential to a maximum, you can consider contacting our Trading Psychologist.
Table of Content
Why is Trading Psychology so important?
You probably heard that 90% of the traders fail.
A lot of people might think it is because they don't know what to do.
This is not true, they just don't do what they know they have to do.
Let's start with a Quiz
You have two traders, Trader A, and Trader B.
Trader A has the best trading strategy out there, but very poor self-discipline and risk management.
Trader B is using very basic strategy, he has a basic understanding of trading, but he has bulletproof trading psychology and risk management.
Which one is going to be more successful?
If you have guessed Trader B, you were right.
With the best strategy in the world, but with poor trading psychology, you are going to be easily outperformed.
Trading Psychology - Battle of Emotions
Much has been written about the psychology of trading and, in particular, the theory of trading psychology.
In this article, we will focus on some of the issues that may arise and some specific exercises will be shown on how you can fight these issues and how they can be eliminated.
What is most important to acknowledge is that emotions associated with trading emerge from something.
Emotions don’t arise from the air, emotions arise from the thoughts we put in our mind and from biological reactions triggered by these thoughts.
What does it mean in practice: If we think about the fact that our trades do not come out as a success, we start to worry, so we put a negative thought and a negative emotion of fear appears.
But this is not the beginning of the problem. Negative thoughts also appear from something. In this case, negative thoughts result from poor previous experiences or low self-esteem.
If we had enough confidence, our thoughts wouldn’t turn to previous bad experiences thinking that we failed before. In a perfect scenario, we would take it as a lesson and transform the negative emotions into a productive thought that would help us improve in the future.
Likewise, if we feel demotivated, the cause may be a lack of inspiration that stems from poorly set goals.
Another problem may be a lack of discipline.
But if we compare it to my favourite resemblance with house building, the discipline is like the stairs from the basement to the first floor, while emotion management is building the floor so we have where to put the stairs.
For those of you who do not know what it means, imagine trading as a house building.
The first step is to select the land that in this case represents trading in general.
Then we choose the type of construction, which means we decide what we want to trade.
Then comes the design itself from the architect, a plan to start building and selection of a construction company that in this case is the strategy we choose based on our knowledge.
Then we can build the foundations, which is one of the most important, yet often neglected trading psychology or we could say how we manage ourselves, our emotions, how we follow our chosen strategy and discipline needed in order to execute our strategy.
Only then on these strong foundations based on clearly chosen strategy and mastering of the psychology we can build another floor that represents profits. Those can increase unlimitedly with each floor.
Here I have the first task for you: Write down why you began with trading in the first place and what you enjoy about it. Every time you aren’t sure if your time is dedicated in the right direction, go back to this list and remind yourself why you do what you do. Write to me to firstname.lastname@example.org the reasons why you enjoy trading, I will be happy to read it and be inspired by it.
If we look at emotions and their coping, I’d like to introduce to you the method called DOT (doing – outcome – thinking) that was introduced by an American psychologist.
Its essence lies in considering all the available facts first and based on the rules we set, we then simply act.
Then something will happen, an outcome, in our case a profitable or an unprofitable trade and only after that there comes the moment where we can give space to emotions.
Here, I would like to mention that you need to think of trades as profitable or unprofitable, not as successful or unsuccessful.
Even a losing trade can be successful. If you have managed to follow your strategy and your rules, you have not been dominated by emotions and have taken the trade as a lesson, then this loss-making trade is only a statistical item, a cost to trading just like any other activity.
Every time you decide which trade to take, evaluate all the facts you have available and then decide into which trade to enter.
Tell yourself what a computer would do in your place because a computer doesn’t have emotions and makes decisions based only on the data set in the program.
Enter the trade and follow the limits you set.
Only after that give space to your emotions, and in case of a loss, rationally evaluate why it happened, how to prevent it next time or praise yourself in case the trade turned out profitable.
Take your time to absorb the emotions, for example, set your phone for 2 minutes and let yourself be fully dominated by emotions.
Consciously imagine letting off emotions when the alarm goes away. Do not think about past trades and do not enter another trade unless you have a clear head.
Exercise: Test this methodology every day. Write down how you are doing and always review everything. Write yourself feedback as if you were writing it to someone else.
Think about the reasons why you didn’t succeed. I will be glad if you write to me (email@example.com) how successful you are, or the reasons why you are not.
Trading - a mental game
The following article was sent to us by one of our clients, Samira C. Samira shares her story of how she became a trader. It is a very inspiring journey as you see her talk about her ups and downs. We are very happy to share her wisdom with our traders.
For more stories of our successful clients, you can take a look at the testimonials page.
I got into trading almost by chance.
The first time I ever saw a chart it looked like astrophysics to me. I remember staring at the screen and back at him and wondering how he could understand anything in all those hieroglyphics while I would only see numbers.
I couldn’t define anything I was seeing, it was like a Picasso painting. Just numbers and lines and colours and symbols that – I believed – only some chosen people could translate into something useful.
It was overwhelming, for the first time I felt really stupid for not being able to put any of the things I was seeing together.
Short after my first interaction with the markets, I went on holiday and met such Swiss guy claiming to be employed by Goldman Sachs as a stock manager. I didn’t know much about Goldman back then apart from it being one of the biggest financial banks in the world, but then I didn’t have any knowledge about trading whatsoever.
So to me, the fact that an approximately 27 years old guy could already be stock manager didn’t raise any suspicion in me.
The guy turned up being a scammer, thing that I would learn later on wasn’t uncommon at all in the financial markets.
But what is really important about this piece of information is how coincidentally or not I came in contact with financial investment talk twice over the span of one month while before the whole subject seemed to me like an unreachable reality that only the top 1% could afford.
These two experiences fired up my curiosity, especially since both guys were claiming that investing is THE Sacred Grail of money making.
So as all new things that fascinate me, I started looking into it.
As probably most new traders, I landed up almost immediately on the BabyPips website where I got all my basic knowledge from.
Was months and months I would spend on charts and reading material. The whole enthusiasm brought me to even buy a relatively cheap course which helped me in the first couple of months of my trading journey.
I didn’t spend much time on a demo account
Enthusiasm was so big that after almost no practice I decided to open a live account with as little as £200. Probably the luck of the beginner or the lack of understanding in risk management made me somehow flip that account to £800 in the time frame of couple months. As you can imagine the risk I was taking was ridiculously big, but my trading was going so well that my mind didn’t even take into consideration the idea that the winning streak could eventually end.
But it did. I lost a couple of trades in a row and being my risk huge it had an enormous impact on my trading psychology.
Taking a step back to focus on Trading Psychology
I decided to take a break and re-assess what I was doing wrong.
Obviously, the beginner’s mentality “let’s make millions overnight” didn’t even clued me about the fact that maybe – just maybe – my mistake could be the risk I was taking.
Either way as everyone who is new in the business and unsure about what they’re doing I started wondering if it was my strategy that stopped working (newbie mistake, I know).
So, I started wandering around listening to what anyone had to say, hoping someone could give me the secret formula for the perfect trading.
I was lucky enough to meet a trader who would have later on shared with me his experience.
This knowledge was coming down to a basic series of rules of trading psychology:
- risk less than your reward
- cut your losses quick
- find a strategy that works and stick to it no matter what
- focus on trading psychology more than the technical analysis.
Now, that last part was what really overwhelmed me. He taught me everything he knew in terms of technical analysis. Tools that he said worked for him forever and seemed to me like the answer to my prayers.
But, what I wasn’t expecting was that after teaching me all the secrets he knew about trading he would turn to me and said:
"Now forget analysis, you need to work on your trading psychology."
The statement was probably so far from my expectations on what trading meant that I didn’t really believe him, or didn’t want to.
He just handed me techniques top traders make you pay for or don’t even want you to know, completely for free, and he was telling me to forget about them?
I would find out later on what he meant with that statement.
I blew two accounts and I did it with the perfect set of skills: why?
Because I didn’t grab a fundamental concept back then: no amount of perfect analysis is going to make you a profitable trader.
On my way to success
Was a tough reality to accept, but here is what I found out.
"The analysis gives you the tools to trade, but what makes the difference between those few who make it in the long run and the rest who spend their life being bitter over their failure as traders is the trading psychology."
What is think is the main ingredient that separates success from failure:
- Accepting failure, making sure that when you’re wrong you always lose less than you make when you’re right
- Being able to sit and wait for the right opportunity instead of chasing the market with no clue whatsoever.
Having the mental strength to make your own rules in an environment that doesn’t offer boundaries and having the discipline to stick to your rules no matter what.
I hope you found yourself in my story and it gave you the chance to reflect on your own trading and if possible helped you improve.
I wish everyone happy trading! - Samira C.
Do you want to join Samira and become the FTMO funded trader?
Trading Psychology Guidelines
We hope that after a great story from Samira, everything makes little more sense why trading psychology is so important.
Now we provide you with some great set of rules you should stick to while you trade.
- Always know the risk/reward ratio of every trade. If a trade doesn't have a decent ratio, then that trade isn't worth pursuing.
- Never make a trade where the loss (risk) is too big to stomach.
- Place your stop-loss as technical invalidation level (below the swing low/ above swing high), don't use a predetermined number of pips for your stop.
- Never go all-in on a trade.
- Don't enter into a position because you feel like you have to trade something. Trading is about patience and it is okay not to take a trade for a couple of days.
- Only trade with a planned strategy.
- Always stick to your stop-loss! When trade is going against you, never touch your stop-loss, it is okay to take a loss.
- Look at losing trades as a cost of doing business, study your losses and learn from them.
- Never marry your bias. When you are feeling overly bullish or bearish, take a step back and re-analyze the situation from the opposite perspective.
- Avoid over-trading.
- After closing an extremely profitable or unprofitable trade, take a break and clear your head before returning.
- After a loss, avoid going into the next trade expecting to make that loss back.
How to deal with Fear Of Missing Out (FOMO)
Controlling emotions in trading has always been difficult.
We all know what we SHOULD do, but as human beings, we always do what we WANT to do, or what is easier.
Remember the time when you waited for the price to come to your support level to go long?
Somehow, price always seems to reverse a few pips before your entry point. You're nervous, scared, not thinking properly. In the heat of the moment, you go long at a price point 10 pips above your original entry level.
After you have entered, you tell yourself: 'Instead of risking 10 pips on this trade I now risk 20...'.
Obviously, what does price do?
It comes to your desired level after all and now you're sad that you lacked the discipline to wait.
You had the FEAR OF MISSING OUT (FOMO).
A trade, that originally may have a RRR of 2:1 was reduced to 1:2 that easily.
By waiting out, you'd only need at least 33% win rate to be a profitable trader, but your lack of discipline now forces you to be right 66% of the time.
For the reference take a look at our Risk To Reward ratio infographic.
Now the odds are against you, aren't they?
The point is, that the problem simply comes from your own mind and trading psychology.
You want to be in the trade and make money. This means that you don't want to miss any market opportunities.
Unfortunately, this type of thinking paradoxically caused your biggest demise.
You have to tell yourself:
'There is no need to trade every setup. It is worth to wait for the best trading setups and opportunities. NEVER regret missing out on a trade or losing one. I must patiently wait and stick to my rules. Staying disciplined is the most important thing.'
The question what a trader could do and should do is a very debated subject.
- Enter early and ensure to be in the trade.
- Take your profits early to secure them.
- Drag your SL and miraculously price reverses thanks to your decision.
Should you have done that? Certainly NOT.
You should enter when you are supposed to enter and exit when you are supposed to exit. If you're not doing that, then you are just a gambler. You trade based on emotions and intuition instead of proven mathematical or historical backtesting on which your strategy is built on.
At the end of the day, we are still human beings and emotions will always be in our way.
A good trader is aligned with his mindset and is in control of his actions.
He is aware of bad habits he has and as a result, the part of his brain responsible for rational thinking and discipline is in full control.
Our performance psychologist is here to help you with the FOMO phenomenon and many other psychological problems that traders face.
Very often, our psychological issues are much deeper than we admit ourselves.
Funded FTMO Traders can use the services of performance psychologist completely for free.
If you are not yet out funded trader and would be interested to utilize the psychological sessions, check out this link for more info.
Trading Other People’s Money Versus One’s own
We would like to end this with the article we received from one of our clients, Eugene G. This article is a great summary of benefits you are going to get once you become funded FTMO trader.
I have been trading my own money with little success. For 7 years, I have been profitable to a small degree, yet FTMO funded trader program has opened my eyes to another world. There’s a certain shift in mindset once you know you are handling other people’s money.
The Stressful environment and risk management were taken very easily into my stride. While doing my own account, the worry has always been to finance a loss that eroded my progress to date. That certainly has a detrimental effect on trading without an emotional burden.
Benefits of FTMO
FTMO model allows me to be a professional, considering risk above selfish greed, the leveraged account, and decent account size makes the trade worthwhile in my mind’s eye.
The mediocre amounts dollars and cents now mean something to my eye’s impression, seeing the capital of such amount makes me respect the double-edged sword trading is really at such a degree.
The clarity is heightened with rules on non-trading on major impact news events, this instantly kills the gambler mindset hoping to profit on such a move.
It keeps things realistic and rational.
Going through the Challenges forces me to not simply develop a trading plan and risk management plan but to fully and strictly adhere to them.
There’s the maturity in trading development sorely needed for all traders, no matter which development stage they are at. I highly recommend any budding aspiring traders to give the Challenges a test and allow what kind of trader we are to be revealed to ourselves. Never mind the outcome, the learning is most treasured here.
If one gets it, I believe the lesson learned to be more valuable then becoming a funded trader eventually.
Without a doubt, having technical skills to understand charts is very important.
But you should never overlook the psychological aspect of trading.
Developing your trading plan, following important trading guidelines, keeping your trading journal are the things crucial for your trading success and mastering trading psychology.