How to maintain a positive trading psychology

Your psychological state can have a massive impact on your trading decisions. Here’s how to stay positive under pressure

A trader is shown with smoke replacing his head to illustrate losing his cool during trading                                 
Sticking to your trading plan will help you stay psychologically secure and trust your decisions – Photo: Shutterstock

There are many skills you need to be a successful trader. Strong analytical skills are essential, as is good numeracy and an attention to detail.

But more important than any of these learnt skills is your mindset – or your trading psychology – which can have a massive impact on your trading decisions.

How to manage your emotions when trading

The study of trading psychology is called behavioural finance. Its basic tenet is that behaviours and biases affect trading behaviour. In an ideal world you would trade with the efficiency of an artificial intelligence bot, making decisions based purely on facts and data. But the fact is that you’re human and no matter how much research you do, or market information you have, you can never completely shut off your emotions when trading.

“Successful traders don’t get rid of emotions,” says Ekaterina Serikova,’s trade behaviour analyst. “They experience them to the fullest and use them as additional information for trading.

”What you can do, however, is take steps to improve your psychology when trading, and maintain a strong, stable mindset.”

Recognise your biases

A key aspect of behavioural finance studies is trading biases, which can lead to irrational behaviours and decisions, based on gut feelings, past experiences or current prejudices. Instead of following the facts, we follow our instincts. This can be disastrous when trading.

While it’s almost impossible to make unbiased investment decisions, by understanding your biases you can moderate your instinctive behaviour and improve your performance.

Behavioural biases in investing fall into two main categories: cognitive and emotional. Cognitive biases are based on established concepts that may or may not be accurate, while emotional biases are more spontaneous and based on your personal feelings.

Serikova explains: “Cognitive bias means that the person is thinking about an issue, rather than responding to it emotionally, but thinking about it does not mean they are immune from bias.

“Emotional biases are biases based on intuition, feelings and emotions rather than knowledge or facts and that’s not a good mixture for the ever-logical markets.”

There are dozens of different types of biases, from overconfidence and loss aversion to familiarity bias and herding instinct. By understanding and recognising them, you can avoid falling victim to them.

Feeling the fear

Fear when trading is a natural and expected emotion but it can prevent you from applying your hard-learned technical skills if you let it take over.

Fear is most often seen during bear markets, when it can cause traders to panic and act irrationally in their haste to exit the market and minimise losses.

So how can you control your emotions when trading? By working out what you are afraid of and knowing how you may react to those fears, you can create a plan that will help you move past your immediate emotional response and react in a rational and measured way.

It’s also important to take the long view that trading losses are normal and probable, as this will help you manage your fear when markets don’t go your way.

Don’t be greedy

While bearish markets trigger fear in traders, bull markets can encourage greed as traders become seduced by the prospect of getting rich quick.

As the old Wall Street expression goes: “Bulls make money, bears make money, pigs get slaughtered”. Pigs are investors whose goal is to make the most amount of money in the shortest amount of time. As a result, they often make rash investment decisions and buy stocks without doing their proper due diligence, which can lead to big losses.

Stick to the plan

If there is one thing you can do to strengthen your trading mentality, it’s to stick to your trading plan. This is your roadmap for the trade ahead. It will help you determine your entry and exit, the size of your position and your risk-and-reward ratio. All of which will help you stay psychologically secure and trust your decisions.

“Your plan should clearly state the rules of entering, exiting and risk management, with as many different scenarios as possible,” says Serikova. “For example, what will you do if the market reaches the support/resistance line or a previous high or low? What will happen in case of surprise breaking news when you’re in the position?”

Stay focused

The trading world is full of distractions about potential new investments and possible losses and gains on your portfolio. So you need to stay focused on your strategy and, once again, stick to your plan.

Do your research

Knowledge is power, so one of the best ways to improve your trading psychology is to do your research. With a stronger knowledge about how trading works, you will be better equipped to react calmly and logically to market changes and make smarter trading decisions, both long-term and on the fly.

Don’t set stop losses that are too wide or too narrow – and hold your nerve! Don’t be tempted to move your stop loss, or cancel it.

Stop orders

Stop losses enable traders to automatically put their shares up for sale if they fall below a certain price. They can take the emotion out of trading, as they give you time to think about the price you want to sell your shares in advance. Stop losses help eliminate rash and potentially costly decisions.

Mental stops

As with a stop loss order, a mental stop is where you make a decision or promise to yourself that you will exit a trade or investment at a certain point. Mental stops require more will power, however, as you still have to carry out the trade yourself. When it’s automated, you’re less likely to change your mind at the last second.

Get in the right mindset

To help you get in the zone when trading, Brett Steenbarger, author of The Psychology of Trading, recommends meditation, exercise or self-hypnosis.

“These methods don’t eliminate emotion; they build minds,” he says. “If we can exercise for 30 minutes a day and build our cardiac fitness and our physiques, maybe – just maybe – a similar commitment could strengthen our abilities to operate within life’s zone”.

Do whatever it takes to start the day with a PMA (positive mental attitude), whether that’s waking up earlier to allow time to prepare for the day head, going for a run, having a decent breakfast or avoiding drinking the night before, or during the daily trade.

Find out what works for you and make it part of your trading routine.

Visualise winning

Athletes visualise themselves winning a race or game, so why not do the same with your trading? Visualising a winning trade can not only inspire confidence, it can help you realise the steps you need to take to make it a reality.

Visualise losing

While visualising winning is important, you should also take a few moments to think how you will feel if you lose. By considering the worst that could happen, you will be better equipped to handle losses and potentially save yourself from making rash decisions under pressure. Visualising a loss will also help you take proactive steps to avoid such an outcome, such as creating a detailed trading plan, with entry and exit points designed to save you from negative outcomes.

Learn from others

While we don’t want to encourage herd instincts when trading, looking at what other successful traders are doing can be an effective way to improve your performance. Incorporating other proven methods, habits or traits into your own style of trading can make you a mentally stronger investor.

Keep a journal

One of the best ways to maintain a positive, stable mindset when trading is to monitor, observe, and document your behaviour and progress.

By keeping a trading journal, where you document wins and losses, and how you feel every time you open or close a position, you will be able to see if there are certain trends in your psychological state.

“It can be hard to notice these emotions as they are happening – we get caught up in the moment,” says Serikova. “But once you get used to reviewing and analysing how you feel you will become much more proficient at being able to spot the impact your emotions are having on your behaviour.”

Keeping a journal can help improve your mental state and streamline and improve your trading.

Practice helps make perfect

There is a much-touted theory that practising any skill for 10,000 hours will make you an expert. While we can’t promise this will make you a perfect trader, putting in the hours will undeniably improve your stock trading psychology.

We can give you advice, but unless you go away and practise, practise, practise, the effectiveness will be limited.

FURTHER READING: How to recognise loss aversion bias and what you can do to minimise its impact

FURTHER READING: How to create a trading plan

The material provided on this website is for information purposes only and should not be regarded as investment research or investment advice. Any opinion that may be provided on this page is a subjective point of view of the author and does not constitute a recommendation by Currency Com Bel LLC or its partners. We do not make any endorsements or warranty on the accuracy or completeness of the information that is provided on this page. By relying on the information on this page, you acknowledge that you are acting knowingly and independently and that you accept all the risks involved.
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