Mastering your Trading Psychology 101

Containing emotions, thinking objectively, committing to your strategy if you have one, and displaying mastery in the markets; all fall under what is known today as trading psychology.

In one of my previous issues, I discuss how one should be aware, understand and keep under control two primary emotions:

• Fear
• Greed

These two will singlehandedly either ruin your portfolio, for, when appropriately managed, take you to new highs as you leverage and play o the fear and greed displayed in the markets to your advantage.

Fear

Fear is, well, fear. You feel scared when the market goes against you (whether it crashes or skyrockets).

Fear is when your heart starts racing, and you start thinking about how much you will lose.

Fear can (and will) kick a fight or flight response in your brain, which will push you as a trader to make fast and, more often than not, risky and rash decisions to protect your capital.

In 9/10 cases, specifically in volatile markets, the above backfires, and you end up chasing candles.

Mastering fear

The most effective way to master fear is to plan your trades ahead of time.

Map out how events might unfold, and jot down how you would react to everyone. You might not get all scenarios, you might miss a few, but at the very least, you should have the following:

An exit plan if you feel the market is going against you and your invalidation has hit.

Failure to stick to the above will lead to disastrous effects. Your number 1 job is to remain as objective as possible.

No matter how hard it can get, remaining objective (or at the very least try) is the only way you can approach the market rationally and with a clear eye.

Greed

“Bulls make money, bears make money, pigs get slaughtered”

The market turned in your favor. You’re no longer afraid. Now it’s time to let your winners run.

Let them run for too long, and you’ll end up at break-even, or even worse, in a loss.

One of the hardest things you can do, especially as a beginner, is close a position in profit. You might close your position, and your asset might even move more in the direction you were hoping for.

“What if I haven’t closed it? I could have secured 50% more profit!”

I view the markets as a sizeable statistical space where playing the highest probability will make you a winner in the longer run.

Mastering Greed

Mastering Greed is trickier than mastering fear.

There are two ways greed can consume trader:

• In the beginning, when the trader feels too confident in a trade, you’ll start increasing position size and bet more than what you can afford to lose
• Let a position ride for too long without having an exit plan.

Like mastering fear, you must stay methodical in your trades. Set an exit plan, and walk away.

If you’re afraid to miss out on the whole run or think the trend isn’t over yet, then learn how to secure profits incrementally: this should allow you to catch the bulk of the move.

Have a Trading Plan — Setting the Rules

Set up some ground rules when you approach the markets.

These rules can be a simple as not trading any weekend move, not going below a specific timeframe, not risk more than 1% of your portfolio on a single trader. The list is endless.

When executing a trader, set your entry, stop loss, and profit-taking beforehand.

Never, ever remove your stop loss no matter what. Stick to your invalidations and don’t “hope” for anything.

If the market went against you, took you out, triggered your invalidation, and then reversed, who cares? You might end up losing a lot more if it didn’t.

Conclusion

Keep an eye on your own emotions, especially when you want to trade.

Learn how to identify the most important two: Fear and Greed.

Learn how to take a step back and manage them properly.

Most importantly, have a plan for everything.

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