What Is Trading Psychology?
Want to know the magic formula for making money in the markets?
Well…we’ve got a lot of people working on the details…but this is a big chunk of it:
Poor Trading Psychology = Poor Trading Returns
Good Trading Psychology = Good Trading Returns
If you’re a trader or investor…or plan to become one…then your understanding of trading psychology will be one of the most significant influences on your success.
Despite at times behaving with the unpredictability of an angry mob on St Patrick’s Day…the financial markets mean no harm. A market can’t actually ‘mean’ anything. It’s neutral. It moves up and down and goes about its business whether you’re involved or not.
So…if the market isn’t some manic thief out to get you…if it simply moves up and down independent of your actions…then it will do what it was going to do…whether you’re invested or not. That is, if you bought some gold…and the price of gold dropped the next day…it would have done so whether you bought the gold or not. Right?
What I’m getting at here is…given the market will do what it’s going to do…how can you ever be worried about it? The one thing you know for sure is you don’t know what’s going to happen…and when that happens…what you didn’t know…how can you ever be surprised?
I bet you’re thinking…if you don’t know what’s going to happen next how can you ever make any money?
Because trading/investing is a game of probabilities…and understanding trading psychology is about:
* Learning to always acknowledge that trading/investing is a game of probabilities
* Learning to control your susceptibility to emotions
That actually might be the magic formula to making money in the markets:
Discover How to Get the Probabilities on Your Side + Don’t Get Emotional About Your Decisions = Consistent Long-Term Success
So how do you get the probabilities on your side?
You find an ‘edge’ over the market – something that puts the probabilities in your favour. Casinos are the best example. Casinos don’t know which hand of blackjack they’ll win. But they do know they’ll win over time…because the probabilities are on their side.
With trading/investing you need a strategy that (through testing) finds an edge over the market.
So how do you control your susceptibility to emotions?
Take a long hard look at yourself.
Learning to think in probabilities will help. So will having a trade/investment plan in writing before you risk any money. As will learning to become aware of your emotional state when making investment-related decisions.
Fear and greed are the emotions that – if left to their conniving devices – will stuff things up for you.
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