Psychology Is Key To Great Trading

You should never underestimate the importance of psychology when it comes to trading the various markets. Many traders believe they will become a master of trading by reading a book. Others by acquiring or developing some magical indicator or system. The truth of the matter is that it takes years of proper trading education along with experience to become a good trader. Some people do become good traders after putting in the time. The key to becoming a great trader is to master the psychology of trading.

The force behind psychology in the marketplace is human emotion. Fear, greed and hope are human emotions that have taken down many traders. As an example with the emotion of "hope". Lets say you bought xyz stock. Your xyz stock starts to go against you. The best thing you can do is get out of the stock, taking a small, manageable loss. But you keep watching your stock go lower and lower with the "hope" it will turn around. The emotion of "hope" just caused you a massive loss. The key is to eliminate all emotion when trading the markets. How is that accomplished?

First of all, you need a good sound trading plan to follow. Following your trading plan which includes solid money management is a great start. Then you need to change your way of thinking, modify your behavior. The best traders think differently from the rest. Thats why they are great traders. You need to think in terms of "probabilities" once you have an "edge" in the market because of your sound trading plan. Winning trading doesn't have anything to do with being right or wrong on any particular trade because all trades have an uncertain outcome. You will be able to make a fortune over time because of your edge. Concentrate on the "process", not the results. The results will take care of themselves.

The world's best traders and investors can put on a trade without any hesitation or worry and just as easy, admit the trade isn't working and exit with a small loss. They are not afraid, but at the same time, not reckless. You must always remember that each trade has an uncertain outcome with the odds in your favor. This is your trading edge. Winning at anything in life is mostly a function of your attitude.

A sound trading plan and understanding the psychological part of trading:

1. Make an objective analysis of the market using a sound method. This puts the odds in your favor which is your edge.
2. Utilize sound money management to keep all losses small. Know ahead of time how much you are willing to risk on any trade. This is the secret to success.
3. Take complete responsibility for your trade and accept the risk.
4. Think in terms of probabilities and accept the fact that each trade has an uncertain outcome. You know you will make a lot of money over time because of your edge.
5. Act instantly according to your trading plan. You will follow your plan 100% without hesitation.
6. You are not impacted in the least by your last trade or last few trades. Most traders are controlled by their emotions. They become either over optimistic or over pessimistic. Never trade on human emotion. Emotion blocks perception and clouds our vision. Trade only on facts and by following a sound trading plan. Its absolutely crucial to control your emotions when it comes to trading the markets.

The most important factor in shaping markets is the psychology behind the markets. Human psychology has never and will never change. A successful trader understands human nature and many times does the opposite of what the general public does. This is especially true at market turning points. The various patterns you see on charts are a result of human psychology. Once the psychological part of trading is understood and controlled, you then can become a true master of trading and investing.

About the Author:
Chief Investment Strategist for Tradingmarkets4u. Over 20 years experience trading the stock market, futures market and options.