Trading Psychology is probably one of the most difficult elements of trading. So much so that one could write an entire book on it. Actually there are over 3000 already written on Trading Psychology on Amazon currently.
While the points of Trading Psychology could be elaborated upon for thousands of words, I will keep it brief and point out only the essential information for you to put into practice right away.
Before we begin you must know that you going to have good days and bad days, good weeks and bad weeks. As long as month on month, year on year you have consistency profitability, you are trading well and moving in the right direction.
Lesson One In Trading Psychology
Lesson one in trading psychology is to accept the inevitable. You are going to lose trades. It is what you do with that information that makes the difference.
Do you remember learning to ride a bike? If so, you can probably recall the bitter burn of grazed knees and elbows! But, you knew that you could do it, so you picked yourself up and got back on, a better rider that what you were before you fell off. Trading is no different. You know in advance you are going to make mistakes but as long as you learn from them, you will be all the better for it.
Lesson Two In Trading Psychology
If you speak to almost any professional trader you will probably tell you something similar to: “don’t aim to make big wins, aim to make small losses.” Or “If you cover your downside, then your upside will look after itself.”
This can only be done by doing your calculations in advance and sticking completely to the Defensive Trading Trading Strategy, knowing the assets you trade and accepting the reality of the outcome; come what may.
In essence, you need to be able to take emotion out of the equation when you are making your trading decisions and stick to your calculations during the trade. You have probably heard the saying “don’t change horses midstream”, well it couldn’t be more true in trading Forex.
If you are going to master yourself and feel as if you have complete control over the situation, no matter what happens, you must stick to the rules. Below are the 6 Tips of Defensive Trading Psychology.
6 Tips of Defensive Trading Psychology
Defensive Trading Psychology Tip 1:
Be patient. No FOMO. No overnight millionaires.
One of the biggest elements of the psychology of trading is FOMO (Fear of Missing Out). In plain English, this term is used to describe the irrational rush to enter the market due to the fear that the asset is going to rocket sky high and that the trader who is not in the market will then miss out.
Defensive Trading Psychology Tip 2:
Be realistic, not greedy.
Set realistic targets for your trades and take the money when it is on the table. As I say repeatedly throughout this book, there are always more trades around the corner. Yes, it hurts when you see an asset move past your take profit level, especially it if is significantly, but nowhere near as much as it hurts to look at your account at the end of the day and see that your take profit wasn’t hit at all, and the market has turned around and is fast approaching your stop loss level. That’s money you are handing over, not collecting on which is the wrong side of the equation to be on in any game.
Defensive Trading Psychology Tip 3:
Keep your cool. Don’t panic.
It should also be noted not to hesitate. If you see a trade in front of your face, take it. Should it go against you, keep your head. If you follow the steps set out in the Defensive Trading approach, you will be prepared for the downside and it is all accounted for. It is only a matter of time before you will see the profits stack up.
Defensive Trading Psychology Tip 4:
See what is really there.
This is probably the hardest to tip of them all to follow. All too often a trader has a winning streak where they are so in tune with the markets and the asset they are trading, they can tell you what is going to happen two weeks from now. And it does. Good times. But, then, alas, something changes.
There is a new fundamental factor affecting the prices in the market, or perhaps it may just be as intangible as market sentiment, risk appetite etc. Then, the moment is gone. The trader who once had godlike control over the price movements of the asset is now playing a game of cat and mouse and getting beaten at every turn.
This is ok. It is at this time that you need to stop and recalibrate your point of view. That doesn’t just mean do a 180 degree turn and jump into a trade. It usually means that you are too early to make that trade set up that you believe that will take place and you keep getting stopped out on your trade.
To prevent this, wait for signs of confirmation before getting into your trade rather than trying to wish the price to move as you what it to.
Defensive Trading Psychology Tip 5:
Don’t get too confident.
Often traders have periods of exceptional profitability where they are correct in their analysis and time trades wonderfully. This is a fantastic experience and can help a trader to make a great return. It can also do something more sinister. It can lead a trader to believing that that they are so in tune with the market price movements, that they are going to continue this mastery indefinitely.
Of course, this is not true and all too soon they will find that they could pick a winner in a one-horse race. When experiencing a larger than usual return, maintain constant awareness that this is cream on top of what you would usually generate. If this does become a regular circumstance, then you will simply need to recalibrate your Defensive Trading strategy calculations accordingly.
Defensive Trading Psychology Tip 6:
Always remember that tomorrow is another day.
Defensive trading teaches traders to protect capital and profits at all costs. This logic works based on the knowledge that there is always, always another day of trading following this one and that no two days are alike. Do not lament bad decisions or missed opportunities, do not dwell on them. Certainly, learn from them, but do not be defined by them.
The reality is that a meticulous, cool-headed and systematic approach to trading anything, is the winner at the end of the day. This is much easier when you use a trading plan or checklist and stick to it in the heat of the moment.
If you need to brush up on your Defensive Trading, make sure to read through the Defensive Trading Principles.
As always, if you have any questions, we would love to hear from you in the comments box below. Happy trading!
