Traders love to argue about what’s more important: technical analysis, trading strategy, and trading psychology.
The truth is, even with a natural-born trader’s mindset, without a proven profitable strategy, you won’t make money. That's why it’s crucial at the start of your trading journey to focus on developing an approach with a technical edge. And even then, as you scale up, you'll quickly realise that 80-90% of what separates winners from losers is psychology.
But don't take our word for it. A 2018 study by FXCM of 255,000 traders and 43 million trades found that 62% of their trades were winners, yet most lost money. The issue? Their average loss was 82 pips, compared to just 48 pips gained on winning trades—almost 70% bigger losses than wins.
This isn’t a strategy or technical problem; it’s a psychological one.
That's why, In this blog, we’ll discuss practical ways to improve your trading psychology, so you can start trading smarter today.
Stick to Your Trading Plan
If you have a trading strategy, you have a clear set of rules to follow when entering and exiting your trades. If not, you are guaranteed to lose money in the long run.
You should have a rule-based trading strategy that outlines your entry and exit points, risk management guidelines, and position sizing rules.
Any attempt to deviate from your plan often leads to overtrading, revenge trading, and unnecessary losses. And if your strategy has a proven edge, every trade outside your plan is essentially gambling.
Developing Emotional Discipline and Control
Almost 80% (or more) of trading psychology is learning to control your emotions.
One of the biggest challenges traders face is managing their emotions. Fear and greed often drive trading decisions, clouding judgment and disrupting rational thought.
Let’s explore some common trading issues that arise from emotions like fear, greed, and other human impulses.
- Fear of Missing Out (FOMO)
FOMO is one of the most pervasive emotions that affect traders. It’s the anxiety that you’re missing out on a big opportunity, pushing you to jump into trades without sufficient analysis or preparation. FOMO often leads to chasing after price movements and entering trades late, ultimately resulting in unfavourable positions and losses. Learning to control FOMO is crucial—successful traders wait for the right setups and trust their analysis instead of chasing every market move.
- Following the Crowd
It’s easy to get swept up in the collective actions of the market, especially during market volatility. Fear and greed fuel a herd mentality, where traders blindly follow others instead of relying on their analysis. This often results in entering trades at poor price points. Instead of following the crowd, focus on your research and maintain confidence in your strategy. Remember, just because everyone else is buying or selling doesn’t mean it’s the right move for you.
- Ignoring/Shifting Stop-Losses
One of the biggest mistakes traders make is ignoring stop-losses because of the fear of taking a loss. This fear often leads to holding onto losing trades far longer than planned, turning small manageable losses into significant drawdowns. A stop-loss isn’t just a protective tool; it’s a commitment to your trading rules. Set your stop-loss, respect it, and let it do its job. Accepting small losses as part of the trading process is crucial to long-term success.
- Chasing Losses
Chasing losses, also known as revenge trading, is a common emotional reaction when traders try to recover from setbacks by making high-risk trades. This behaviour is dangerous because it shifts the focus from executing a well-thought-out strategy to making emotional, often reckless decisions. The urge to “win back” lost money leads traders down a risky path that results in deeper losses. Instead, accept the loss, step back, and return to your plan with a clear mind.
- Jumping the Gun on Profit-Taking
While fear can prevent traders from cutting losses, it can also cause them to exit winning trades too early. This habit often stems from a lack of confidence or anxiety about market volatility. Remember, most traders have an average win rate of over 60% but still lose due to exiting trades early. So, let your winning trades play out according to your plan without giving in to emotional urges.
Embracing Emotional Discipline in Trading
Emotional discipline isn’t just about suppressing feelings but understanding and managing them. Therefore, learn to recognise your emotional triggers, set clear rules, and consistently apply them.
Building emotional control is a continuous process that requires self-awareness and a commitment to staying focused on your strategy rather than being swayed by market noise.
Keeping a Trading Log
Most novice traders don’t see the value or the importance of keeping a trading journal. Yet, it’s more than just a record of your trades; it’s a powerful tool for self-assessment and improvement.
Keeping a detailed log of each trade, including your emotions and thoughts at the time, can reveal valuable input. Patterns of impulsive decisions or repeated mistakes often emerge, providing clear areas for improvement.
Building Resilience to Handle Losses
Losses are an inevitable part of trading. Therefore you should not try to avoid them. Instead, embrace it and shift your mindset to view losses as learning opportunities rather than failures.
This is because if you look closely, every loss provides valuable feedback. Instead of focusing on the negative, analyse what went wrong and what you can improve in future trades.
If you incur a series of losses, rather than revenge trading, try scaling down your position size, taking a short trading break, or revisiting your trading journal to rebuild confidence.
Focus on regaining consistency rather than making back all your losses quickly.
Risk Management Techniques to Protect Your Capital
You must protect your capital at all costs to stay in the game long enough to enjoy the profits.
Yes, you may have a sound strategy and solid psychology, but proper risk management is crucial. Or you will quickly suffer significant losses.
How do you protect your capital?
Well, you need to understand position sizing and leverage. Using too much leverage or taking on too large a position can lead to outsized losses, which can be emotionally devastating. Most traders consider it a good practice to risk only 1 or 2% of their capital.
Another technique is to use stop-loss and take-profit orders. Some traders ignore this, yet it helps manage risk by locking in profits and limiting losses. Moreover, setting these orders in advance reduces the need to make real-time decisions under stress, allowing you to stick to your plan.
Diversifying is another way you can protect your capital. Spreading your trades across different asset classes or instruments can reduce risk and manage the psychological burden of significant losses in any market.
Leveraging Community and Mentorship
Surrounding yourself with the right traders can greatly improve your trading psychology. The trading community can provide support, insights, and needed reality checks.
Observing and learning from successful traders can also help you create the right mindset. They have well-developed strategies and strong emotional discipline.
Avoiding toxic trading environments where members encourage risky behaviour or promote negativity is also essential.
The Bottom Line: You Can Change Your Trader DNA
You may find it difficult to be consistent and profitable if you have certain psychological traits. Luckily, there are ways to alter your trader DNA.
Regardless of how difficult it may be, accept the negative or counterproductive habits you may have to develop a good trading psyche.
For instance, if you are clinging to a losing trade out of stubbornness, learn to cut your losses and move forward.
If a loss feels personal, remind yourself that your worth isn’t tied to your trading results.
The goal isn’t to eliminate emotions but to understand and manage them. With greater self-awareness and honesty, you’ll better manage their impact, ultimately leading to more consistent and profitable outcomes.
Remember, to minimise risk, you need a reasonable capital. But don’t worry. At Optimal, we offer you the chance to trade with our funding through our funded challenges. Plus, you’ll benefit from our supportive community and expert mentorship to grow your psychology.
