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How to improve your trading psychology and become a better trader?

Psychology is an important part in trading and should be taken seriously. Trading consists of two parts: getting an edge and being able to execute that edge without making mistakes. The last part is where psychology plays a huge role. In this article you are going to learn more about trading psychology. You will learn about the best trading psychology you can have that will help you to succeed.

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How important is trading psychology?

Trading psychology is very important and should be taken seriously. Like I said in the intro: trading profitably comes down to two things:

  • Trading with edge

  • Executing the edge without making mistakes

This is what profitable trading is all about. Most people overcomplicate trading by using advanced stuff and thinking way too hard about things. Trading, in its essence, is quite simple: know when the odds are in your favor and only trade when the odds are in your favor. Don’t make mistakes in the meantime and execute according to your rules, that’s it. That is profitable trading.

Now, there are a lot of methods to trade but we prefer a mechanical trading strategy. Why? Because this makes it easier to identify an edge and it makes it easier to execute your edge without making mistakes. These are the two most important things that make you profitable.

So, to answer the question of how important trading psychology is: it’s important but not as important as most people think. If you don’t have an edge, good trading psychology won’t help you. It can increase or harm your edge, but getting an edge because of good trading psychology is highly unlikely.

If you are currently a struggling trader, ask yourself where your problems are: are you unable to identify your edge or are you unable to execute your edge because of psychological problems you have?

Asking yourself that question can help you to identify your issues. Then, it’s easier to fix those issues and to become a better trader. Be your own psychologist and journal your mistakes. Noting down your mistakes and problems makes you aware of them. Then, you can build a plan to improve your trading psychology.

How to learn trading psychology and how to improve your trading psychology?

So, how do you actually learn about trading psychology and how do you improve your trading psychology? First of all, trading psychology is simple and complex at the same time. Usually, most psychological issues come from the same source: lack of confidence. Lack of confidence in your trading creates doubts like:

  • Should I enter now?

  • Should I scale out?

  • What if I move my stop loss a little?

If you had full confidence and knew what you were doing, you wouldn’t be asking yourself these questions. Confidence is key in life and especially in trading. So, if you experience any psychological issues, then start with building confidence. How do you do that? By:

  • Getting to know why your strategy works

  • Getting to know when your strategy works

  • Getting to know how your strategy works

These are key factors that you should take into account when building confidence in your edge. Please take notes, because these are things many people overlook, but these are the things that make the difference. It’s not about the next shiny indicator, or the next signal, it’s about your edge and getting to know yourself and your problems.

Know why your strategy works. What concepts do you use? Why do they work? What’s the idea behind the concepts? It’s very important that you know exactly why something works. Making this clear, increases your confidence. Be as specific as possible. So, don’t say: because someone trades like this, or because banks trade like this. Be specific and really dive deep into this.

You also need to know when your strategy works best. No strategy is going to work all the time. For example, our mechanical trading strategy trades breakouts and aims to capture the beginning of a trend after a trend change. So, when the markets are ranging the strategy doesn’t do well. Know this and save yourself a lot of losing trades. It’s also wise to know which months or quarters your trading edge performs best. This can help you to minimize losses as well.

Know how your strategy works. What’s the win rate? What’s the expected return? What’s the risk of ruin? Know all the relevant statistics about your trading strategy. This helps you to prepare for what’s coming and decreases the chances of you making mistakes during a drawdown. Drawdowns are going to happen. You should also know your maximum drawdown in the past. Let’s say you had 15R drawdown when you tested your edge and you are now experiencing a 7R drawdown, but you haven’t made any mistakes. Then you know it’s normal and you shouldn’t freak out. It has happened before and it will happen again. Stick to the plan & trust your edge.

Backtesting & demo trading are important parts of building confidence and should be taking seriously. These things allow you to gather statistics and see how and why your strategy works. This is where the foundation of your career is being build. If you skip this part, sooner or later you will find yourself having psychological issues because you lack confidence in your trading. Take this step seriously and you will find yourself having way less problems as you get further with your trading career.

Trading psychology in forex

So, trading psychology is important in forex, but also in other markets. For example, when investing you also need to be patient and know when to invest. Once again, if you have confidence, know what you’re doing and know your trading or investing edge, you will have way less psychological issues.

Please, don’t fall for the trap that trading is 90% psychology. In my opinion and from my experience, this is simply not the case. Be real with yourself. Ask yourself what problems you have and why you have them. Then, come up with a plan to fix your problems, it’s that simple.

Trading psychology books

One thing I want to add when it comes to trading psychology, is that there are certain trading psychology books that can help you develop a clearer understanding of the essence of trading. Please be aware that you don’t go out and read all the books you can and find as much information as you can. The goal is to fix your psychological issues, not to become an expert on the literature.

How to master trading psychology? Brett Steenbarger has written some awesome books about this. You also might know Trading In The Zone, by Mark Douglas. That’s a great book to get started. Reading trading psychology books is a good way to help you to understand thinking in probabilities, but building confidence and actually taking action is what is going to make the difference in the long run.

To conclude

Trading profitably comes down to having an edge and executing that edge without making mistakes. You now know more about trading psychology and hopefully know what to do next to fix your trading issues. If you liked this article, please leave a comment or like this blog. Also, if you have any questions, feel free to contact us, we will be there to help you out.


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