Introduction To Psychology of a Successful trader The Psychology of a Successful Trader Trading Plans Importance of Trading Plans Discipline

1. Chapter 2:
Psychology of a
Successful Trader
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2. In order to succeed in the arena of financial trading, a trader must possess several key skills such as the ability to
understand the fundamentals of the market, be able to determine the direction of the market’s trend.
Nevertheless, none of these so called skills is as important as the ability to remain calm and steadfast during times
when the trades are not going your way. In other words, a trader must possess the right psychological makeup.
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3. THE PSYCHOLOGY OF A SUCCESSFUL TRADER
The importance of the psychology of a trader cannot be understated and the reason for its importance is due to
the frequency of extreme mental stress that a trader has to trade under. Due to the dynamic nature of financial
markets, traders are always darting in and out of the markets in a blink of an eye and to be able to make the right
decisions, the trader must have a clear presence of mind and this by implication necessitates having discipline.
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4. THE EMOTION OF FEAR
For new traders and even some experienced traders, it is not unusual for them to feel scared when
their trades are not going the way they expected. This is because fear is a natural survival instinct
found in almost all living creatures. The positive function of fear is to prompt a person to be cautious
when recklessness in a situation could result in harm or loss. Unfortunately, fear also has the ability
to immobilize a person to a stage that essential activities needed for survival are not carried out or
resulted in a person having hair trigger responses causing that person to overreact in the situation.
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5. In the world of fast paced financial trading, this can result in a trader liquidating his position
prematurely or stopping him from taking any risk. The ultimate result of these actions is that the
trader will miss out on gains that he might have made had he not overreacted.
THE EMOTION OF GREED
At the other end of the emotional roller coaster that traders usually face is greed. Consumed by
greed, a trader can end up holding on to a winning position for too long ultimately resulting in him
getting whipsawed. This emotion is not easy to overcome as we all have this instinctive nature and
we usually do not know where our limits are.
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6. TRADING PLANS
To help overcome these emotions, you need to train yourself to acquire the necessary confidence and skills that
would help you develop trading strategies, which are based on an objective rather than an emotional assessment of
your trading situation. In addition to providing you with an objective assessment of your trading situation, a pre-established
trading plan also helps to guide you by acting as a roadmap of your trading objectives.
IMPORTANCE OF TRADING PLANS
Trading plans help traders to keep their head screwed on before their emotions get the better of them. By
establishing the trading rules prior to trading, they establish the parameters of the risk & reward relationship for
their investment decisions. So if a trader decides that he has managed to make $250 in profits for the day, he will call
it quits regardless of how promising the market looks.
Conversely, he could also set a rule that if he made a loss of $50, he will quit for the day and start trading anew the
next day. Regardless of the state of their emotions, as long as the trader keeps to the parameters that he had defined
earlier, he should be able to maximize his investments over the long term.
In addition to keeping a trader on track, a trading plan helps
traders in the review of their trading performance. They can use
the trading plan and judge how effective their trading strategies
are. And if a trading strategy is performing below par, they can
tweak the parameters of their trading plan until they get the
best possible result.
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7. DISCIPLINE
While defining all the trading rules through a trading plan prior to trading can help a trader to overcome his
emotions, all the planning in the world is for nought if the trader lacks the discipline to follow his plan through.
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8. However, if a trader who is normally disciplined starts to find himself having lapses of discipline, this could be an
indication that the trading plan might not be suitable for the trader concerned. Regardless of how good a trading
plan is but if the plan ill suited to the trader, there is no profit to be gained.
For example, a trading plan might call for trader to trade in specific currency pairs like the EUR/USD. But if he has
difficulties in keeping awake and focused during the main trading hours for this currency pair, then he might want to
consider switching to trading a different currency pair or adjust his sleeping patterns to suit the trading hours
concerned.
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9. The best way to find out what causes the lapses in discipline is to keep a
trading journal and investigate each of those lapses. Learn to see the
lapses not as problems but rather as information which tells you more
about yourself. Perhaps, at the end of the day, you might find out who you
really are. Just remember that nobody is perfect.
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