Psychology, one of the most talked-about yet least understood aspects of trading, traders talk about it so much that now it sounds more like a gimmick.

There are basically two groups of people in the trading community, the first group believes that Psychology is what makes all the difference, it decides whether you’ll be a profitable or a non-profitable trader. The second group believes that “psychology” is pure BS and it’s of no use to traders, so they are more inclined towards a data-centric approach, they believe that if you have an edge, you shouldn’t face any problem in making money, and if you are not making money, it’s not because you have poor trading psychology, it’s just that you don’t have a real edge.

In this article we will know, Is trading psychology really important or is it just a gimmick? And if you are new to trading should you really be worrying about trading psychology at all?

So, let’s dive right in.

Understanding the Trading psychology

Let's understand this whole thing with the help of an example.

My friend Rahul is long in stock X, at 1000 with his SL at 970, also he has a clear edge with this system, i.e in the long run the system is profitable. His plan is to hold the Stock until it doesn’t break the previous Swing low, sounds pretty clear, right?

So, now the stock starts to climb up and reaches 1100 levels the very next day. He's happy, but he’s also worried!

Wait, worried, why? Ain’t the stock moving in the direction that he wanted.

Yes, it is, but the problem is that his last few trades were either the losing ones or breakeven, so he is worried that what if the stock falls back to his buying levels, and he has to close the trade at breakeven.

He is aware of the fact that holding his winning position is required for his system to do well in the long run, i.e according to his system (edge), he should hold the trade, that’s the logical thing to do at the moment, right?

Now, The stock is at 1120, Rahul has to make a decision, whether to sell the stock and put a brake to his losing streak or hold the trade as per his “edge” with the chance of it being turned out to be another losing trade.

He chose to book his profit.

Before reaching any conclusion, let’s take a look at one more example.

Abhi is a Systematic trader, he trades a SAR (stop and reverse) system in Nifty. His system is profitable in the long run.

Now, he has an overnight long position in Nifty at 17500 with his SAR stop at 17400 levels. But nifty has gapped down about 700p. Now, According to his system, he has to exit from his long position at the open and deploy a short position at the same level (16800), with SAR stop at 17000.

After a 50p down move from the opening levels, nifty starts to climb back up, and hits his stop at 17k levels.

Now, according to his system, he has to take a long position. But, he’s down about 7% for the day, he wasn’t expecting this gap down at all, and he is in a shock after losing 7% of his account value in a day.

Now, he has two options whether to stop trading for the day so that he doesn’t lose more, or take a long position, with the possibility of losing 1% more for the day.

He decided to stop trading for the day!

Now, one more example, and then things will become more clear.

One of my friends Aman is a systematic intraday trader, he trades in Nifty, and he is trading with a profitable system, i.e he has an edge.

His account size is about 50 lakhs, and he has made about 20% in the past 1 year.

But he has a problem, he explained it like this, “I don’t know why but I am unable to risk more than 10k on a trade, I know that an ideal risk for my account should be anywhere between 50-75k, but whenever I try to take a trade with risk of more than 10k, I always end up making a mistake.”

Conclusion

In the above 3 examples, you can see that even after having an edge, a system, they were not able to execute it to its full potential, because of their mindset, discipline, biases, etc. Yes, they are profitable, but they are unable to make the returns they should be making.

Also, these things affect you more as you move towards the discretionary type of trading, as it needs you to take more and more decisions in live markets, which increases the chances of you getting into the trap of your own psychological roadblocks, biases, though it doesn’t mean that if you are a systematic or even an algorithmic trader, these things won’t affect you. The degree will be lower as compared to the discretionary side, but you will still be affected.

In my opinion, your “edge” will give you profitability, but your “psychology” will decide whether you’ll make 10% or 100% with the same system.

But, it doesn’t mean that you’ll have to focus only on the psychology part, this is the point where most people falter. They think that if they work on their mindset they will become a profitable trade.

As I said before, “psychology is of no use if you don’t have an edge.” In simple words, psychology is the advanced stuff that you have to focus on once you have your basics clear, i.e once you have an edge.

Now, the question comes to whether we can improve our psychology by reading/taking advice from others?

I’d say NO. You can’t improve your psychology by reading or by listening to others’ advice. Like you can’t grow muscles by reading about it, or you can’t learn to drive a car from just listening to some instructions, of course, I’m not saying that books are of no use, I love reading books, and I feel that they can definitely help you grow as a trader, but they are just supplements, the few things that can really help you to improve your psychology are you and your trading journal.

See, Most of us think that we can shorten the learning curve by reading about psychology, but the reality is that you’ll only understand deeply about something only when you undergo that situation, once you face those psychological roadblocks, biases, only then you’d know what they are and how they affect you.

And as they say, (Right) Practice makes the man perfect, your psychology will improve with time as you’ll keep executing your edge, and those psychological blocks will diminish with time.

It might sound a bit harsh but believe me, the things that you are told by most traders on social media aren’t going to work in your favor, they would say read more about psychology, but they won’t tell you that the main reason why you are not making money or at least why you are not at breakeven, is because you don’t have a process, you don’t have an “EDGE”.

Believe me, I have wasted countless hours believing that there was something wrong with my mind (psychology) when the real problem was with my process, I didn’t simply have an edge, and the whole time I was trying to become a Zen and what not! haha, well the problem is that no one wants to tell you that you have to put in some serious work, you’ll have to spend countless hours watching charts and writing your journal and then improving your plan, and keep repeating the process for months, maybe years, until you have an edge.

And then you’ll have to work on your mindset, and the other things, and not the other way around.

0ne more problem with taking advice from others is that most of the time the advice won’t be practical (if it is related to psychology) Like if any of you have tried public speaking, you know how hard it is for someone who is trying it after a long time or for the first time. like I remember once I was at an event, and I was a bit tense about my speech and all, and one of the speakers said to me “just let go of the fear and everything will be fine”, and I was like “Bhai, but how to let go”, haha, you see it wasn’t practical advice and the only thing that helped me to “let go of the fear” is by doing that thing again and again, and every time you repeat it, you’ll be more confident, I have applied the same process in my trading, and it has worked fine for me.

So that’s it for today from our side, if you learned something new from this article, do share it with your friends over social media, kardo yaar ;)