Six keys to managing trading psychology

We live in a “quick fix” world in which everyone is looking for “hacks” to solve and shortcut problems. The internet is filled with “you’re doing it wrong” posts that purport to show you how to do everything from tying your shoes to drinking orange juice correctly. For traders struggling with psychological weaknesses–and, to be clear, this is all of us! All traders are vulnerable to making mistakes driven by psychological issues. For traders, there are no shortcuts to solving psychological issues. It’s hard work, but if you don’t do it you’re going to lose a lot of money in the market. It is work that must be done. Here are six of the most important tools I’ve found to help you manage your psychological issues in the marketplace.

key1. Make sure you have an edge. This seems elementary, but so many traders begin to trade without knowing they have an edge. Yes, there are many ways to find an edge in the markets, but an edge is a precise and delicate thing. If you don’t know what your edge is, you don’t have one. In my experience, I’ve seen many struggles that appear to be psychological–both my own and others’–and, in most of those cases, the issues were not psychological. They were methodological: the traders had no edge in that time and that environment.

There are psychological issues in trading, and even experienced traders sometimes hit roadblocks. It would be wrong to say that there are no legitimate psychological issues in trading, but I suspect that most of the psychological issues people face are the result of doing something in the market that does not work–not having an edge. If you’re trading without an edge you should have psychological issues because you are going to lose money! First, make sure you have and understand your edge.

2. Have a trading plan. We hear and read the same, boring things from people who write about how to trade, right? Have a plan. Plan the trade; trade the plan. Fail to plan; plan to fail. Well, this “boring” thing is the difference between success and failure.

People want shortcuts. It would be nice if I could tell you some magical hand position and way to look at a special plant on the corner of your desk that would make all of your trading issues go away, wouldn’t it? The world doesn’t work like that; there really are no shortcuts. If you create a good trading plan, then your job, as a trader, is to simply follow that plan. When you are evaluating your actions, the only question you really need to ask is “did I follow the plan?” (“Does the plan work?” is another question that should be asked and answered separately. I refer you to point #1 above.)

3. Have a written gameplan for each day or trade. The trading plan in #2 is more of a business plan/control document, but I’ve also found it helpful to have notes for each trade I execute. If you’re a swing trader, then you can write down your initial stop loss, target, and perhaps some trade management guidelines for each trade you enter. These don’t have to be extensive or formal; maybe you even write them on scrap paper, but the act of writing them down gets the ideas out of your head and into the real world. If you’re a daytrader, this is impractical, but you still need to have guidelines for each trading day. Where will you execute? What kinds of trades will you look for? Is this a day to be aggressive or lay back? If these questions aren’t relevant to your style, find the questions that are.

4. Keep a journal. I’ve written about this before in great depth, so I won’t beat that horse again, or I’ll let the sleeping dog lie, or you can insert your own cliché as appropriate! 🙂 Keeping a journal, of some kind, is perhaps the single most important thing in your development as a trader. Everything, from execution issues, to developing methodology, to dealing with psychological issues, can be addressed, over time, through the journalling process. This is something you probably aren’t doing, and, frankly, you probably aren’t going to be successful unless you start doing it. Enough said?

5. Know yourself. Easier said than done, but it’s worth spending time understanding who you are in relation to risk, money, hard work, uncertainty, and a number of other things you will face as a trader. While you’re at it, also consider what skills you need to develop: a better understanding of probability? Deeper knowledge of financial markets? Any specific analytical techniques?

There are many ways to work toward the goal of knowing yourself, and it’s probably the process that matters more than anything. Some people will talk to a therapist, some will go on long walkabouts, some will journal and reflect, and some may work on the answers in the quiet moments each day. There’s no wrong way to do this, but the market is going to make you face the best and worst in yourself.

6. Work on pattern interrupts. If you were looking for a simple, shortcut technique, this might be it. A pattern interrupt, to put it very simply, means you notice when you’re about to do something dumb or make an emotional mistake, and you break that pattern. Again, there are many ways to do this: go for a walk, make a phone call, go to the gym, stop trading for a few days, but the key is awareness. You have to build awareness of your own mental and emotional state, first, and then somehow disrupt the negative cycle you have been stuck in.

For instance, assume you get angry after losses and make emotional trades to try to get even. These trades are impulsive and ill-considered and, over time, you lose a lot more money on them, so you want to stop doing that. First, you must have a plan (ahem), and then maintain the awareness of your own mental state to be able to say “I’m emotional right now. I might make a revenge trade.” Now, simply not making that revenge trade might be beyond your capability, but you can make yourself get up and go outside, can’t you? The pattern interrupt is a way to get some leverage against your behavior, even when you might be very emotional. Spend some time working on this, and a lot of your problems will go away.

As I said, no shortcuts here, but these are the most powerful tools I know for improving your trading psychology and avoiding emotionally-driven mistakes. (If you didn’t catch it, I did a podcast on the topic of trading emotions which you might enjoy.)


Adam Grimes has over two decades of experience in the industry as a trader, analyst and system developer. The author of a best-selling trading book, he has traded for his own account, for a top prop firm, and spent several years at the New York Mercantile Exchange. He focuses on the intersection of quantitative analysis and discretionary trading, and has a talent for teaching and helping traders find their own way in the market.

This Post Has 2 Comments

  1. owen cooper

    An interesting read “your money and your brain “by Jason Zweig
    explains why our modern way of thinking is but a thin veneer over the ancient brain patterns that we have
    evolved with, (which also has cross over lessons in memory development )and has
    many ahaaa moments on why we make common investment/trading mistakes .

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