Why Psychology in Trading is Essential for Your Success?

What is Trading Psychology?

According to Investopedia, trading psychology refers to the emotions and mental state that help to dictate success or failure in trading securities. Trading psychology represents various aspects of an individual’s character and behaviors that influence their trading actions. Trading psychology can be as important as other attributes such as knowledge, experience and skill in determining trading success.

I've been trading in the Philippine Stock Market (PSE) for one year now and had the working knowledge required to trade. But why I'm still on the losing side?

In my previous post, I talked about my one-year experience in trading stocks. I mentioned the need to have a 1. trading system/strategy (edge) 2. and the need to follow the system/strategy with discipline, 3. the need to have a risk management plan.

Well, I have already a trading system/strategy and risk management plan. If you are a newbie, you should find these two. The best option is to get it from successful traders ahead of your time. You will get it by reading books, watching tutorials, joining traders group on social media.

I recommended this option because creating or formulating your own strategy will take time. It's a try and error, hit and miss process. Adapting a system/strategy from successful traders works for me. I just need to tweak it so that it will suit my personality and availability in the market.

Why I'm still on the losing side? 

Okay fine, I have the system/strategy, I have the risk management plan. But the problem is, I DO NOT FOLLOW my system or risk management plan CONSISTENTLY. So, I have inconsistent results or consistent loss results if you may. Damn it, it is easy to say that I will follow my system on each trade I made but in truth, it is the most difficult thing to do.

In my experience, two things will happen if you will not follow your system.

1. Unable to buy when your system tells you to buy - Hesitating. 
2. Unable to sell when your system tells you to sell (frozen to cut loss) and selling even if the system doesn't say so (cutting the profit short).

Here's a sample of my recent trade where I cut my profit short.

If you look at the above chart, my trading system has a clear entry and exit signal. The trade went to my favor. But what the fuck I did? I sold it too early. There's No sell signal yet. After I sold the price went even higher. Why it is difficult to follow the system? It is because it involves emotions, you need to have the proper mindset or the so-called Trading Psychology. What I felt when I sold my position prematurely? It is fear. I feared that the above trade will become a losing trade. The fear of losing. The fear to be wrong.

I spent one year finding the system and risk management plan that I'm comfortable with but I do not have the proper mind to follow it. My goal in my second year trading stocks in PSE is to follow my system and risk management plan on all of my trades. There's no other way. But first, I need to prepare and set my mind "to be in harmony with the market". This where trading psychology comes into play.

I started learning about trading psychology by reading the book of Mark Douglas, "Trading in the Zone: Master the Market with Confidence, Discipline and a Winning Attitude".

The author talked about how our mind processes information and how we associated market information about our previous experience. This book is not about the technicalities of trading but instead teaches what should be the proper mindset of trading.

The author pointed out that every moment in the market is "unique" and "anything" can happen.

The lessons of this book is so simple to understand, yet very difficult to learn that is why you need to read it again and again.

After reading this book, I realized that the problem now of my trades is not the market, not the system, but it is ME!. The weakest link of trading itself---is the TRADER.

So, I have my system, I have my risk management plan. So it's on me now. I need to listen to my inner self and look at the market information exactly what it is at it's every "now moment".

Simple to understand yet hard to learn. I'll give my self one year to learn this one.

Stay safe everyone.