Did you know that 6 out of 10 traders given an exact set of trading rules will fail to follow them? This issue is due to flawed day trading psychology.
Their performances end up worse than if they stuck to the plan. Trading rules themselves can either be profitable or unprofitable. In both cases traders who stray from their plan end up performing worse 100% of the time.
Traders emphasize the importance of planning and discipline. Then why is there still a performance gap between expected and actual results? It boils down to psychology.
So below you will learn 10 straight forward ways to master your day trading psychology. Apply these methods and you will be ahead of the mental game of trading.
Day Trading Psychology – Method #1: The beauty of great trading
The biggest hurdle for most traders is that they are unable to recognize great day trading.
It can be difficult to spot because what makes a skilled professional in one field is not the same in trading. A surgeon wants their performance to be flawless every time. They have to get it right.
A traders’ path is different. They need their performance to be net positive, not flawless. Good trading performance involves many losses and may wins.
Many traders struggle because they believe a loosing trade is is a sign that something is wrong. They miss the fact that trading is a process of tweaking an edge that gives a net profit after wins and losses.
Trying to avoid all losses is a path to ruin.
Great trading involves losses. Losses are healthy and appear through the records of able traders.
The best traders in the world generate monumental total losses. They also generate astronomical total gains that eclipse those losses. That combination is what results in attractive net profits.
What you need is to recognize what great trading looks like.
Appreciate that the beauty of great day trading is the way in which the wins make up for the inevitable losses. Forget trying not to lose. Focus on being net profitable over time.
Day Trading Psychology – Method #2: Plan your trade and trade your plan
Not having a trading plan is one of the most insidious dangers ignored by traders.
Gut feeling, random untested hypotheses, and rationalization stand in for planning. This is the fuel the operations of these rogue traders run on. The results are rarely good.
Even when they are, they are not good for very long.
“A trading plan is NOT an optional piece of a successful trading career.”
What can you do to avoid being one of the rogue unsuccessful traders?
A simple solution is to ensure that you have an excellent trading plan.
Even a mediocre trading plan executed will exceed the long-term performance without one.
The old trading adage “Plan your trade and trade your plan” is than a catchy line. It’s the cornerstone of a strong and healthy trading career.
Day Trading Psychology – Method #3: Judge, jury and executioner
No matter how a trader makes money, there will always be another trader making money a different way.
There is a huge variety of ways to trade.
Plans can include:
- Trading break outs
- Going for swings
- And the list goes on…
There will always be another trader with a different situation who makes more money. Jealousy, greed, and desire are all emotions that can creep in. These emotions can cause a trader to get too aggressive, leading to their downfall.
An elegant solution to this psychological pitfall is to focus on yourself.
Stop being the judge, jury, and executioner of your performance as it compares to others.
There are only two things that matter. One is the quality of the trading plan. The other is the precision with which you execute it.
Day Trading Psychology – Method #4: Stimulate through simulated trading
“Woulda,” “Shoulda,” and “Coulda” are the official mascots of sub-par trading. We have trading plans for a reason. But even when we have a plan, there are always temptations to trade outside of it.
“I would have gone long there if my plan allowed it.”
“It’s not in my plan but I should have put a short anyway. Look how far the market’s fallen.”
“I could have made that trade if I didn’t have this pesky risk cap in my strategy.”
It’s not surprising that none of these theoretical trades post profits in a trader’s account.
“Don’t drop your simulated account when you start live trading. Use it to experiment.”
The best way to banish the three unwanted mascots from your trading is to have a simulated account open.
If you see a trade you want to take that’s outside of your plan, place it risk-free trade in your simulated account. Get it out of your system by paper trading it. You’ll avoid breaking your plan and can experiment with opportunities the right way.
Over time, one of two things will happen.
One is that the results of your simulated trades might become meaningful. If they show profit potential, quantify and observe them. Then you can find a way to build them into your trading plan.
The other thing that can happen is you find out those extra trades would have drug you down. In this case, it’s as simple as sticking to your current plan and not changing a thing.
Day Trading Psychology – Method #5: Trader of the ridiculous
Whether you are a novice amateur or pro, one of the most challenging aspects of trading is sticking to the plan.
A myriad of outcomes in day trading, and it’s quite easy for our minds to wander.
The grass always seems greener on the other side. The new strategy always shines the most.
How do you avoid getting pulled away from your plan?
There is a little known yet powerful two-step solution to this:
Follow these two steps to keep your plan on track over the long term.
Step 1: Come up with a ridiculous set of trading rules.
- For traders without any imagination, the Internet is an abundant source. Look for the most unbelievable claims and the most ridiculous rules are close at hand.
Step 2: Trade those rules in a simulated account.
- This exercise is excellent training for the second part of point #2 above which is to trade your plan. It is also a great way to remove your emotions from the process of great trading.
What this process accomplishes is giving you an outlet to your desire for variety. You get to stand on the greener grass. You get to try the shiny new strategy.
But the important thing is you try it in a risk-free simulated account. In the meantime, you keep trading according to your tried and true plan. It’s the best of both worlds.
Day Trading Psychology – Method #6: Surround yourself with support
The people that surround a trader influence their psychology a lot.
Those surrounding people can be within the trading industry or part of everyday life. The effect can happen without the trader knowing it. Quite often it can be negative.
Negative influences take many forms.
They can be family and friends who think that trading is gambling and a waste of time. Others can be argumentative participants in a trading forum you are part of. Even online information that only blasts trading can be a negative influence.
These all cause the trader to manifest a poor psychology. Negative influences create and reinforce deep-seated beliefs that are not empowering.
“A well-balanced trader needs a support system of like-minded traders.”
So what can you do to avoid this pitfall?
Take a few simple steps towards fostering a supportive environment. Help close friend and family understand what trading is all about. Educate them about what trading is and what it is not.
Seek out like-minded traders who want to improve, not complain.
The sign of a positive trading influence is someone who never blames the markets. Positive traders remain open minded and ready to learn from their mistakes. And they don’t mind sharing their tips for success.
Day Trading Psychology – Method #7: Trading is for traders, not for investors
Almost everyone has some involvement in the stock market.
They know about it, they invest in it or they know someone who does.
Even people without an account may have money in the markets. There are pensions and profit sharing plans that invest an employees money for them.
In the market or not, everyone seems to have an opinion about markets and the economy. The thing is, anyone can be loud without putting money where their mouth is.
For traders it’s different.
Sure, we can be loud too if we want. But we put our money where our mouths are. We play an active role in the markets.
You are probably wondering:
What can traders do about the loud majority that doesn’t play the game for themselves?
Well, there is nothing wrong with not putting money in the markets and still having an opinion. It’s like commenting on a sport that one does not play.
But active traders best steer clear of market discussions with those who are not traders. Forcing an opinion or pushing a position in a conversation can spill over to your trading. At best it will reduce flexibility.
You don’t want to create any mental friction for yourself when you are trading.
Focus on reserving trading conversations and collaboration for other active traders. Select the people you will discuss markets with care. Make sure they support your psychology and build up your perspectives and expertise.
Day Trading Psychology – Method #8: Go long for longevity
Deciding to only take long trades is a hard decision, but it can be one that increases your chances of success.
The mathematical reason for only going long instead of going short or both would take an entire post of its own.
Here we take the psychology angle. Traders who struggle often do so as a result of over-complication. Having two directions to trade is itself a complication. This is why many trader training programs start off by only allowing long trades.
“Stick to long positions in your trading when you are feeling psychologically drained.”
And there is another good reason it makes things easier on the psyche.
Long only trading plans avoid the specter of unlimited loss. Sure, you can still lose but you won’t owe more than you have (this assumes a zero leverage situation).
Serve your psychology with a healthy dose of relief from unnecessary stress. Stick to buying before you sell.
Day Trading Psychology – Method #9: Schedule trading-free time off
Free time. It does the body, mind and soul good.
Whether you have a great strategy or are still building one, remember to schedule in free time. This wisdom flies against the crowd of “a good strategy should traded as often as possible.”
Free time rejuvenates and refreshes you. It makes as much sense to trade 20 hours a day as it does to exercise 20 hours a day. The latter will make you no healthier or better looking. In the same way, over-trading can lead to increased mistakes and senseless losses.
Sometimes it can be hard to give ourselves true time off.
We take an afternoon to ourselves, but find that a feeling of guilt ruins the leisure. Or we find that thoughts of our trading desk pull us away from enjoying our time off.
This can lead to over working, and staying glued to our desks and screens.
An good way to overcome this issue is to schedule in trade-free time and to let yourself enjoy it.
A great trader once told me “Trade to live. Don’t live to trade.” To which another professional once responded, “Can’t I do both?”
My answer is “yes” – as long as you are taking regular time away from the screens to ensure the health of your trader psychology.
Day Trading Psychology – Method #10: Sanity through proper sizing
Many traders love the sizing and scalability aspect of trading.
It’s one of the fantastic features of the business. An effective plan applied to one share is no different when applied to 100 or 1,000 shares is empowering. In theory, there’s no limit.
Yet psychology starts to play a role. I have made more in one day of trading than I ever earned in a year working for a company. And this has happened more than once.
I have also lost more in one day of trading than I have ever earned in a year at a corporate job.
Both trades were part of the plan yet the latter was uncomfortable. It shook my unfettered desire to continue with trading.
“When in doubt, secure your sanity through smaller sizing.”
What can you do to avoid the loss side of scalability and sizing?
Well, you can’t completely. But a solution that helps a great deal is to investigate how you feel about potential losses.
It’s one thing to have a million dollar trading account and apply the 1% position sizing rule. It’s not the greatest when all three of your positions lose at the same time, and you see -$30,000 post for the day. Ensure that you consider both the math and your trading comfort when sizing your trades.
For more day trading techniques, tools & strategies, check out these articles:
- Core Technical Analysis Charting Methods
- 5 Lies That Can Kill Your Online Trading Success
- 7 Essential Techniques For Pre-Market Trading
You learned 10 ways to master your day trading psychology and help put you on the path to trading success. Remember that psychology is every bit as important as strategy.
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