Trading Psychology – 6 Ways to Master Your Mind to Make Money

Most investors and traders think that performance and timing are the key to success while investing. What they often forget or ignore is that the entire market is made up of people interacting with people either directly or through systems they have built. And, a large part of these interactions is governed by our behaviour and our psychology. Our actions are not guided by information but how our brains process that information and come out with conclusions. Our brains are conditioned to determine patterns and use context to make predictions or drive outcomes.

Trading psychology includes all the emotions and feelings that a trader encounters during trading practices. During this process a lot of biases come into play. Cognitive biases are often a result of your brain's attempt to simplify information processing. Your brain is trained to spot patterns and if it finds a pattern it is familiar with, it directs it to a conclusion. Becoming aware, understanding and controlling these biases, fears and greed are the most important factors when you are set to make money through trading!

Rewiring your brain is a dynamic process and the subject of Neuroplasticity aims at working towards this goal. There are several skills required for trading successfully in the financial markets. The abilities to evaluate a company’s fundamentals and to determine the direction of stock’s trend and timing the market are among the important skills required. However, the investor’s mindset and conscious actions in recognizing and preventing biases are key to bridging the gap between the achievable performance and actual performance.

Knowing trading psychology better

Trading psychology contains several elements that a typical trader will encounter while trading. Some of the emotions and factors including fast thinking ability, decision-making abilities, and exercising discipline are good and must be embraced and followed religiously to be consistently successful in the market. On the other hand, emotions like fear, greed, nervousness, anxiety, whimsical decision making, etc. must be contained.

The psychology of trading is quite complex and takes time to master. As a matter of fact, many traders experience negative aspects more than the positive effects.

World-famous psychologist and winner of the Nobel Prize in Economics, Daniel Kahneman in his book, Thinking, Fast and Slow, discussed the topic of Loss aversion as a cognitive bias. He describes why, for individuals, the pain of losing is psychologically twice as powerful as the pleasure of gaining. Loss aversion refers to an individual's tendency to prefer avoiding losses to acquiring equivalent gains. Simply put, it's better not to lose $20,than to find $20.

Fear of missing out or FOMO is another treacherous emotion prevalent in financial markets and results in what we know as the herd mentality.

Successful Investors and traders have been able to consistently improve their performance by becoming aware of their biases and patterns and working towards managing their emotions in the market. This gives them the ability to weather and navigate the volatility of the financial markets and ultimately perform better.

Here are some of the ways to master your trading psychology skills:

1. Paper trading helps build confidence

Investing and trading is all about practice and experience along with skill and knowledge. The Dunning-Kruger effect explains the journey of the process of enlightenment that an individual goes through during his journey. Most individuals are over confident in their initial journey which causes great losses driven by factors like taking large positions, lack of risk management, over deployment of capital etc. They quickly get a strong wake upcall and suffer to a great extent. This is the phase where they drop into despair and most of them even give up. But slowly start to climb up and work towards a sustainable model that helps them achieve.

One such way is through practicing with a paper trading account. This is a great idea to build confidence. You can practice real-time trades without the fear of losing money as there is no real money involved.

Create a paper trading account and practice to maintain detailed records of your trading performance. While this is a great tool for the beginners, paper trading can be used by everyone to evolve in trading skills.

2. Be prepared for loss(es)

Take into account that you might face a few losses not just at the beginning but throughout your trading journey. What matters is the risk management practices you deploy and how disciplined you are in that process. Once you start using real money even after months of practice, you will definitely be making losses. Instead of setting your emotions on fire and letting your biases come into play, take losses as your learnings and become better at risk management. The key to success is not to not make losses but to minimize the losses you make in your journey.

3. Set stop losses in advance

Some market waves are simply too strong to paddle against. So, it is better to learn to go with the flow and cut your losses. Your “stop losses” must be wide and tight enough so that a small dip won’t disturb your position, nor does it require you to sell when things don’t go as expected. We are more motivated by our fears than by our aspirations. We work towards avoiding losses more vigorously than we work to pursue gains. What is even more important is that you have a set system of risk management and stop losses in place.

This system should change only on subsequent investments based on your learnings and experiences and not to suit the individual trade. The biggest mistake investors and traders make is that they repeatedly revise their stop losses based on the trend of the stock because they are more emotionally invested in it.

4. Learn and pick your chart pattern

It is always advisable to pick a chart pattern that seems to work best for you. A big part of trading psychology involves picking the right pattern. Patterns tend to repeat, and picking a few of them as your favourite can be beneficial in the long run.

What is important to keep in mind is that you need to decipher and use the patterns that work for you and not to over complicate by using too many patterns. Over time you evolve your process and add patterns that work for you and remove those that don’t. Again, there is no secret key that unlocks all locks. You need to have a dynamic system in place for different instruments and markets based on a thorough study of the subject.

5. Read news catalysts properly

You might have the best technical analysis, right patterns, good advice and training, yet can go broke if you don’t take news catalysts seriously. Doing your research and reading about the markets is critical in timing your positions. A smart approach could involve using a methodical screener process to narrow down onto a small universe of stocks first before looking for a news event that explains individual stock’s performance.

A single news catalyst might rally several stocks within the same industry. The trick is to jump on the one that’s still lagging. However, it is also very important to note that you are actively conscious about your biases and are not letting confirmation bias come into play. Confirmation bias is the tendency of people to search for, interpret and recall information in away that supports their pre-existing beliefs. This cognitive bias is probably the most prevalent and most dangerous.

Also, FOMO should not drive your decisions alone which eventually leads to herd mentality. Just because everyone is buying a particular crypto, does not mean you should too. Research, study and analyse a security before jumping onto the bandwagon, because when the bubble burst, you are going to be caught in the explosion radius.

6. Learn from seasoned traders

There are hundreds of successful traders and millennial investors with their personal YouTube channels, websites, training portals and blogs. Social investing has become a pandemic today amongst unskilled investors and traders. You read about someone posting about their one success story and gravitate to putting in their hard-earned money into such notions without analysing the situation. Learn from market veterans and qualified professionals. Improve your process by learning from them. They set goals, scrutinize the process, trading psychology, and progress. There are chances you would make mistakes, but try to get hold of the process and learn from the traders to improve.


Behavioural and Trading psychology is a dynamic learning process. Becoming aware of your biases, clearing your mind, keeping your emotions in check and following a developed system especially when things aren’t going your way are the key tenets on your journey to performance success.

If you are willing to learn trading psychology in detail, or looking for tips, you can register for Bull Run Summit where the masters of capital market talk about different topics under investment and personal finance.

Trading psychology is one of the major topics highlighted for the event, to be explained in detail by Joel Pannikot, the Head of the CMT Association Inc. in an exclusive workshop. Join us to master in trading psychology and to get hold of the process for successful trading experience.

Visit register for Bull Run Summit scheduled for 23rd to 25th July.

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