When it comes to trading, the biggest battle is in your head. Before you can even hope to conquer the financial markets, you first need to slay your behavioral demons. In trading this comes down to managing two competing mental forces: fear and greed.
Fear and greed are the bane of successful traders because they illicit terrible responses and knee-jerk reactions that go against rational, evidence-based decision-making. But these emotions are deeply rooted in the human psyche, and overcoming them isn’t as simple as reading a self-help book.
A wise person once said: One moment of fear or greed can lead to a moment of madness and months of hard won profits down the drain.
A simple Google search failed to identify the original source of this quote, but it was obviously made by a trader – one who was probably burned a few times in the market.
The psychology of winning is all about mastering fear and greed. There are three ways you can go about doing so. If you adopt these methods right now, you are on the path to becoming a more successful trader.
Understand the psychology of the market
If you want to develop a winning psychology, you first have to understand how the market thinks and behaves. In general, fear (selling) and greed (buying) are the two forces that drive the markets. Somewhere in between is a period filled with uncertainty and doubt.
You can either join this perpetual tug-of-war, and get burned repeatedly or overcome it once and for all.
Develop your method
Every successful trader has a plan. Whether it’s long-term position trading, short-term swing trading or very short-term scalping, there’s a winning method out there designed for you. We should caution here that no single method guarantees success. The strategy that suits your overall trading style, goals and personality will ultimately be the one that’s best for you.
Regardless of the method you choose, technical and fundamental analysis are both critical for understanding the markets and trading them successfully. These two analysis techniques will form the basis of your trading strategy and inform your understanding of the market.
Stick to a trading plan
Now that you have an understanding of how the market works and have developed a basic technique for analyzing trading instruments, it’s time to formulate your plan and stick to it through thick and thin. Having a clearly defined plan is critical for success as a trader. Without it, you’ll be flying blind in a series of random trades.
Your trading plan is essentially your roadmap for entering, managing and exiting trades.[1] By sticking to your plan, you effectively remove emotions from the picture. Feelings of fear and greed will simply be kept on the sidelines. If a market situation doesn’t meet your criteria for a trade, you simply don’t take it.
By understanding how the market works, developing a trading method and sticking to your plan, you’re well on your way to conquering the psychological demons that plague the vast majority of traders. Hopefully this article is one of your first steps toward overcoming fear and greed in a market that produces a lot of it.
[1] Miles Eakers (October 19, 2015). “3 Keys to Mastering Your Trading Psychology.” LinkedIn.
