Trading Psychology: Tips for Beginners from Trading Gurus

Trading might seem all about charts and numbers, but there's more to it that many forget.

Your mind!!

That's right,

Understanding your psychology is just as important if not more, than anything else when becoming a successful trader.

Even with the best battle plan, an army can't win if its soldiers get scared and run at the first sign of trouble.

Isn’t it?

The same goes for trading. You must control your emotions and make intelligent decisions, even when things get tough.

So,

How do you master this mental side of trading?

In the blog below, We've compiled some tips to help you develop a winning mindset. Let's get started to trading success!

What is Trading Psychology?

Ed Seykota, the famous Commodities trader, once said,

"Trading is not about knowing what's going to happen next. It's about controlling the way you react to what happens."

So, how do you tame those emotions?

Here's the thing:

Emotions can be your worst enemy in trading.

Fear of losing money can make you jump out of trades too early or stop you from getting in.

Conversely, greed might make you hold onto losing trades for way too long, hoping they'll magically turn around.

We've said it before, and we'll say it again:

Even the best trading strategy in the world is only helpful if your mind is in the game. You're in for a rough ride if your feelings control your actions instead of your plan.

But don't worry, we've got your back!

We're sharing some tips to help you master your trading psychology, no matter what you're trading: stocks, currencies, or even things like coffee futures (that's a real thing!).

And the best part?

We're not just throwing advice here.

Tips for Managing Trading Psychology

You can become a successful, emotionally controlled trader with these simple steps:

1. Set up a trading plan.
2. Take regular breaks.
3. Focus on building your trading skills before relying on them for income.
4. Expect Some Learning Losses.
5. Keep practicing until it becomes second nature. 
6. Set goals and safety nets.
7. Backtest Your Trading Strategy.

Below, we have explained each step in detail

1. Set up a trading plan:

Richard Dennis, a renowned trader and founder of the famous Turtle Trading program, has made a good point regarding this;

"A good trading plan is like a good Cake recipe. If you follow it carefully, you can expect good results. But if you start adding your ingredients or changing the cooking time, you may burn the cake."

 A trading plan is a written document outlining your strategy and rules for entering and exiting trades. It guides your decisions and helps you maintain discipline and consistency while trading.

A good trading plan includes details like  Market and Asset Selection, Strategy and Risk Management, Money Management, Trading Psychology and Discipline.

Having it written down lets you think clearly beforehand, reducing impulsive decisions fueled by emotions in the heat of the moment.

So, whenever emotions cloud your judgment, take a deep breath and refer back to your plan.

2. Take regular breaks:

Do you know what Jesse Livermore, the Legendary trader, used to do when the market was against him?

He used to go Fishing!

It is because Stepping away can help you return with renewed focus and clarity.

Just like any demanding activity, trading can be mentally draining

That's why taking regular breaks is crucial, whether you're a seasoned pro or just starting.

Stepping away helps you relax, clear your head, and manage any emotional stress that might impact your judgments.

This is especially important after a tough trading session or a string of losses.

When you feel your emotions taking control, step away from your screen and do something else for a while. Take a walk, listen to music, or chat with a friend.

A clear and calm mind is essential for making sound trading decisions.

So,

don't be afraid to hit the pause button and recharge – it can make all the difference in your trading!

3. Focus on building your trading skills before relying on it for income:

What this means is

Don’t Quit Your Day Job for Trading!

John Maynard Keynes, an American Economist of the 20^th Century, was also of the same view. In his own words,

"The market can stay irrational longer than you can stay solvent."

Here, Keynes has highlighted the unpredictable nature of markets and the potential for significant losses. In other words, he emphasizes the importance of financial stability before relying solely on trading income.

You think, Why?

Because the pressure to make money fast can lead to stress and bad decisions.

So, here's the deal:

If you're starting, relying solely on trading income can be a bit stressful. The pressure to make money fast can get to you, and you might end up making rash decisions that backfire.

Instead, think of trading like learning a new skill, like playing the guitar. You wouldn't expect to be a rockstar overnight. The same goes for trading. It takes time and Practice to get good.

Here's the good news:

if you have another source of income, you can take the pressure off and focus on learning and practicing without worrying about making money immediately. This way, you can:

• Learn about the market: Understand how things work, research strategies, and gain knowledge without feeling rushed.
• Practice without the stress: Gain experience and refine your skills without the constant pressure to make money now.
• Make better decisions: When you're not stressed about paying the bills, you can think more clearly and make better trading choices.

Trading can be rewarding, but being realistic and responsible is essential. By having a separate income source and focusing on learning first, you can set yourself up for success in the long run.

4.     Expect Some Learning Losses:

Jesse Livermore has something to say about this as well,

"Losses are inevitable. You will lose money. Accept that. But what you absolutely must avoid is losing money consistently."

To be successful in trading, You must understand that,

Losses happen and there are ways to manage them. It's just a fact of life in trading.

You might lose some trades, especially when you're new.

But hey, accepting this upfront makes things much easier!

Don't let a bad trade ruin your day.

Instead, use it as a learning experience.

Ask yourself:

"What went wrong?

Where did I mess up?

How can I do better next time?"

Every Loss can be a stepping stone to becoming a better trader.

You know what most experienced traders do?

Focus on making consistent profits over many trades, not hitting one lucky jackpot.

Those only happen sometimes. It's much better to build a solid trading strategy that gives you reliable results over time, like building a steady brick wall, instead of hoping for a single giant prize.

So next time you take a loss, remember two things: first, it's natural in trading, and second, you can learn from it.

5.     Keep practicing until it becomes second nature:

William Delbert Gann ( famously known as W.D. Gann) was a market analyst and trader of the 20th century who developed a theory of market prediction known as the Gann theory. He has a beautiful piece of advice for you,

"Markets are constantly changing, so traders must constantly learn and adapt. The learning never stops & Practice is the Key."

This fact highlights the importance of deliberate Practice, focusing on specific aspects and consistently repeating them.

 Afterall,

Even superstars gotta practice, and trading is no different!

Sure, you can read all the tips you want, but mastering your emotions in trading comes from actually experiencing them.

You need to feel the emotions you'll encounter in trading to learn how to manage them.

That's where demo accounts come in.

They allow you to trade in actual market conditions without risking real money.

 It's the perfect training ground for beginners to experience the ups and downs of the market and practice overcoming emotional hurdles.

Before jumping into the live markets, sharpen your skills and build confidence on a demo account.

Many brokers offer risk-free demo accounts. Explore your options and find the one that suits you best!

6. Set goals and safety nets: 

Do you know what Alexander Elder, a Russian-American charting expert and technical analyst & the author of several popular books, including "Trading the Range" and "Inside Trader?" Says?

"No trade is ever guaranteed to be profitable. The Key is to plan for winning and losing trades."

Remember your trading plan?

This quote emphasizes the importance of having a pre-defined plan for every trade, including entry and exit points.

Take Profit and Stop Loss orders are integral to such a plan, ensuring you have a strategy for potentially profitable and losing scenarios.

Take Profit is like your "get out of jail free card" when things are going well.

You set a price in advance, and when the market reaches that point, your trade automatically closes, locking in your profits.

Stop Loss is your safety net. It's your way of saying to the market,

"Hey, if things go south, I'm out at this point, no questions asked."

There may be many methods to place a stop loss, but in essence, In Stop Loss, you set a price that, if the market reaches it, your trade automatically closes to limit your losses.

These orders are crucial because they help you manage risk and avoid letting emotions cloud your judgment. When the market gets crazy, it's easy to get greedy or scared and make irrational decisions. But with Take Profit and Stop Loss orders in place, you can trade with a clear head, knowing you have safeguards in place.

So, the next time you're trading, remember to buckle up (figuratively, of course) and use Take Profit and Stop Loss orders to keep your journey smooth and safe.

7. Backtest Your Trading Strategy:

Need clarification on your trading strategy? That's normal!

Will your trading plan work? Don't worry; it's a common concern for most traders.

Here's an excellent tool to help you test it out and build confidence: backtesting.

But before telling you about backtesting, here is what Dennis Gartman, a financial analyst and former commodity trader. Founder of The Lone Trader trading firm and Known for his conservative approach to trading and investing has to say about backtesting.

"The more you backtest, the more confident you become in your trading plan, and the less likely you are to deviate from it when the emotions kick in."

Think of backtesting like a time machine for your trades. It lets you see how your strategy would have performed based on historical market data, showing you both its strengths and weaknesses. You'll see when your strategy would have thrived and, more importantly, when it might have stumbled.

There are three main ways to backtest:

• Manual: Manual Backtesting involves digging into past price charts, identifying potential entry and exit points based on your strategy, and keeping track of the results. Think of it like detective work for your trades!
• Automated: Some Software allows you to input your strategy, and they'll automatically analyze historical market data for you.
• AI-powered backtesting: More Advanced Versions, Like AfterPullback Backtesting, utilize artificial intelligence (AI) to analyze your strategy against different market conditions and optimize it based on the results. If you want to learn more about AI-based backtesting, here are some points you need to catch up on!

For beginners, manual backtesting is a great place to start. It helps you:

• Practice identifying chart patterns: This is like getting familiar with your strategy's " language " to analyze the market.
• Gain confidence: Seeing your strategy in action, even if it's just with historical data, can boost your confidence and understanding.

Remember, backtesting, in any form, doesn't guarantee future success. It's a valuable tool to test the waters and refine your approach before risking real money in the live market. Think of it as a practice round before the big game! As you gain experience, you can explore AI-powered backtesting to enhance your strategy and potentially gain deeper insights.

Conclusion:

While trading may initially seem complex, remember that it can be a journey with clear steps and achievable goals. By setting up a structured plan, prioritizing emotional well-being, and dedicating time to learning and practicing, you'll develop the skills and discipline necessary for trading.

So,

Embrace the learning process, utilize tools like backtesting to refine your approach, and set realistic expectations that acknowledge both potential learning losses and the rewards of sustained effort and

Trade Smarter!