Mastering Trading Psychology: The Key to Long-Term Success

Last Updated on May 11, 2024

Trading psychology is among the essential traits of being a successful trader since it is decisive for your medium- and long-term performance. Yet, it is often among the most overlooked aspects of trading.

In this guide, we will uncover the entire concept of trading psychology – what it is, what makes it so important, and how to ensure that you have the right mindset to become a successful trader, regardless of the market you specialize in.

What Is Trading Psychology?

Trading psychology describes the emotional and mental state that determines whether a trader will succeed or fail. It is a complex concept, representing various behavioral traits and aspects of your character.

Trading psychology is the engine behind the trading decisions you are making. It reflects your trading profile and motivations. Alternatively, how fear and greed influence your behavior and trading decisions.

Trading psychology encompasses various factors, including emotional intelligence, mindset, discipline, ability to recognize and overcome cognitive biases, and more.

Think of trading psychology as the ability to maintain a clear and stable state of mind at all times, regardless of market conditions and external factors. Alternatively, how capable a trader is to remain rational and cold-blooded even when things aren’t going their way or when they might be tempted to act against their trading plan.

What Makes Trading Psychology So Important?

Famous trading professionals have already answered this question.

Successful trading is about managing your psychology, not predicting the markets.”

– Mark Douglas

While often overlooked, trading psychology can be as crucial as factors like understanding financial market mechanics, fundamental and technical analysis basics, trading experience, and more.

In high-stress situations like volatile market periods, it can often be the decisive factor in whether you will win or lose the trade.

A trader that lacks resilient psychology is prone to making bad decisions, including going against their trading plan.

For example, traders with poor trading psychology profiles don’t have good discipline. As a result, they might fall victim to excessive greed and chase after high-risk trades (e.g., trading on high leverage during volatile periods). In situations like these, it takes just a slight move of the market against the trader’s position, and his entire portfolio might be wiped out in just a single moment. On the other hand, it can also lead to missing out on trades due to excessive fear.

Maintaining a stable trading psychology ensures that your rationality and judgment won’t be clouded and you won’t violate your trading strategy (e.g., regret losses and try to compensate, overplay a position, fall victim to FOMO or another bias, etc.).

Trading psychology is integral for long-term success. While even the most adventurous or undisciplined traders might succeed in the short term, it would be mostly out of luck. In the long term, the results will even out, and the one-off outliers will quickly turn into losses without the right trading psychology profile. 

What Is Emotional Intelligence?

Emotional intelligence is the ability to understand and manage your own emotions and the emotions of those around you. According to Daniel Goleman, an American psychologist who helped to popularize the concept of emotional intelligence, emotional intelligence is built upon five key elements, including:

• Self-awareness
• Self-regulation
• Motivation
• Empathy 
• Social skills

Mastering emotional intelligence ensures you are better equipped to fit in different societal groups or succeed in particular activities.

Emotional intelligence is often mistaken for intellectual intelligence. However, there is a core difference. While the former is about processing emotions, the latter is about processing data and making decisions based on it.

In trading, while intellectual intelligence can ensure you succeed in the short- or mid-term, having emotional intelligence on top guarantees sustainable performance and long-term success.

Importance of Emotional Intelligence in Trading Psychology

Positive and negative emotions follow traders on every step of their journey. Simply put, there is no way to escape them. That is why it is essential to learn how to respond to your emotions.

For example, let’s say you are specializing in a highly-volatile market. Thanks to your intellectual intelligence, you have created an excellent trading plan and figured out at what point to enter a trade. When the moment comes, you buy. But as already said, the market is very volatile and immediately starts going down. Naturally, the fact that things are now going against you can trigger negative emotions – be it fear, anxiety, or else. And this is when emotional intelligence comes into play. If you are able to control and react to your emotions and keep your cool, you will be able to withstand the drop and wait for the upward rally (as we said already, you had created a trading plan that motivates your position). However, people with low emotional intelligence might quickly get stressed and leave the market to avoid losses.

So, in a nutshell, how you process emotions will determine the outcome of your trades. And not only your emotions but also those of others. Don’t forget that trading is a game of reading others’ sentiments. If you can correctly interpret the prevailing market emotions and the reactions they can trigger, then you will significantly improve your performance. 

Strategies for Improving Emotional Intelligence in Trading

Let’s start by saying that recognizing positive and negative emotions on the spot can often be very hard. Often, they are evident only in hindsight, and what can seem a negative right as it happens might turn out to be positive in retrospect.

However, there are some strategies that you can apply to become better at reading the room and developing higher emotional intelligence. Those include:

Practice self-awareness  

Learn to understand when you are doing something deliberately or subconsciously. Analyse how it makes you feel based on the way you are doing it, especially for situations you haven’t been in yet.

Learn to accept all emotions 

Be they positive or negative, there is no escaping from emotions. Learn to watch from the sidelines, and don’t let emotions take over you or try to suppress them. Make sure to label your feelings to ease the process in the future. 

Accept that you won’t always be in control 

And that it is okay. We are all control freaks to some extent, but there is a line beyond which this becomes a real problem. If you can’t accept that you won’t always be in the driving seat when trading, it will start piling up pressure and anxiety to a point where it will all explode.

Treat everything as a lesson

Make sure to accept every situation, good or bad, as a step towards your growth. This will help you tame your emotions and help you be less affected by negative situations.

Look back and build a feedback loop

Make sure to often get back the memory lane to see how you have reacted to particular situations. Oftentimes, similar or even the same scenarios might repeat in the future, and comparing the way you have responded in both cases would help you acknowledge your emotional growth.

Don’t compare yourself to others 

Judging the emotions that a particular situation has triggered in yourself based on the response it has triggered in others is a recipe for disaster. Not everyone has the same emotional intelligence, is in the same phase of their lives/trading careers, or has similar personality traits. As a result, it is completely normal to react differently.

Developing Your Trading Mindset – the Importance of Mindset for Trading

Think of the mindset as a collection of traits that will determine how successful you will be when trading (or in any other aspect of life). Having the right attitude can decide how you perceive particular situations and how they affect you.

Individuals with a winning, never-give-up mindset will remain calm and collected even when it feels like their entire world is falling apart.

Having the right mindset is an integral part of trading psychology. It is a collection of personality traits and various abilities, including emotions of acceptance, discipline, motivation and self-determination, willingness for self-improvement, adaptability and flexibility, and more.

Common Mindset Pitfalls to Avoid

You have probably heard the expression, “You are your worst enemy.” This is precisely the case when it comes to trading mindset. Traders are often limited only by the limitations they have set themselves. These limitations are usually a result of their mindset.

Here are some widespread mindset pitfalls to avoid if you want to become a better trader:

• Greed – traders with weak mindsets are prone to pursuing higher profits even when it is extremely risky;
• Fear – as the opposite of greed, fear is when traders are too scared to enter the market, even when the chances to lose are slim;
• Recklessness – traders can often get caught in the moment and make a wrong move that goes against their trading plan (e.g., when revenge trading to try to compensate for a loss); 
• Overconfidence – know-it-all traders always find out that nobody knows better than the market the hard way. Having a big ego also prevents traders from improving their skillsets;
• Stubbornness – traders that remain fixated on an approach that has proven not to be working well are guaranteed to fail in the short- and long-term;
• Lack of dedication – trading the markets isn’t a sprint but a marathon and those that aren’t willing to take on the long journey are the first to fail;
• Indecisiveness – if you spend too much time perfecting your strategy or trading within a demo account, in the end, you will be procrastinating rather than progressing.

Strategies for Developing a Winning Mindset

There are tons of books and seminars by experts on how to develop a winning mindset. When it comes to trading psychology, it all comes down to: 

• Learn to let go – if you lose a trade, don’t make a fuss about it. Collect yourself, analyze why the trade has panned out that way, and use it as a stepping stone.
• Always strive to improve – never stop learning new things and exploring various aspects of trading – fundamental and technical analysis, behavioral finance, money management strategies, risk management techniques, and more.
• Build a routine – whether it is to keep a trading journal, read the morning news, or analyze your past trades, make sure to build a habit since it helps you hold yourself accountable and also improves you as a trader.
• Learn from past mistakes – turn every unfortunate trade into a lesson. Observe the behavior and performance of other traders and try to learn from their mistakes as well.
• Remain neutral – the market is neither your friend nor your enemy. Stick to this, and you will limit your emotional investment.
• Be adaptable – markets are dynamic structures that evolve continuously, and you should do that as well. Failure to adapt to changing conditions will significantly affect your performance.
• Have a plan A, B, and C – successful traders think several steps ahead, so make sure to have a plan for how to react based on different market scenarios (best, average, and worst case, for example).
• Have a goal, and don’t give up on it – trading without a goal is just chaotic buying and selling. Always have a profit target and pursue it to keep yourself motivated.
• Set more ambitious goals – build a habit of revisiting your goals once you hit them. Successful traders grow over time thanks to setting more ambitious goals. However, make sure to keep your goals realistic (e.g., don’t aim to triple your profit in a week) to avoid setting yourself up for disappointment.
• Keep your ego in check – you won’t hear the all-time greatest traders brag about their success, and there is a reason for it – they let their performance do the talking. Keep your head down, talk less, and focus more on the trading itself.

The Importance of Trading Discipline

In “The Disciplined Trader” book, Mark Douglas says:

In the market environment, you have to make the rules to the game and then have the discipline to abide by these rules, even though the market moves in ways that will constantly tempt you into believing you don’t need to follow your rules this time.”

Discipline is the ability to stick to a plan or strategy and never go against it, even if it feels like you should. 

Discipline comes from within and is a quality that you build over time in order to be able to respond adequately to feelings like confidence, fear, greed, etc. 

Think of discipline as your shield against irrational and emotional decisions.

Some experts believe that trading discipline is even more important than making profits. While this might sound controversial, Mark Douglas gives a great explanation of it in his book. He says that as a trader, it is more important always to follow your rules than make money since whatever money you make, you will inevitably lose it if you don’t follow your rules.

Strategies for Developing Trading Discipline

Developing trading discipline is a complicated process, but we can bring it down to just three main elements:

1. Set your rules

Be it a trading strategy, the habit of keeping a trading journal, or backtesting a risk management strategy, it is essential to set rules. They will serve as the foundation that will determine whether you will succeed in the long term.

2. Follow your rules

Think of your trading rules as the law – they are there for a reason, and you shouldn’t break them. 

3. Keep yourself accountable

Use the carrot-stick method. Reward yourself when you execute your strategy to perfection, and punish yourself when you go against it.

The exact rewards and punishments are up to you to decide, but the main thing is that they should be sufficient to motivate you to follow your rules and stop you from breaking them.

I realize that keeping yourself accountable is easier said than done, so you can rely on external help for that. Use a friend of yours to judge how disciplined you are and leave them to decide whether you deserve a reward or a punishment.

Impact of Discipline on Long-Term Trading Success

Discipline is critical to long-term trading success, and studies prove it.

DALBAR finds that over the past 30 years, the average investor has been consistently underperforming the S&P 500 by up to 3.5%. The study attributes this mainly to emotion-led decision-making and poor trading discipline. 

Other studies find that trading discipline evolves over time. The more mature a trader is, the more disciplined they are likely to be.

In a nutshell, individuals who demonstrate solid trading discipline are better positioned to ensure long-term success. By following a well-defined trading plan, sticking to their risk management strategy, and avoiding emotional decision-making, traders can improve their performance and achieve consistent profits over time.

Risk Management – Your Number 1 Priority

There is a saying in sports that attack wins you matches while defense wins you titles.

Now let’s apply this to the field of trading. If your trading strategy (e.g., patterns, entry points, position size, etc.) wins your trades, risk management is what will protect your portfolio against losses.  

Risk management is the process of identifying, assessing and mitigating the potential risks that might affect your portfolio, alongside their probability and their degree. The process aims to define strategies that will help you protect your positions against those risks and avoid the loss of capital. At the same time, it seeks to ensure that you are in a good position to grow your capital sustainably. Alternatively, proper risk management helps you minimize losses and maximize returns.

Think of it as bullet-proofing your trading plan against a potential unfavorable turn of events. Don’t forget that, in the long term, your success will be defined not by the size of your profits but by your losses. You can lose all your profits in just one or two trades without a proper risk management strategy. If you have one, however, and apply it meticulously, you can ensure that your capital is protected and you can sustainably grow it over time.

The Role of Risk Management in Trading Psychology

Risk management plays a pivotal role in trading psychology. Not only will it help you minimize losses and maximize returns, thus helping boost your confidence, but it will also protect you against a potential spiral of negative emotions.

This is especially important for novice and not-so-disciplined traders. The reason is that a series of losing trades can quickly get them off-track and distort rational decision-making.

Proper risk management can serve as a shield or a safety net against such situations as you will know the extent of the consequences of your strategy not panning out as planned. This will protect you against negative surprises and all the potential impacts stemming from them.   

Furthermore, risk management plays a critical role in managing stress levels. Think of risk management as your silent guardian who will help you, even if emotions go out of hand. Knowing it is there will ensure your peace of mind even when trading becomes a highly-stressful endeavor (which it often does). This will help you retain a positive mindset and help you avoid the risk of emotional trading.

Common Risk Management Strategies and Techniques

In the “Art of War”, Sun Tzu says that every war is won or lost before it is fought, and trading makes no exception.

Spending sufficient time on the drawing board to develop a sound risk management strategy, backtesting it and refining it when trading with paper money will give you an enormous advantage when trading with real capital. As a result, it will position you for long-term success.

Some of the most essential elements to build your risk management strategy around include:

• Figure out your entry and exit points – take your time to identify when you will be entering and exiting the market. The exit point is of greater importance since it ensures that you will leave the market precisely when you hit your profit target or maximum loss.
• Set stop-loss orders – having a predetermined stop-loss order puts the brakes on potential runaway losses if the market turns out against you beyond a specific point.
• Set take-profit orders – this is the exact opposite of the stop-loss order. Its goal is to ensure that you won’t end up chasing profits above your target ones and suffer losses as a result.
• Position-sizing – define how much you want to make/risk on every trade – for reference, conservative traders never risk more than 1% on a trade. More aggressive traders can risk 10% – 12% or more on every move.
• Think about the leverage – if you are trading on margin, make sure to carefully calculate how much leverage you can use. This is critical since just a slight miscalculation, and you can end up wiping out your portfolio in a blink of an eye.
• Diversify – similar to investing, diversification is equally important when trading since it helps you spread risk across various trades.

While these steps are a good foundation to build your risk management strategy around, it is essential to continuously monitor the market and adapt on the go based on the prevailing conditions.

Impact of Risk Management on Long-Term Trading Success

Ask any fellow trader or just do a Google search yourself, and you will quickly discover that risk management is traders’ number one priority and determinant for long-term success.

Here is a fact – the most and the least successful traders have one thing in common. It is the way they deal with risk management. And this isn’t only valid for retail traders but also for institutional investors, asset managers, and more.

Just think about the Global Financial Crisis (or the earlier cases in history) – the institutions that collapsed all had poor risk management where the maximum potential losses weren’t considered probable to materialize. And when they did, the banks, insurers and mortgage companies had to be bailed out.

The same thing goes for trading – if you don’t account for the maximum potential losses and their probability to materialise, you will set yourself up for disappointment. Having proper risk controls ensures that you won’t lose amounts that will get you out of business. 

*For reference, today, surveys find that up to 88% of traders use stop-loss orders, with 62% relying on position sizing.

Cognitive Biases – What Are They and What Makes Them Important

Cognitive biases are systematic, consistent errors in our thinking that can affect the way we make trading decisions. These judgment-clouding factors usually happen on a subconscious level, which makes them very hard to recognize.

However, cognitive biases can be very problematic since they can affect our ability to think objectively and lead to potential losses or missed trading opportunities.

For example, if your best trade ever was when you bought the stock of a legacy automaker a while ago, you will have very fond memories of it. They might cloud your judgment and, again, push you towards the same company when there might be better opportunities based on the current market environment.

In the long run, traders who can identify and tackle their cognitive biases will likely make better decisions and improve performance over time.

Cognitive biases are of significant importance not only on a micro level for retail traders. They can often help explain the behavior of the masses. Alternatively, they can give an explanation as to why particular market anomalies happen and provide a blueprint on how to avoid them in the future.

Cognitive biases are studied by behavioral finance, a subfield of behavioral economics. The main point of research is to figure out why traders make irrational decisions.

10 Common Cognitive Biases in Trading

There are many cognitive biases that can affect your trading performance. Some of the most popular ones include:

1. Confirmation bias

Confirmation bias is the tendency to seek information that fits your existing beliefs while ignoring information that contradicts them (also known as cognitive dissonance – the process of avoiding uncomfortable facts opposing your convictions).

2. Recency bias

Describes the tendency to give more weight to more recent information than to older information since it is believed to influence the future more.

3. Overconfidence bias

It can lead you to take too much risk while ignoring available data. It stems from the false sense of skill and excessive self-belief.

4. Loss aversion bias

The opposite of the overconfidence bias, the loss aversion bias is when you prioritize avoiding losses over making gains. As a result, it might make you ignore many potentially-winning trading opportunities.  

5. Self-serving bias

It makes us explain every winning trade with skill and every losing one with bad luck. Alternatively, to boost our ego or find solace, we tend to base the results on whatever makes us feel better.

6. Herd mentality bias

Describes the tendency to follow the crowd and ignore your independent findings. Traders suffering from it find comfort in knowing that they are doing the same as others. According to a CFA Institute survey, this is the most common bias.

7. Hindsight bias

It describes a thought process known as “I knew it all along.” Basically, it perceives actual outcomes as reasonable, expected, and even guaranteed, but only after they materialize.

8. Anchoring bias

The bias covers the idea that traders use pre-existing data or just a single piece of information (stock price, for example) and use it as a benchmark for all subsequent data. Traders suffering from this bias tend to remain fixated on that single piece of information or past data while ignoring other factors. 

9. Narrative fallacy bias

The bias describes situations where traders are attracted to investments with stories they can relate to or are trendy. For example, ignoring well-established stocks of companies with decades of history in favor of novice companies that invest in the metaverse, crypto or other alternative investments that are more hyped.

10.  Blind spot bias

This is a tendency to acknowledge the biases of others while ignoring your own. Alternatively, traders have blind spots when it comes to evaluating their own deficiencies and aren’t willing to take into account other persons’ opinions. 

Strategies for Identifying and Overcoming Cognitive Biases

Cognitive biases are hard-wired into our psychology, and overcoming them is a very challenging process that requires a lot of work and dedication.

Given the potential impact of cognitive biases on trading decisions, it is vital for traders to be aware of them and take steps to mitigate their effects. Here are some practical measures on how to do that:

• Identify your biases – the first step is realizing that you have a particular bias and identifying it. Popular methods are consulting professional therapists, asking friends for their personal opinion and listening to them, taking tests for bias identification, reflecting on yourself, and more.  
• Be objective – when trading, try to maintain a neutral position. For example, don’t try to fit information into your beliefs, but analyze it through the prism of your knowledge and expertise. Avoid curve-fitting market signals but, instead, explain them through data. A good tool for that purpose is technical indicators.
• Avoid high-stress situations (at least at the start) – usually, when you have to make a decision on the spot, you are more likely to revert to your bias. When you have enough time to think over a situation, you will be able to make a more objective decision.
• Work, work, work – overcoming biases takes a lot of time and effort, so it is crucial always to maintain a good work ethic in tackling your biases. The only way to overcome them is if you address them consistently.

Last, don’t forget that each bias is overcome in a different way, so make sure to build a strategy based on your personality traits.

Trading Plan – What Is It and Why Is It So Important

A trading plan is basically the strategy to follow to achieve your trading goals. It is a roadmap that guides the trader’s decisions and actions in the market, helping them stay focused, disciplined, and consistent in their approach.

Think of it as a system to keep your trading in check. It helps you avoid falling victim to your emotions or deviating from your strategy’s principles. By having a trading plan in place, you will know when and what to do and won’t be caught out unprepared in the moment.

But having a trading plan is just part of the process. The more important thing is sticking to it for the long term. 

Furthermore, it is essential to make sure to regularly conduct performance evaluation and optimization for your trading plan (through backtesting, for example).

If you want a detailed dive into what a trading plan is and how to create one, check out our dedicated guide.

Key Elements of a Trading Plan

A trading plan includes a series of factors that map out the trading activity. Here are some of them:

• Assets you will be trading
• Time horizon
• Profit target and trading objectives 
• The conditions under which you will be buying and selling
• Capital and position size
• Trading style and position management
• Risk management strategy
• Trading restrictions

The most important thing is to build your trading plan around goals that are specific, measurable, achievable, realistic, and time-bound (SMART).

The Impact of a Trading Plan on Long-Term Trading Performance

A well-designed trading plan can be a powerful tool for novice and experienced traders to achieve success in the market. Over the long term, having a trading plan will ensure that:

1. You have clear goals and objectives and a blueprint for achieving them.
2. You will remain focused on what matters most and will be able to avoid distractions (e.g., noise).
3. You are building a consistent and methodical approach to the market that will help you avoid impulsive decisions.
4. You are trading rationally and have the proper risk management controls in place to minimize losses and maximize profits.
5. You will be keeping yourself accountable and will be more likely to stick to your strategy, even when the market conditions are changing or becoming more challenging.

The Role of Patience and Perseverance in Trading Psychology

The saying that patience is a virtue acts in full force when it comes to trading. Time, patience, and perseverance are the three magic words, the importance of which is acknowledged by every successful trader.

Patience and perseverance accompany successful traders on every step of their journey on micro- and macro-levels.

On a micro level, patience is required throughout the entire trade lifecycle – from the entry, through the holding period, to the exit point.

On a macro level, patience is critical for finding the best opportunities and timing your moves.

Patience and perseverance are crucial elements of trading psychology and are often associated with discipline. For example, traders with low discipline usually can’t work under pressure and wait patiently for the right opportunity to arise. Instead, they recognize many “right” opportunities and are quick to grab them, only to regret doing so afterward.

Strategies for Developing Patience and Perseverance in Trading

There are various techniques for developing patience and perseverance, but, in the end, they all come down to one thing – working on improving your discipline.

It is essential to understand that becoming more patient takes time and is more of a marathon than a sprint. Cutting corners won’t magically improve your trading performance but only distort the real picture.

So, how to develop patience in trading? The most effective way is to start small by micromanaging every open position. As you repeat this process consistently (talking about hundreds of times), it will become hard-wired into your brain, and before you realize it, you will become more patient. Here is a basic strategy on how to do that based on a single trade:

1. Wait for your entry point – thanks to your trading plan, you have now identified the perfect moment to open a position. Whatever happens, don’t act rashly – for example, if you are buying, don’t do it if the market jumps way above your entry point. Simply wait for the price to get back and hit your entry point. Yes, in terms of profits, it might be a slight difference, but buying at a different point than your entry one is a recipe for violating your principles that risks pushing you down the path to ruin.
2. Give it time – once you open a position, give it enough time to develop. Ignore the fear of losing and sell only when the price hits your pre-determined profit target. Rest assured – you will be protected by the trailing stop-loss you had already set, so the risk here is minimal, while the potential for gains is high. Wait patiently for the price to hit the target and sell only then. That way, you will train yourself not to give up on emotions and remain disciplined even under pressure.
3. Don’t rush getting back in after closing the position – instead, ensure sufficient time to evaluate your performance and the way the trade has panned out. This is crucial since it allows you to take a step back and have a bird-eye view of the entire process to recognize the true importance of being patient. 

Note that while the strategy mentioned above might not always be the most efficient in terms of trading performance (especially for advanced traders), it will train you to become more patient and disciplined. The more times you repeat it, the better the effect.

The Impact of Patience and Preservence on Long-Term Success

Patience and perseverance are crucial for successful long-term trading performance due to several factors. Part of them includes the following:

• They help avoid impulsive trading – by being able to wait for the right opportunity to arise, you won’t get caught up in risky trades or open positions that aren’t aligned with your trading plan. They also help you remain disciplined and prevent you from trading the market noise.
• They help you remain laser-focused on your goals – when trading, you will often feel lost or that things aren’t going according to plan. Being patient allows you to trust the process and go through even the most difficult periods without sacrificing your long-term goals. 
• They ensure you are trading only favorable opportunities – trading is a game of numbers between risk and reward. By being patient, you will be able to trade only positions with optimal risk-to-reward ratio, thus gradually improving your long-term performance.
• They help you become a more knowledgeable trader – becoming a successful trader is a process that requires dedication and hard work, and there are no shortcuts. By being patient, you are basically acknowledging that you won’t get there overnight but, instead, will have to immerse yourself fully into learning more about the markets. 
• They ensure you will adapt to the ever-changing market environment – make no mistake, going forward, markets will only become more complex and interconnected. By being patient to study how they are evolving, you will be better positioned to recognize useful patterns and arising opportunities that will boost your performance in the long term.

Furthermore, learning to be patient when trading also makes you a better version of yourself since this quality is invaluable in many aspects of life.

The Trading Journal – What Is It and Why You Should Have One

The trading journal gathers information about your past trades so that you can analyze them later. Think of it as a trading diary, where you record everything about your trading activity.

The goal behind having a trading journal is to build up a database of qualitative and quantitative insights about your trades that you can use to improve your trading style. 

The most important principle behind keeping a trading journal is recording your trade history consistently. The more data there is, the better and more accurate insights you will have.

On the other hand, traders who don’t keep a trading journal risk repeating past mistakes. Furthermore, they might miss out on opportunities to improve their trading style.

If you want to learn more about trading journals, here is a helpful article. If you want to find which are the best trading journals, we have you covered as well – check here.

Elements of an Effective Trading Journal

The features of an effective trading journal software include but aren’t limited to:

• Trade import/export feature for automated record keeping
• An abundance of supported asset classes
• Connection with various broker platforms
• News coverage and 24/7 market developments
• Powerful analytics dashboard with rich statistics and trade summary information
• Trading assistant to highlight misalignments with your strategy goals
• Backtesting feature for strategy analysis

The elements of each trading journal entry that you should aim to consistently record include the following:

• Trade date
• Traded instrument
• Market circumstances
• Reason for buying/selling
• Result
• Mood

The Impact of a Well-Kept Trading Journal on Long-Term Success

Considering that past performance isn’t indicative of future performance, one might wonder why is keeping a trading journal so important. The truth is that you have made profitable and losing trades in the past, and you will definitely make such in the future. The main thing is to find the patterns, prerequisites, and aftermath characteristics that define a losing and a winning trade in the past and use them to improve your performance in the future.

Here are a few things that a trading journal will help you with:

• Keep track of your emotions – if you regularly update your trading journal and add the way each trade made you feel, you will be able to see whether you are improving at controlling your emotions. This will help you identify any weak points in your discipline and pinpoint the aspects of your trading psychology that need further addressing.
• Improve your trading plan – the truth is that whatever you don’t track, you can’t improve. In that sense, a trading journal helps you identify where your trading plan or strategy falls short and pinpoint the aspects that might be improved upon. This will help you avoid repeating past mistakes.
• Track market changes and improve performance – keeping records of your trades will help you compare them to similar positions in the present. The more data you have, the better picture of the market dynamics you will be able to paint. If all things are equal, but the results are different, you will find out that the market is changing and will be able to align your strategy accordingly to minimize your losses and maximize your gains.

In a nutshell, the main benefit of keeping a trading journal for your long-term success is tracking your evolution as a trader – both performance- and personality-wise (in other words – strategic & emotional management). This will help you build confidence and highlight areas where you can become even better.

To Wrap Up

Alexander Elder, one of the world’s most famous traders, says that beginners focus on analysis, but professionals operate in a three-dimensional space – trading psychology, their feelings, and the mass psychology of the markets.

The importance of trading psychology can’t be overstated enough. Personality traits like discipline, mindset, and emotional intelligence, are equally, if not more important than the strategy itself. It is worth noting that even the best trading system will fail if you don’t learn to follow it.

Here are five reasons why trading psychology is so crucial for long-term success in a nutshell:

1. It helps deal with emotions (fear, greed, overconfidence, etc.) which often lead to poor decisions.
2. It helps you remain disciplined – successful trading requires discipline and consistency in following a trading plan. 
3. It keeps your objective view – trading psychology can influence how you perceive risk, which in turn can impact your risk management decisions.
4. It makes you want to grow continuously – developing your winning mindset will cultivate the desire to constantly improve yourself and strive to become a better trader.
5. It helps you realize the one truth about being a successful trader – it is a marathon, not a sprint. Success doesn’t come overnight, and you should always look at trading as a long-term game. As a result, you should have the mental fortitude to stick with it through ups and downs, and trading psychology ensures just that.

Now that you are familiar with the theory behind trading psychology, it is time to practice. 

Earn2Trade’s funded trader programs give you the perfect stage to train your skills and develop your discipline and winning mindset, with the added benefit that you can get a shortcut to a professional trading career.