In this post, I’d like to share 32 trading psychology lessons I learned the hard way over my 14+ years in the market as a trader.
Time flies…it really does.
Yesterday, I was looking at the 24-year-old me in some old photographs and I couldn’t help but notice how much I’ve changed.
Back then, I was skinny; I looked pale, stressed, and unhappy… I was a struggling trader.
Still, against all odds, I was determined to push through the difficulty because I knew that trading was something I wanted to get good at.
That commitment surely paid off.
Off the top of my head, here are a few trading psychology lessons I’ve learned on this journey.
#1 – Trading is difficult to master. Anyone can learn a technical signal in an hour or two, but the right mindset takes years to develop ―possibly a lifetime.
#2 – Risk management is crucial, and it’s both an art and a science. That’s why most people are really bad at it. They understand the ‘science’ part of it, but the ‘art’ part (the part that is up to your discretion) is where things get complicated.
#3 – An edge is easy to come up with. No need for a degree in statistics, just basic common sense goes a long way. Buying when everything within you is screaming “Wait!!”; holding when everything within is screaming “Sell!!”; selling when everything within you is screaming “Hold!!”… that’s the real challenge.
#4 – Price action is human psychology. At times, it’ll be predictable; at times not.
#5 – Success happens to those who keep taking their chances, manage their risk, and stay in the game. Most people don’t stay in the game long enough, that’s why they fail.
#6 – You need a good strategy. That’s pretty obvious. What’s not-so-obvious is that you also need a particular type of mindset – a trader’s mindset. By all means, work on it: read books, get a coach, take a mindset course, meditate… it’ll all pay in the end.
#7 – If you’re not in the right mood, stay away from the market. This is not the state of mind you want to be in when making important financial decisions. Take the day off. New opportunities will materialize… the market isn’t going anywhere, but your capital is if you trade with a compromised mindset.
#8 – Different strategies work for different people in different places, at different times. Don’t be dogmatic and think that the only strategy that works is yours.
#9 – The traders who have an uncontrollable urge to make money lose money.
#10 – Less is more when it comes to news and other traders’ opinions. Trust your strategy and process and let that be your entire world. That’s how you become a money-making trader.
#11 – As said above, the game of trading has a lot to do with your mindset―I’d say 90% of it. Don’t ask me how I came up with this, it’s just a number that makes sense to me based on my experience – over my 14 years of trading, I’ve made and lost quite a substantial amount of money in the market. Mark my words, without the right trading psychology, you won’t make it. Even with the best trading strategy in the world.
#12 – If building (and keeping) wealth is your main goal, you should always seek ways to generate income. Aside from trading, invest in a business (or a few of them), invest in real estate, create an online business ―but, perhaps, above all, learn to live frugally.
#13 – Objective judgment is very important. For you to be and remain objective, you must not be attached to money or being right.
#14 – A calm and rational mindset (no matter what happens) is absolutely key. You need to understand and focus on what you can control and not worry about (and accept) what you can’t control.
#15 – You’ll be wrong a lot―being wrong shouldn’t scare you.
#16 – Discipline is not a feeling of motivation; it’s a hard choice. Consistency is not someplace you arrive at; it’s an ongoing effort.
#17 – A good trader needs flexibility and conviction ―yes, both can co-exist.
#18 – The market is a discounting mechanism. When the consensus suggests that the ‘Golden Cross’ will break to the upside or that the XYZ indicator is flashing red, most likely the opposite will happen.
#19 – The market has trends that are broadly predictable, but it also has a lot of noise; hence, no strategy, no matter how effective will win all the time.
#20 Systems with low risk, high rewards profiles are the most anti-fragile and robust ones even though they typically display low win percentages. The reason is that they thrive despite losses and not due to their absence.
#21 – The difference between a 30% and a 3000% return per annum is often boldness.
#22 – One major downside to being a trader who trades for a living is that you don’t have to force yourself to go out and interact with people face to face, hence, your social skills will worsen over time. It’s not ideal when you already have introverted tendencies like me. The lesson here is that there’s still a world out there. Don’t let trading cut you out of it.
#23 – The market is a dynamic process ―what has consistently worked yesterday may not work today. Hence, consistent profitability is a balancing act. It’s about understanding the inevitability of drawdowns; it’s recognizing the market phase(s) you thrive in; it’s pushing the gas pedal when it’s easy for you to make money and releasing it when it’s hard for you to make money.
#24 – If you get excited when you win and depressed when you lose, you risk doing things badly. This will make it difficult to generate superior results. Win or loss, your reaction should be indifference.
#25 – Businesses have to deal with change all the time. Kodak, Sears, BlackBerry, Blockbuster… these are companies that didn’t recognize, appreciate, and respond to change in a timely manner. It is with trading as it is with business ―if you don’t adapt, you get left behind.
#26 – Practice mindfulness, not necessarily as a spiritual pursuit but as a performance enhancement strategy. In the market, your mind is not your friend; it’s built for survival out in the open and its job is to protect you from harm at all costs. Mindfulness can help you become more aware of your self-sabotaging tendencies, and be more intentional and purposeful.
#27 – One of the best ways to trade with the least amount of friction is to come up with a method that leverages your strengths. But this requires some initial work. You have to put in the time to understand yourself ―who you are at the core, your inclinations and tendencies― and then, you have to come up with a system that best fits the description. Nobody is going to hand it to you on a plate.
#28 – Steve Jobs once said: “You’ve gotta be willing to fail; you gotta be ready to crash and burn… If you’re afraid of failing, you won’t get very far.” I couldn’t have said it better. If you’re not failing, then you’re probably making a significantly worse mistake: You’re not taking your chances. And this strategy—trying to avoid failure—inevitably condemns you to fail.
#29 – Trading will change the way you think, the way you develop skills in other areas, and perhaps even the way you parent. You will discover that talent is highly overrated. This means that you can truly do anything you set your mind to— but, often, at an incredible cost.
#30 – Periods of rest and recovery are part of the job description. On the weekends, let your mind rest, spend time with family… grab a good book. And, once in a while, take some vacation. Expand your perspective; don’t just feed your mind with trading, markets, profits, and losses. If you don’t allow yourself to unplug from time to time, trading won’t be sustainable long term, no matter how much money you’re making in the short term.
#31 – Everyone makes mistakes. Even when we know better. And yes, even the pros. The myth of the perfectly rational trader/investor is just that… a myth. If you can keep your mistakes to a bare minimum; keep your losses small; take bigger profits on most of your winning trades, you’ll still do well. (And this is coming from a flawed human being who still makes mistakes but who has enjoyed a positive performance in the aggregate over the past decade.)
#32 – If you don’t learn money management, you may get rich someday, but you’ll be poor again soon after that.
I hope you found these short trading psychology lessons helpful. If yes, try to re-read them occasionally. Don’t let them be ‘just words.’
Trading and investing for a living is such a privilege, and I can’t even imagine myself doing anything else.
There’s a lot of free time, which gives me the chance to allocate more of it to other passions of mine ―yoga, guitar, meditation, cooking …
But, perhaps what I enjoy the most is that I get to reflect a lot and be a budding philosopher. Plus, I get to share these trading psychology lessons with you all.
If there’s anything you’ve learned in your own journey, feel free to share it in the comment section.
Also, don’t forget I’m releasing a free mini-course before the end of the month called The Psychology of Risk for Traders.
In this course, we’ll look at some trading psychology lessons: I’ll help you deepen your understanding of risk and we’ll see how you can develop a more thoughtful approach to risk management.
In the meantime, I wish you an amazing trading week.