The recent market volatility has many traders on edge… one day we’re rebounding… the next we’re selling off as bond yields collapse.
With all the wild swings in this news-driven market, it’s not surprising to see many traders struggling and trading on tilt.
It’s very easy to make mistakes and trade based on emotions, especially if you buy a stock based on one of your best patterns… only for it to go against you and sells off because of a tweet or a headline that has nothing to do with your stock.
However, in times like these, the last thing you want to do is trade on tilt or panic… and it’s okay to take a step back and evaluate your trading strategy.
Today, I’m going to share with you some of the most important factors affecting your trading psychology… and how you can avoid the common pitfalls that cost traders money in volatile markets like these.
Creating a proper mindset for trading is an ongoing endeavor for you to be successful.
Trading psychology can be quite complex, but it doesn’t have to be… let’s break it down to its core.
Fear and Greed
Let’s face it, everyone is fearful of something… in the markets, traders mainly fear two things…
- Failing to become a successful trader
- Losing money
When you focus on your fears, it creates stress and anxiety… and messes with the part of your brain that allows you to make clear and rational decisions. This, in turn, leads to the losses or lack of gains you worried about in the first place.
Greed is the second emotion that plays into your trading mindset.
- You want more than the market is providing
However, the market doesn’t care about you or what you want. You can’t force it to go up further or to give you more money. Greed gets you to hold on to a trade just a little too long, trying to get those last few pennies. Only to watch those profits disappear.
Sure fear and greed affect your trading mindset… and if you’re letting fear and greed control the way you trade, that’s okay because there’s a simple fix.
There is little room for emotions in trading.
- Mindset – Always stay calm and level headed. One technique that many successful traders use is to visualize their trades.
To do this, you would simply take time to close your eyes and visualize different outcomes and scenarios that can happen when trading.
See yourself take your gains and losses when you are supposed to, as well as see yourself entering the position based on your setup. Doing this will help when you are trading live and emotions are involved.You can even write down different scenarios and plan accordingly and walk through the trades so you’ll be ready when you have real money on the line.
- Knowledge – Gaining the proper knowledge about trading can go a long way in getting your mind right. Use a system with clear cut rules.
For example, my trading system is focused on trading one symbol: the SPDR S&P 500 ETF (SPY). More specifically, options on SPY. Every day I have a trade in SPY and I stick to my clear-cut simple guidelines. If you want to learn more about this strategy, click here.
- Learn from successful traders – Successful traders know how to keep a level head. If they didn’t, they wouldn’t be able to consistently pull profits from the markets.
You can learn a lot by listening to them and paying attention to the little things.
How do they react to swings, market chaos, and unexpected occurrences?
- Plan your trade and trade your plan – If you take the time to plan and write your trades out in detail, the more likely you are to stick to the trade without making mistakes based on emotions.Use as many details as possible…such as the reason for the trade, the exact entry, exit, and stop, etc.
In the end… Trading Psychology = Discipline
Use visualization techniques to keep a level head while in trades. Always use a trading system with defined rules and a clear edge. And learning from successful traders can help you get a jump on fortifying your mind for trading in a market that doesn’t care about you.
Money management is another very important discipline you will need to keep when trading.
You need to have specific rules for how much you can risk whether it be per trade, per day, as a percentage of your account or a combination thereof.
What will you do if you lose 5 in a row, or if you hit a 20% drawdown on your account?
You need to look at all the angles you can think of and come up with rules on how you will handle them. This way you aren’t stuck deciding in the moment when emotions are riding high.
The only way to stay disciplined is to have your rules detailed out as specifically as possible and always, always have them written down.
Don’t let the market scare you from taking your next trade. The market doesn’t know you and it definitely doesn’t care about you. Take control of your mind and conquer the market.
If you want to know how some of my clients have been able to profit in this challenging market environment, click on the image below.