Psychology is vasty Important in enabling the trader to stick with winners until they reach their target. Psychology is also critical in helping the trader to cut his or her losses quickly without reservation. If there is any holy grail in trading it is these two fundamental things. Cutting losses and riding winners is critical to success. Many losing traders actually try and or purchase methods that work however they are not mentally prepared for the games trading plays with your mind.
People are taught from a young age in school that anything less than 90% is failing (less than A). Many people are very competitive and therefore do not like to be wrong. Trading is a bit different in that often a winning strategy may rely on a low win to loss ratio. Many very profitable methods have win rates in the 40 or even 30 percent range. These methods rely on cutting loosers quickly and riding winners. Our psychology often is that a losing trade equals a failure when, in reality, it is not a failure but simply a losing trade. Many novice traders view a losing trade as failure and simply won't close the trade hoping instead that it will come back. Often with a novice trader there is a tendency to fear loss and any trade that goes into profit is quickly cut at breakeven or for a tiny gain. Many traders never get past this stage as they ride loosers and cut winners until their account is ground into nothing.
If you are one of the people I have described here is a little exercise I used to help get past fear of losing trades. Open a small account, 50.00 is fine. Oanda works well because you can trade any size position. Open a fifteen minute chart any pair is fine. Any time the current bar exceeds the high of the previous bar then turns red go short. Do the opposite for long trades. Stop is one tick above the high or low of the current bar. Trade size is one hundred units, penny a pip. You will take many losses with this and it will teach you to kill them quickly. After a couple of weeks of this exercise you should be comfortable with losses. You hold the trade until you get an opposite signal, which should help you to learn to hold winners. THIS IS NOT A TRADING STRATEGY IT IS ONLY AN EXERCISE IN DISCIPLINE.
Now that I said all of that: THE TRUTH:
Psychology is important but only if you have a winning method.
If you KNOW your method will win only then should you begin to train your mind. Having a great psychology is useless if practiced on a losing strategy. The holy grail of trading is to know without question that the method you trade is profitable. Only when you KNOW the method works will perfecting your psychology help you to improve.
People are taught from a young age in school that anything less than 90% is failing (less than A). Many people are very competitive and therefore do not like to be wrong. Trading is a bit different in that often a winning strategy may rely on a low win to loss ratio. Many very profitable methods have win rates in the 40 or even 30 percent range. These methods rely on cutting loosers quickly and riding winners. Our psychology often is that a losing trade equals a failure when, in reality, it is not a failure but simply a losing trade. Many novice traders view a losing trade as failure and simply won't close the trade hoping instead that it will come back. Often with a novice trader there is a tendency to fear loss and any trade that goes into profit is quickly cut at breakeven or for a tiny gain. Many traders never get past this stage as they ride loosers and cut winners until their account is ground into nothing.
If you are one of the people I have described here is a little exercise I used to help get past fear of losing trades. Open a small account, 50.00 is fine. Oanda works well because you can trade any size position. Open a fifteen minute chart any pair is fine. Any time the current bar exceeds the high of the previous bar then turns red go short. Do the opposite for long trades. Stop is one tick above the high or low of the current bar. Trade size is one hundred units, penny a pip. You will take many losses with this and it will teach you to kill them quickly. After a couple of weeks of this exercise you should be comfortable with losses. You hold the trade until you get an opposite signal, which should help you to learn to hold winners. THIS IS NOT A TRADING STRATEGY IT IS ONLY AN EXERCISE IN DISCIPLINE.
Now that I said all of that: THE TRUTH:
Psychology is important but only if you have a winning method.
If you KNOW your method will win only then should you begin to train your mind. Having a great psychology is useless if practiced on a losing strategy. The holy grail of trading is to know without question that the method you trade is profitable. Only when you KNOW the method works will perfecting your psychology help you to improve.
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