How Important a Role Does Trading Psychology Play?

09/02/2014 6:00 am EST

Focus: STRATEGIES

Instead of merely trying to avoid or ignore psychology, Andrew Menaker, PhD of AndrewMenaker.com teaches how to incorporate psychology into trading and give it as much attention as research and prep to improve results over the long-term.

Most traders agree that psychology plays a role in trading. If you agree, take a moment to answer this question:

Ask yourself, what percentage does psychology play a role in my trading? 30%? 50%?, 80%? Write down the number you come up with.

Next, write down the number that represents the percentage of how much of your prep, homework, has a psychology focus. What’s your number? Be honest with yourself.

If you’re like most traders, you’ll see a large discrepancy between these two numbers. And if you’re like most traders, you’re probably not satisfied with your trading.

The next question you need to ask yourself is, what will I do to close this gap? Closing the gap is accomplished by incorporating psychology into your trading plan.

Likewise, golfers will say that golfing involves a lot of psychology, but the majority of golfers spend most of their time working on the mechanics of the game such as their swing, or perhaps researching new clubs.

The relatively small numbers of elite performers at the top of their game, whether it is trading, golfing, or something else, are doing whatever it takes to improve their inner game.

It is up to you whether you think it is merely a good idea, or you actually do something about it.

Performance improvement requires much more than positive thinking. It requires self-management and dealing with discomfort and internal conflict, including subconscious conflict. Traders often experience a conflict between needs for short-term gratification (avoiding loss, avoiding the anxiety of uncertainty and exiting early, etc.) versus longer-term goals.

By Andrew Menaker, PhD, AndrewMenaker.com

Related Articles on STRATEGIES