Google, YouTube, influencers, gurus, your trading friends—what do they all have in common? They’ll tell you that traders fail because of psychology.
This is borderline gaslighting.
Let’s break down some common scenarios where psychology is often blamed:
- Ignoring a trading plan
- Taking on too much risk
- Closing a trade before hitting your target
- Holding onto a trade for an unrealistic risk-reward ratio
At first glance, it might seem like psychology is the problem. But if you dig deeper, a different conclusion emerges:
A trading strategy problem is the root cause.
Poor psychology is usually a symptom of a bad strategy or the lack of confidence in a good one. Let me explain…
Confidence in a good strategy would prevent you from falling into the four so-called “psychology-related” traps mentioned earlier. For example, if you had a solid strategy and knew exactly how it should perform, chances are you wouldn’t stray from it.
Now, let’s step away from trading for a second.
Think about football. If someone misses a penalty, is it just because of psychological pressure? Sure, that’s part of it. But then ask yourself, “Why do top players consistently score their penalties?”
The answer is simple: They’ve mastered their penalty-taking skill.
So, should you focus on mental toughness or penalty strategy to improve your penalties? The answer to this is the same for trading. It’s strategy.
Anyway, there’s something essential to address:
Traders often experience swings in their psychology.
Many traders can relate to times when their psychology fluctuated between strong and weak, depending on their series of wins, losses, or even break-even streaks. But what no one asks is: What’s actually causing these psychological shifts?
It’s often tied to one thing: A lack of understanding of their trading strategy. Specifically, they don’t know their strategy’s key stats. What do I mean by this?
Every strategy comes with vital stats, like win rate, win streaks, and losing streaks. Not knowing your maximum expected losing streak from backtesting can lead you to abandon a strategy that’s actually working. On the flip side, experiencing a winning streak with an unprofitable strategy can trick you into believing it’s successful.
Do you see how not knowing these stats can either create false confidence or lead to unnecessary doubt?
The fastest way to improve your trading psychology is to use a strategy you fully understand.
That’s the real secret.
It’s not just about mindset—it’s about trusting in a well-tested strategy. Good, consistent psychology is a byproduct of a strategy you know inside out. It’s not the other way around.
Now, this doesn’t mean psychology isn’t important in trading.
There are cases where psychology is the root issue:
- Hesitating to take a trade when you should
- Struggling to handle a large account
- Moving your stop loss to break even seconds after entering a trade
Yes, psychology matters. But trading strategy matters just as much.
Other factors are important too, and you might not even be aware of them. But the key takeaway is this: Perfecting your trading strategy is the foundation of long-term profitability.
In 2024, many traders are failing because they’re not focusing on this.
So, how do you perfect your strategy?
You backtest it, know its stats, and start using it in live markets. Over time, you’ll gain the wisdom needed to refine and solidify it even further.
Focus on strategy improvement.
Have a great trading day!