Trading Psychology

Trading Psychology: Master Your Mind, Master the Market 🧠

Imagine you’re a captain sailing a ship through stormy seas. The waves are the market—wild, unpredictable, and powerful. Your ship is your money. But here’s the secret: the biggest danger isn’t the storm outside. It’s the storm INSIDE your head.

The Universal Metaphor: You Are a Video Game Character 🎮

Think of trading like playing a video game. Your Health Bar is your money. Your Enemy isn’t the market—it’s your own emotions trying to make you press the wrong buttons at the wrong time.

The market doesn’t care about you. It just moves. But YOUR brain? It panics. It gets greedy. It wants revenge. These emotions are the real boss battles.

1. Fear and Greed: The Two Monsters 👹👹

What Are They?

Fear and Greed are like two invisible monsters sitting on your shoulders.

• Fear Monster whispers: “Sell now! You’ll lose everything! Get out! GET OUT!”
• Greed Monster whispers: “Don’t sell yet! It’s going higher! You’ll be RICH!”

The Pendulum Problem

Imagine a playground swing. Fear pushes you one way. Greed pushes you back. You’re never balanced—you’re always swinging too far.

        GREED
          ↑
    "Buy more!"
    "Don't sell!"
          |
    ------●------ ← Balance (where you SHOULD be)
          |
    "Sell now!"
    "Get out!"
          ↓
        FEAR

Real Example

Sarah’s Story:

• Sarah buys a stock at $50
• It rises to $70 → Greed says: “Hold! It’ll hit $100!”
• It drops to $60 → Fear says: “SELL! It’s crashing!”
• She sells at $55 in panic
• Next week: It’s at $80

Sarah lost money because she listened to both monsters instead of having a PLAN.

The Fix: Decide BEFORE You Trade

Before buying anything, write down:

1. At what price will I sell to take profits?
2. At what price will I sell to cut losses?

Then follow it. No emotions. Like a robot.

2. Overtrading: The Itchy Finger Problem ☝️

What Is It?

Overtrading is like eating too much candy because it’s there. You trade not because you SHOULD, but because you CAN.

Signs you’re overtrading:

• Trading every day “just because”
• Feeling bored when not trading
• Making many small trades instead of few good ones
• Paying more in fees than you make in profits

Why Does It Happen?

Your brain loves ACTION. Sitting still feels boring. But in trading, sometimes the BEST move is NO move.

graph TD
    A["See Market Moving"] --> B{Good Setup?}
    B -->|No| C["DO NOTHING 😌"]
    B -->|Yes| D["Trade!"]
    C --> E["Wait Patiently"]
    E --> A

Real Example

Tom’s Month:

• Week 1: 20 trades → $50 profit → $80 in fees = -$30 loss
• Week 2: 25 trades → $40 profit → $100 in fees = -$60 loss
• Week 3: He takes only 3 GOOD trades → $200 profit → $12 in fees = +$188 profit!

Less trading = More money.

The Fix: Quality Over Quantity

• Set a maximum number of trades per day/week
• Wait for YOUR setup (not just ANY setup)
• Ask yourself: “Would I take this trade with my life savings?”

3. FOMO and Revenge Trading: The Evil Twins 👯‍♂️

FOMO: Fear Of Missing Out

FOMO is when you see a stock going UP and you jump in LATE because you don’t want to miss the party.

What FOMO feels like:

• “Everyone is making money except ME!”
• “It’s already up 50% but it might go higher!”
• “I NEED to get in NOW!”

The Problem: By the time you notice something is “hot,” it’s usually too late. You buy at the top. Then it crashes. You lose.

Price
  |        You buy here → 😭
  |              /\
  |             /  \
  |            /    \
  |           /      \
  |    ------         \------
  |   Others bought
  |   here 😊
  |_____________________________Time

Revenge Trading: Getting Mad at the Market

Revenge trading is when you lose money and immediately try to “win it back” by making another trade.

What it sounds like:

• “I’ll show this market!”
• “I need to make back what I lost!”
• “One more trade and I’ll be even!”

The Problem: You’re angry. Angry people make BAD decisions. You lose more. Now you’re angrier. You trade again. You lose again. This is a death spiral.

Real Example

Mike’s Terrible Day:

1. Loses $100 on Trade #1 → Feels bad
2. Revenge trades → Loses $150 more
3. Revenge trades AGAIN → Loses $200 more
4. Ends day down $450

If Mike had stopped after Trade #1, he’d only be down $100.

The Fix: The 24-Hour Rule

• After a loss, STOP trading for the day
• Or even better: Stop for 24 hours
• Cool down. Come back with a clear head.

4. Trading Discipline: Your Superpower 🦸

What Is Discipline?

Discipline means doing what you PLANNED to do, even when your emotions scream at you to do something else.

It’s like being on a diet and saying “no” to cake. Easy to say. HARD to do.

The Three Pillars of Discipline

graph TD
    A["DISCIPLINE"] --> B["Follow Your Rules"]
    A --> C["Control Emotions"]
    A --> D["Accept Losses"]

1. Follow Your Rules

• You made rules for a reason
• Break them = lose money
• It’s that simple

2. Control Emotions

• Feel the fear/greed
• Acknowledge it
• Do NOT act on it

3. Accept Losses

• Losses are part of trading
• Even the best lose sometimes
• A small loss today protects your money for tomorrow

Real Example

Disciplined Dana vs. Emotional Eddie:

Same market. Different results. The difference? DISCIPLINE.

How to Build Discipline

1. Start small - Practice with tiny amounts
2. Write it down - Keep a trading journal
3. Review mistakes - Learn from them
4. Forgive yourself - Then do better next time

5. Trading Plan Development: Your Battle Map 🗺️

What Is a Trading Plan?

A trading plan is your written set of rules for trading. It answers every important question BEFORE you trade, so you don’t have to think when emotions are high.

It’s like a recipe for cooking. You don’t decide ingredients while the pan is on fire.

The Essential Parts of a Trading Plan

graph TD
    A["Trading Plan"] --> B["What to Trade"]
    A --> C["When to Enter"]
    A --> D["When to Exit"]
    A --> E["How Much to Risk"]
    A --> F["Daily/Weekly Limits"]

Part 1: What to Trade

• Which stocks/assets do you focus on?
• What do you understand well?
• Stick to what you know!

Example: “I only trade tech stocks from the S&P 500.”

Part 2: When to Enter (Buy)

• What signals tell you to buy?
• Be specific!

Example: “I buy when the price crosses above the 50-day average AND volume is higher than normal.”

Part 3: When to Exit (Sell)

• At what profit do you take money?
• At what loss do you cut and run?

Example:

• “I sell to take profits at +15%”
• “I sell to cut losses at -5%”

Part 4: How Much to Risk

• Never risk more than you can afford to lose
• Most pros risk only 1-2% of their total money per trade

Example: “If I have $10,000, I risk maximum $100-200 per trade.”

Part 5: Daily/Weekly Limits

• How many trades per day?
• What’s your maximum daily loss before stopping?

Example:

• “Maximum 3 trades per day”
• “If I lose $300 in a day, I stop trading”

A Simple Trading Plan Template

MY TRADING PLAN
===============
1. I trade: _____________
2. I buy when: _____________
3. I sell for profit at: _____%
4. I sell for loss at: _____%
5. I risk per trade: _____%
6. Max trades per day: _____
7. I stop if I lose: $_____ in a day

Real Example: Complete Trading Plan

Jenny’s Trading Plan:

1. I trade: Apple, Microsoft, Amazon, Google only
2. I buy when: Stock drops 5% in one day on NO bad news
3. I sell for profit at: +10%
4. I sell for loss at: -5%
5. I risk per trade: 2% of my account
6. Max trades per day: 2
7. I stop if I lose: $500 in a day

Jenny doesn’t think. She just follows her plan. Her emotions don’t get a vote.

The Big Picture: Putting It All Together 🎯

graph TD
    A["Successful Trading"] --> B["Control Fear & Greed"]
    A --> C["Avoid Overtrading"]
    A --> D["Resist FOMO"]
    A --> E["No Revenge Trading"]
    A --> F["Stay Disciplined"]
    A --> G["Follow Your Plan"]

    B --> H["Profits!"]
    C --> H
    D --> H
    E --> H
    F --> H
    G --> H

Remember These Golden Rules:

1. Fear and Greed will lie to you - Don’t listen
2. Less trading = More profits - Quality over quantity
3. Missing out is okay - There’s always another opportunity
4. Revenge never works - Walk away when you’re angry
5. Discipline is your edge - Follow the plan, always
6. Write it down - Your trading plan is your best friend

Final Thought: The Real Competition

The stock market isn’t you vs. other traders.

It’s you vs. YOU.

The trader who controls their mind controls their money.

Master your psychology. The profits will follow. 🏆

“The stock market is a device for transferring money from the impatient to the patient.” — Warren Buffett