The Trader’s Psychological Backdrop

The Trader’s Psychological Backdrop

Making a winning trade often comes down to how you handle a few key moments, from planning to execution. During the planning stage of a trade, it is essential to account for all potential adverse events. You must clearly define where you will enter, where you will exit, and the signals you will use to monitor the trade. And after you execute the trade, it is useful to enter the zone, a peak performance state of mind. When it all comes together, you’ll be unbeatable, but you can’t expect to consistently reach a peak performance state without preparation. Unless you take preparations, you’ll trip up at a critical point during the trade. Perhaps the most important factor in trading success is maintaining a reservoir of psychological energy to draw on.

Psychological energy is closely tied to adequate rest and relaxation. These days, few people get enough rest and relaxation. Recent studies have shown that many people avoid sleep; they just don’t have the time to get a full eight hours. Depending on where you live, it may be particularly hard to get enough sleep if you are a trader. On the west coast, for example, the markets open early in the morning, and it’s quite possible to miss a few hours of vital sleep a night. And if you are worried about how your trades will turn out, you may toss and turn all night. Getting the proper amount of rest and relaxation is vital. You cannot enter the zone if you are tired and you are constantly struggling to stay alert. Many times, you may go for days without getting the proper amount of sleep, and if you are like most people, you can fool yourself into thinking that you can get away with it. But you can’t. Without the proper amount of sleep, you’ll feel tired and irritable. You will be on the verge of making an impulsive decision.

Self-control requires energy, and you must control many psychological tendencies in order to trade profitably. You must control your emotions, for example. This is much easier said than done. Unless you are incredibly wealthy, it is hard to avoid feeling uneasy when you put your money on the line. In order to put your money on the line and trade it nonchalantly, you must continually tell yourself that it doesn’t matter. You can ease some of the pressure by using risk management. If relatively little can be lost on a trade, then you won’t feel as pressured. But lurking in the back of every trader’s mind is the fact that money is on the line, and that in the final analysis, you must make more money on your winning trades than you lose on your losing trades. If you don’t come out profitable across a series of trades, you will have to work even harder just to break even. These are the unpleasant facts of the trading life, which are impossible to completely ignore. That said, you can’t let the downsides get to you. You must combat them by cultivating an uplifting fighting spirit. But again, it takes psychological energy to keep upbeat. If you don’t have the energy, you can’t maintain a positive mood. When you are tired, even just a little, it is much easier to fall prey to a pessimistic attitude than to keep up a positive outlook. You need psychological energy and stamina to do it.

Winning trades require careful planning and execution, which is yet another area where self-control is needed. You must concentrate and think carefully while planning and executing a trade. If you are tired or distracted, you won’t think things through. Your subconscious mind will tell you to throw in the towel and take a rest. Concentration takes energy, and again, the best way to stockpile psychological energy is to get plenty of rest and relaxation. When you store up psychological energy, you can use it when you need it. And you will need it at critical moments during a trade.

A final area where psychological energy is lost is in managing everyday stresses and strains. Every hassle you try to cope with saps up precious psychological energy. It all adds up, a minor conflict here, an unexpected setback there. It is unavoidable, but you have control. You can minimize your everyday hassles as much as possible. Avoid getting into unnecessary arguments and conflicts. You can’t fight an endless number of battles, so chose them wisely. Better yet, restrict your battles to the ones you have with the markets. If you can create a peaceful milieu for your trading, you’ll be able to parse out your psychological resources efficiently among your various trading tasks. Don’t underestimate the psychological resources you need to trade efficiently. Your state of mind is the backdrop for the drama that unfolds with every trade you make.