Trading Psychology – 11 Things that Separate Winners from Losers

Trading Psychology – 11 Things that Separate Winners from Losers

Psychology of Trading
21 March 2019 , Al Hill

Psychology of Trading

Trading to me is the greatest personal endeavor a person can take on in their life.  I say this because of how difficult it can be at times and how all-consuming it can be as well.  It is one of the last professions that who you are and what you think of yourself is reflected back at you based on your equity curve.

Throughout this article, I will walk you through various aspects of trading psychology and how a winning attitude can lead to greater profits.  I can honestly say as I write this article that I am a profitable trader and will continue to be so for as long as God allows me.  The one thing that has taken me from losing money in the market is realizing that whether I make money or not boils down to my attitude and blind belief in myself.

1. Avoid Analysis Paralysis

Most traders start out soaking up information.  This information will come in the form of stock picks, books, seminars, trading coaches, gurus, you name it.  Your personal beliefs, background and personality traits will then take that information and digest it into what I call your foundation for trading.

Next, you will take this newly found information into the world of the market.  This can be exciting and a bit scary at the same time. If you are lucky you will put on a few trades and things will go smoothly.  The money will just flow.  If you are unlucky, you will quickly realize why 90%+ of traders fail within the first few years.

No matter how you start out you inevitably will face a loss that will hit you in the gut.  This loss will resemble the first time a girl broke your heart or the disbelief you had when you heard at school that Santa didn’t exist after your parents have been helping you draft your Christmas wish list and leaving out cookies for years.

You will feel a sense of utter disparity as your trading world unravels much quicker than the time you have spent to build it up.

Get Beyond the Hard Part

This is the phase where most traders will spend their entire careers.  In any business analysis of the company’s performance to drive further growth is paramount.  Trading is no different.  The only problem is you have to decipher when it’s time to tweak your model versus when results are just noise from the market.

Think about it, if you have just spent hours, weeks or months researching a system. This system on all fronts looks like it will give you an edge over the market 60% of the time.  In addition to this edge, it also provides you 2-to-1 in terms of the size of winners and losers.  By all accounts, this would be considered a system worth testing in the real world.

Of course, since the market is random, let’s say out of your first 6 trades only 1 works.  The seasoned trader will know that it’s a matter of placing a large enough sample set of trades for things to net out.  The junior trader or the trader stuck in the analysis paralysis phase will without a doubt, change this system before it has time to bloom.

As I’m writing this, it sounds so obvious that you have to allow time and opportunity to work in your favor.  But when it’s your hard earned money on the line your first reaction is to analyze and correct.  It’s such a normal human reaction to protect oneself.  Yet this type of behavior is what traps us as traders and never allows us to reach our full potential.

2. Accept that the Market is Random

Understanding that the market is random is probably the key tenet of becoming profitable.   I have done it all in terms of predicting the next action of the market.  Elliott Wave, harmonic trading, point and figure, classic breakout estimates, etc. etc.  At times the market would adhere to my analysis, which would make me feel a sense of control.  However, there were times when the market would pass through my key level as if it didn’t exist.  Now that I’ve been doing this for 14 years, I now realize that my analysis does not exist anywhere else but in my head.  The only reason the market would respond to my analysis is based on whether or not the other active traders who can influence the move of my stock are on the same page as I.

Only Takes One Trader

It only takes one trader with enough capital to completely invalidate your analysis.  It doesn’t take a herd of people yelling and screaming on the floor or placing thousands of trades over the internet.  Remember, it only takes one person somewhere on planet earth to decide that the stock should go higher or lower.

So, where does this leave you?  I will never tell you to not perform some level of analysis because I believe in technical analysis.  What I am saying is you must remove any emotional attachment for what the market can or will do next.  You have to believe that the market will and can do anything.  Until you come to this realization you will always cut profits short or get stopped out short of the breakout move, because your analysis has told you that if x happens then y is right around the corner.

3. Review Your Equity Curve

People spend a lot of time analyzing their individual winners and losing trades looking for some sort of insight that will help them crack the code.  Maybe if I choose a different moving average or if I cut my losses earlier.  These all are helpful things when looking at one or two trades, but how would this impact your bottom line?

Have you honestly maintained the same system long enough to even analyze how minor tweaks could help?

For me reviewing individual trades is critical, but even more important is the review of your equity curve.  This allows you to take a bird’s eye view of your trading performance.  If you plot your equity curve you will see some of the same patterns that you see in price charts.  As we speak for the year of 2013, I have a quadruple top at 70% return.

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The Endless Cycle

I am now sitting right around 50%.  Over the last 3 months every time I hit 70% I would have a nonsense trade that backs me off my high and then I quickly march right back up there again only to be denied.  What hit me just his past week is that every time I approach the high, my appetite for risk diminishes.

How I March Right Back

I am so worried that I will somehow lose the money that I begin to trade so conservatively that I slowly erode any gains until I pull away from my account peak.  I know that I am losing my appetite for risk because when I back off my account highs it is a slow process; however, after backing off I will run right back up to my account peak in 20% or less of the time.  This is only because, after the pullback, I go back to trading loosely and with confidence.  The difference between me now and me 5 years ago, is that (1) this back and forth process may last 6-8 weeks versus years, (2) I can see when I am displaying this type of behavior and (3) I know that it’s not my system but rather it’s all in my head.

So, my point in telling you this story is that when you review your equity curve you can see clear as day psychologically how you are processing the information presented to you by the market.  It is better if you start your review of your account first by looking at the equity curve before you go into each individual trade.  This will let you know if it’s really your system or if it’s you sabotaging yourself.

Trading Psychology

4. No More Tips

The one thing the internet provides as a plethora of market analysis and opinions.  There are literally hundreds of sites that will tell you what the market is going to do next.  Here at Tradingsim, I like to keep the articles more general in nature since everyone’s system is different and remember we never know what the market is going to do next.

There was a time where I was subscribing to two investment newsletters.  One was that of an Elliott Wave expert and another was from a Richard Wyckoff method guru.  Just reading this out loud almost makes me laugh since each method while at times will tell the same story are so different in how they translate market information.  On top of this, I was also a frequent reader of the trading deck over at  Then when I really got desperate or bored I would venture on to StockTwits.

Too Much Noise

Just to make sure I didn’t lose you there I am up to 2 newsletters, 1 market commentary site with multiple others and then Stocktwits which has ramblings from all sorts of people.  How do you think this impacted my view of the market and the decisions I was making. If you don’t know, it only confused me further.

Once I shut out all of the “noise” my equity curve never looked back.  The reason being is because I could interpret the market for myself and no longer relied on other people to solve my problems.  Which funny enough is the same reason you can become successful in life.

5. Truly Accept the Risk

Some of you reading this will say that you always place your stop and are willing to lose the money.  While you may say this, you really don’t want to lose the money.   You’ll place your stop out there, which could be pretty far off from your entry price.  Over the next couple of hours or days depending on your timeframe, you will slowly move the stop up because the stock is not “acting” properly.  Sure enough, at some point, your new stop order is triggered right before the market takes off.  If this has happened to you, it is one of the most frustrating events that can occur in the market.  Your analysis was right, the market, in the end, gave you what you expected; however, you were not willing to accept the randomness of the market and the fact you could lose money.

Until you accept the risk, you will interpret the noise of the market as a potential threat and will find some way of rationalizing to yourself that you must exit the trade now.

6. Knowing When to Take Profits

What is your trigger for exiting a trade as a winner?  Please don’t give me some nonsense about this or that key level.  Unless you are intuitively trading for profits, which are probably less than 1% of the trading population, how exactly do you book profits?

Again this concept sounds simple enough, but when you factor in that most traders have an expectation of what the market will do next it makes this almost an impossible task.  For example, back in March of 2003 my business partner and I were long put options on the DIAs.  We had about $200k in profits.  Up to this point, we had executed our trading plan flawlessly.

At the time we expected the Dow to hit the 6k – 7k level which it ultimately did in ’09 but for this fight, the bears did not have enough energy.  Instead of listening to what the market was telling us in terms of the correction was over, we held on for what we expected to happen. This crucial mistake meant that instead of coming out slightly north of 1M, we loss the 200k.  Afterwards, we were talking about this traumatic experience and both of us had the same feeling that it was time to take profits, but because we did not have a clear trigger we just held on for what the market was going to do next.

Do you find yourself holding on for what your analysis says the market should do next?  You must figure out when it’s time to walk away with the cash to move on to your next conquest.

7. Recognizing when you are wrong

Recognizing when you are wrong does not mean the stock deviated from how your analysis stated things should go.  Remember, the market is completely random.  Understanding when you are wrong is something you need to define.  For me, it’s how much a position goes against me before I see a profit.  Once this happens things will go one of two ways for me.  First, the market will give me the mercy exit opportunity and will close the position with a minor loss or slight gain.  Secondly, the market will continue in the opposite direction and I will take a bath.  Please do not get caught up in my specific rules; more focus on the fact that you need to know when you are wrong.  Accepting that you will not always get it right will save you all sorts of time and money.

More importantly, you will begin to think of the market in terms of averages.  You will have x percentage of winners and x percentage of losers.  There is no escaping this fact.  Show me a trader that always needs to be right and I will show you a negative equity curve.

8. Take Every Setup that fits your System

I use to create alerts for setups that I would review at night.  Then once the alert was triggered I would sit there and analyze the structure of the setup to make sure it still fit my system.  I would then tell myself that the stock wasn’t that good and if an alert was triggered for this other stock I would jump all over the trade.  Sure enough, the alert would trigger for the other stock and I would enter the position.  Since I am my harshest critic I would then follow the stock that I decided to pass on to see how it would perform.  Funny enough 50% of the time the stock that I thought was no good would outperform the stock I thought was a sure winner.

Just Take the Trade

What this taught me is if my system presents me with opportunities that fit my trading parameters I need to take them on a first in first out basis because there is no benefit in further analyzing the stock.  All I was doing was creating a tense situation for myself in which I was unable to make a decision.

Now what I do is set my alarms the night before and I have them sent directly to my email and cell phone.  Once the alert has been triggered, I review the stock just to make sure there isn’t some crazy event driving the price up or down at which point I enter the trade.

Taking every opportunity as they are presented to me allows me to trade in harmony with the market and not overthink the trade before me.  This means I am trading in the moment and not trying to outsmart or predict what the market will do next.

9. Recognize that the market is limitless

If you haven’t read the market wizards books, please do; especially the first one, it’s a classic.  As you read these stories of successful traders, you will notice that they have enormous gains.  I’m talking taking a few thousand dollars to hundreds of millions of dollars.  In addition to the size of their gains, the consistency of their wins almost seems too good to be true.  The reason their gains have no limits is that these top traders do not think in terms of yearly targets.

They have their system and they take whatever the market presents to them.  If this means a windfall profit, they do not look to rationalize the markets movements or exit the trade prematurely.  They simply follow their rules and let the market goes wherever it must.

I magically came up with the bright idea to make a 100% in the market for 2013.  To-date I am at 50%.  The difference now is that I no longer have any expectations for gains.  I must turn a profit, but other than that I’m done worrying about such things.  If you set a target you will either fall slightly below it or above it.  By placing this confine on your trading you will inevitably hit the target.

10. Trading Psychology and Self-Reflection

Never be too proud that you are unwilling to point out your flaws.  In this article, you will see a number of examples where I have called out flaws in my trading.  This is both therapeutic and also forces me to realize that my issues have little to do with my system and more around how I mentally approach the market.

If you approach the market from a negative perspective, you will lose money.  Negative does not mean you expect to lose, but you may have a lot of fear in your trading or have not fully accepted the risk.   Reviewing your equity curve and keeping a trading journal will help you navigate times when you fall off the rails.

11. Develop a Winning Attitude

I have had streaks of 14 or more winning trades in a row.  When you are in the zone it is the best feeling in the world.  It’s like you and the market are 100% connected and the money falls into your account.

You can only get to this mental place if you approach the market with a can-do attitude.  This does not mean you approach the market with an “I am right” attitude, but you fully accept that you will get whatever the market is willing to provide.

Credit: Tradingsim

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