Trading Psychology: Guide to Master Your Mind in 7 Steps

If you want to be a better trader, you need to master trading psychology. 

Nothing can wreck your trades faster than emotions. Fear, greed, hope, regret — they can all wreak havoc on your trading.

If you’ve spent any time in the markets, you already know that. But do you know what to do about it? 

In this post, I’ll give you some tips to help you control your emotions while you’re trading. I’ll also cover some common pitfalls to watch for and some steps to take to keep your head in the game. 

What Is Trading Psychology?

Trading psychology deals with traders’ mental and emotional states. It’s all about how your behavior and mindset influence how you trade. It also touches on your discipline and risk-taking.

Your mind plays a big role in your long-term trading success. It can be just as important to understand how you think about trading as it is to work on your stock market skills.  

Let’s look at two big emotions in trading:

• Greed can make a trader stay in a position too long to try to wring every last cent out of it. Greed can also motivate traders to take risky and speculative positions. It’s most common toward the end of bull markets when speculation runs wild.
• Fear is the opposite. It’s the reason people sell early to cut losses and avoid taking on extra risk. Fear is common during bear markets. It can make some traders exit the market irrationally.

Never underestimate the force of stock market psychology. Fear can turn into panic.

Emotions play a big role in your overall trading strategy. If you want to be successful, you need to master them.

Understanding Trading Psychology Better

There’s an art to mastering trading psychology. Your emotions, fears, hopes, and dreams will change over time. You need to be able to adapt.

Stocks need time to consolidate after a big run-up and so do humans. We need time to integrate the mental and emotional skills behind our big wins.

If you give in to sloppy trading, there’s often a thought or an emotion behind that decision. Find out what happened and work to correct it. 

A lot of people recommend taking the emotions out of trading …  but it’s impossible to do that 100%. Instead, figure out your goals and remind yourself how trading can help you achieve them.

Why Is Stock Market Psychology Important?

As a trader, you must understand your emotions and mindset. That helps you identify when you’re acting irrationally.

Imagine losing $1 … meh. Losing $50 … not ideal, but you’ll live.

Now imagine losing thousands of dollars. That’s probably enough to spin you into a bit of a panic. And panic can make you behave in ways you never expected.

That’s why you have to understand your stock market psychology. If you don’t, you can be swept up in the heat of the moment, by hype, or by panic.

A successful trader learns to manage emotions — even when everyone else is losing it. How? Create a set of trading rules and stick to them. Lay out your decisions in advance to remove emotions from the equation … as much as possible.

Here’s what your rules should cover, at a minimum:

• Limits on how much you’re willing to gain or lose.
• The prices where you’ll enter or exit a trade. If you hit a specific profit target or loss, either take the money or cut your losses.

Most importantly, educate yourself. Commit to research and studying charts. Arm yourself with the right tools and strategies to make better decisions. 

And stay flexible. Experiment with new ideas such as testing different stop-loss levels. Experimenting is a big part of the learning process.

The Emotions That Influence Trading Psychology

Greed and fear are the two most common emotions that influence trading psychology. That’s true on an individual level and for the group as a whole. 

When a group of traders gets greedy, there can be a buying frenzy. The market stays bullish. When fear strikes, the trend can turn bearish fast once panic selling begins.

1. Greed

Greed is a strong motivator. Without greed, you wouldn’t have the guts to buy stocks in the first place. Especially not sketchy penny stocks, right?

Greed gets you up in the morning and keeps you from giving up. But sometimes it’s also why you take on too much risk. 

The market won’t bend to your will. 

Sometimes it quiets down right after you score a big win. You get bored and start feeling anxious. Your greedy side has no outlet. So you take a trade you’re not familiar with, hoping it’ll pay off. 

Maybe you get lucky and your trade moves in the right direction. You scale in further and start to doubt your exit price. Why stop there? You want as much as you can get from the market.

But then the trend reverses. Your emotions aren’t ready to accept the money you missed out on. You didn’t sell at the high, and now you can’t decide on an acceptable profit target. Your gains dwindle.

If you want to avoid psychological trading mistakes, you have to be crystal clear about your intentions going into a trade. Take a moment to examine your mind for the day before you dive into the market. Your account will thank you for it.

2. Fear

Fear is a tricky emotion. It pops up when we want to change a habit.

Fear of failure is pretty common. We all want to succeed, and we all want praise for our efforts. But this can add some performance pressure to our trading game.

Fear of success can have a big impact as well. You might be afraid you’ll lose friends if you outshine them. And success can bring jealous and dishonest people out of the woodwork. 

The 4 Fears of Trading

It’s important to face your fears, so let’s break it down…

Trading Psychology Fear #1. Pride

It’s good to take pride in a job well done. But sometimes, we pin our pride on our ability to score big wins. This can be problematic since we can’t control the markets. 

Trading Psychology Fear #2. Happiness

Happiness is a virtue, right? Sure, but it can also lead to laziness.

If we rest on our laurels for too long, we can miss some great opportunities. And if we’re used to disappointment, we can fear the unfamiliar feeling of success. Weird, right?

Trading Psychology Fear #3. Anger

Anger, like pride, can convince us that we know better than the market. If we can’t accept what the market does and we get angry at it for disagreeing with our almighty knowledge, we risk making a bad trade worse. 

Trading Psychology Fear #4. Impatience

Good things come to those who wait. But let’s face it, staring at our screens all day can be tiring. 

It’s important to stay focused and give your trades time to win. If you cut out too soon, you might miss out on the big breakout you were hoping for. As you can see, it takes a LOT of practice to balance fear and greed.

How to Master Your Trading Psychology Skills in 7 Steps

Everyone wants to know how to master trading psychology. These seven tips can help…

#1. Practice With a Paper Trading Account

Learning day trading is as much about experience and practice as it is about skill and knowledge.

Maybe you don’t feel ready to throw in your hard-earned cash just yet. Set up a paper trading account. You can practice real-time trades without all the stress and emotion that comes when real money’s involved.

Paper trading can help you build confidence.

If you’re new to trading, a paper trading account can help you learn the trading software and the process of reviewing and executing trades. Use it to practice using limit orders and stop losses. Learn how to manage your risk.

Practice paper trading for a few weeks or months. Keep detailed records of your trading performance over time. You’ll need to account for other factors, too. Are you in a bull market or a bear market? When and if the market changes, your strategies may no longer work.

By the way, paper trading isn’t just for beginners. It’s a handy tool to return to as your skills change and grow. Use it to try a riskier trade or a strategy you’re not ready to bet real money on.

#2 Assume Your First Losses as a Fee for Learning

There’s nothing quite like jumping into a live account — even after months of practice.

It’s just … different. Now there’s real money involved. A stock simulator can only do so much, after all.

Using real money can set your trading emotions on fire! You might panic and exit a position too early when one of your holdings starts to drop … Then curse yourself when it bounces back to your initial goal a few hours later.

Or you might hold on to a position too long out of greed — hoping to squeeze out a little more. And you’ll ignore every red flag. All traders go through it. 

Think of your initial losses as your market tuition. It’s all part of your trading education. 

#3 Observe the Habits of Successful Traders

There’s no need to reinvent the wheel. Instead, learn from the thousands of successful traders who’ve gone before you.

It’s easier than ever to learn from seasoned traders. You can find some of the best on StocksToTrade. We have tons of free or no-cost resources. Like our YouTube channel, my Pre-Market Prep, the SteadyTrade podcast, and of course the StocksToTrade blog. 

Top traders spend time learning the basics. Then they work to constantly seek more knowledge and do more research. They scan stocks daily and continue to grow.

Most importantly, they set goals. They scrutinize their process, trading psychology, and progress. Of course they make mistakes, but they learn from them and improve.

The best traders are proactive, not reactive. They focus on the process of finding great market opportunities, instead of on the outcome, like how much money they might make.

#4 Set Stop Losses to Protect Your Account

“It can’t possibly go any lower … right?”

Remember those words as you watch your favorite stock continue to drop, point by point. Through multiple support levels and against all indicators, you’ll hold on to hope.

If you’re too emotionally invested in a stock, you’ll find it hard to pull the trigger when it’s time to sell.

You must set stop losses in advance. No excuses.

The market won’t bend to your will. It can — and often will — do things that you don’t expect. It may seem to defy reason and everything you’ve learned. Accept the random nature of the market. 

Cut Your Losses Quickly to Preserve Your Trading Psychology

Some market waves are simply too strong to paddle against. When they come, learn to go with the flow and cut your losses.

You want to keep your stop losses wide enough that a small dip won’t kick you out of a position. A stop loss also needs to be tight enough so you immediately sell when things don’t go as you expected.

Take time to find that balance. Err on the side of caution. 

#5 Choose Your Favorite Patterns and Stick to Them

Everybody has preferred chart patterns that seem to work best for them — head and shoulders, cup and handle…

Looking for patterns is a big part of trading psychology. Patterns tend to repeat, so identifying can help you in your trading.

But you have to find what works for you. Pick two to five of your favorites. Practice recognizing when they occur. Back in the old days, I kept binders full of charts so I could review as often as I needed.

#6 Learn How to Properly Read News Catalysts

You can have the best technical analysis and still go broke if you don’t also take news catalysts into account.

Most people read a news story and assume that the news will be a catalyst. But by the time you read that news, so has every other trader. And they’ve already acted on it. 

A smarter approach is to do the opposite. Use a stock screener to check out stocks first. Then look for a news event to explain a stock’s performance.

Several stocks within the same industry might rally because of the same catalyst … but maybe there’s one lagging that you can still jump on.

#7 Use a Stock Screener to Locate Your Best Stocks to Trade

Picking the best stocks is no simple task. There are so many out there. It’s hard to keep track of what different stocks are doing day to day.

So … how do you find useful information in stacks of seemingly useless data?

A watchlist can help you focus on specific stocks that meet your needs. (Sign up for my no-cost weekly watchlist to see how I tackle it every week.) You can set your own requirements based on your strategy for the kinds of stocks you want to monitor.

• Do you want to buy small-cap or large-cap stocks?
• Do you only want to buy stocks in a hot sector?

Stock screeners can filter through thousands of stocks to help you find companies you want to trade. Then you can focus on those that meet your criteria.

Stock screeners are an awesome place to start, but they don’t give you the whole picture. You’ll need to do more research to see if there are company-specific issues like labor problems or lawsuits. With a platform like StocksToTrade, however, you can research, scan, chart, and more all in one place.

Trading Psychology Mistakes and How to Avoid Them

Trading Psychology Mistake #1: Overconfidence

We tend to look up to people who seem confident and in control of their lives. But in trading, too much confidence can hurt your account.

Say you place a trade. For some reason, it starts going against you. Surely the market’s just confused, and it will pan out as you expected it to, right?

If you’re the type of person who can’t accept the possibility of a small loss, it might cost you big time. If you’re in this camp, remember to put your stops in right after you enter a trade. Don’t leave it up to your willpower to cut losses.

Trading Psychology Mistake #2: Drinking Too Much Hopium

Some people don’t like details. They move on inspiration. They don’t make plans. This can be dangerous for your trading account. 

If you get into a stock based on hype alone, you won’t know why you’re in it or when to get out. Anything worth having will take a little groundwork. Make sure that if you follow someone’s “hot” tip, you do your own due diligence as well. And always have a trading plan. 

Trading Psychology Mistake #3: Expecting Perfection

It’s hard to separate yourself from your trades. But when it comes to the market, you’re never in total control. 

It can be hard to keep your confidence up after a losing streak or a big loss. Losing is never easy, but it’s a guaranteed part of the game. 

The best traders accept that losing is inevitable. They bounce back from disappointments. You can have losing trades and still be a profitable trader if you keep your losses small.

Trading Psychology Mistake #4:  Needing to Be Right

A great trader is a great student. You must be a lifelong learner. After decades in the business, I still read as many books on trading as I can. 

Some people get into trading because they don’t want to answer to a boss. They want freedom and independence. I get that. And trading can give you that. But it will also humble you. 

Be willing to learn from other traders, teachers, from books, from videos, and the market itself. If you have more success with one pattern than another, don’t blame the market. Focus on what works best for you!

Trading Psychology Mistake #5: Analysis Paralysis

It’s important to study the markets and create a trading plan. But you also need to take risks and be resilient, win or lose. 

Some people have a fear of starting new things. But you can’t be an expert right out the gate. It takes years of practice to get a feel for the market …  and even then, there’s more to learn. 

At some point, you have to jump in the pool. You can’t improve your mindset if you never take a real risk. You can and should start by risking small amounts of capital, but you do have to take the leap.

Trading Psychology Exercises to Improve 

#1 Clear Your Mind

In trading, you need to be able to focus on lots of data in a fast-moving market. You can’t allow other things to distract you.

Start your day off with meditation, going for a walk, or a trip to the gym. The mind follows the body. When you change what you’re doing physically, your mind will reset.

#2 Visualize Your Trades

Sometimes the adrenaline is too much. Especially when you’re new to trading. You might get overwhelmed once your hard-earned cash is on the line. You want to prepare for this.

Athletes practice before they play, and so should you. Take time to imagine yourself in different scenarios. You win, you lose, you break even. See what happens to your physiology when you do. 

Does your heart beat faster? Do you freeze up? It’s good to know how you might react under stress. That way your body’s natural reactions won’t surprise you when stress hits.

#3 Know Why You Trade

If you don’t know why you want to trade, it’ll be hard to stay motivated when things get tough. Do you want extra income? Freedom from the 9-to-5 grind? To pay off your student loans? Build a nest egg?

The clearer you are about your motivation, the less likely you’ll be to get in your own way. Having external goals is a great way to stay on task … As long as you don’t put too much pressure on yourself.

#4 Make Your Trades Real

Trading can feel a lot like buying stuff with credit cards. You never hold the cash in your hands, so the transactions don’t feel real. It’s just a bunch of digital noise, right? 

Not if you want to reach your goals! There are many ways to remind yourself that it’s real money. Some traders put real dollar bills on their desks while they trade. It’s a good visual cue.

Other traders transfer their winnings into their checking or savings accounts. This makes it feel like a paycheck. Find a strategy that works for you!

#5 Keep a Journal

I’ve said it before, and I’ll say it again. This is the best way to keep track of your inner and outer game. Some people like to write, others prefer to type. Whatever you do, make sure you’re tracking your trades.

You can even audio or video record yourself on your phone. Talk about what was going on in your life and in your head at the time of the trades. 

Express yourself the way you’d talk to a friend. The “aha!” moments will surprise you. 

Top 3 Books on Trading Psychology

#1 “Trading In the Zone” by Mark Douglas

Douglas encourages readers to develop probabilistic thinking — looking at different possibilities and outcomes. This helps traders stay nimble and adapt to market conditions.

He also dives deep into the ways traders sabotage their best intentions. And he offers concrete ways for traders to transform fear of loss into a success mindset.

(As an Amazon Associate, we earn from qualifying purchases.)

#2 “Reminiscences of a Stock Operator” by Edwin Lefèvre

This book is an oldie but goodie. Published in 1923, its lessons are still relevant. 

The book, which chronicles trading pioneer Jesse Livermore’s career in the early 20th century, is popular among retail and institutional traders alike. 

The insights are timeless, thorough, and fascinating. This book has wisdom for every stage of a trading career.

#3 “The New Market Wizards” by Jack D. Schwager

This book is part of a series of interviews with top traders. You’ll hear all about their strategies, personal hurdles, and what it took to overcome them. 

There’s something for every kind of trader in these books. And you’ll want to read them, again and again, to soak up all the knowledge. 

Matt, Jack, and Kyle referenced the book in an episode of the TWIST podcast. One of the strategies in it helped Jack reap high rewards in OTC weed stocks.

Plus, check out Jack’s interview on the SteadyTrade podcast!

Benefits of Using STT Features

StocksToTrade brings together all the different websites, apps, and software you’d use to spot stocks to trade and puts everything in one place.

No more trying to piece together a dozen different systems just to find potential trades.

StocksToTrade was created for traders, by traders. It helps automate some of the research so you can focus more on trading. You can quickly find which stocks are hot. 

On one platform, you can access all your watchlists and see stocks on all major U.S. markets, plus OTCs. Then there’s quick access to new highs and lows, top percent gainers and losers, and much, much more.

Start your 14-day trial now for just $7!

The Right Mindset for Trading

Your mindset can make a huge difference to your trading success.

Let’s say you make 10 winning trades in a row. You feel on top of the world when that happens, right? But there can be bad streaks, too. And they can make you doubt your knowledge and methods — even when you know they’ve worked before.

It’s easy to get overconfident when things go your way and just as easy to get scared when the market turns against you. Remember your trader mindset to keep yourself level. Try to approach the market with a positive, yet neutral, attitude.

No Second-Guessing

If you’ve been trading for years, you probably have a good idea of what works and what doesn’t. Even if you’re new to trading, you likely have basic skills and knowledge from paper trading.

Don’t second-guess yourself. Stick to the rules you’ve set for yourself and the trades that are proven to work for you.

No Regrets About Bad Trades

There’s no such thing as a perfect trading record. Mistakes happen. Sometimes things just don’t go your way. The key is to recognize when you’re wrong and learn from it.

Don’t look at every loss as a failure — see it as an opportunity to learn.

There Is No Perfect Trade

No one wins 100% of the time. Know that you’ll usually leave some money on the table when you exit a trade.

It’s better to exit a position with some success than to risk a loss trying to get a bit more. Accept that you’ll never be perfect and you can save a lot of time and money in the long run.

Commit to Learning Forever

There’s a common quality among successful people: a commitment to lifelong learning.

The stock market constantly evolves and changes. So you have to change and evolve, too. Embrace what technology has to offer — new tools, screeners, indicators, and more. Use everything available to hone your skills and edge.

The Trading Psychology Conclusion

Psychology is a huge part of trading stocks. The better you understand your mental and emotional patterns, the better you’re likely to do. 

Set your rules ahead of the trade. Plan your entry and exit. Stick to the plan. 

And remember to practice. Paper trading can give you insight as to how you’ll react in an actual trade, without the risk.

Watch what other successful traders do. Learn how to read news catalysts. And (always!) use stop losses wisely to protect your bottom line.

P.S. If you’re not on board with StocksToTrade yet, sign up for a 14-day trial for just $7 to see why many of the world’s best stock traders start their trading day with our platform.

Have your emotions ever wrecked a well-planned trade? Do you use trading psychology to your advantage? Leave a comment and tell us what works for you!