Trading Psychology – Why you keep losing money
Trading psychology is probably the most significant niche in the trading industry.
Although everyone is trading different markets, using various trading styles across different timeframes, trading psychology is something everyone stumbled upon at some point in their journey.
Endless amount of books, podcasts, videos, courses, or blog articles covering trading psychology and heavily monetizing on the topic as most traders believe that all that is wrong with their trading boils down to their psychology.
But is that the truth? Can trading psychology magically fix your trading and make you profitable? That is what we are going to explore in this article.
Table of Contents
Are you losing because of your psychology?
One of the things that makes trading psychology a tough topic to cover is the fact that we are all different.
For the sake of this article, I am going to assume that you do not have any deep psychological issues and traumas that prevent you not only from trading but also from other activities in your life.
If that is the case, it is probably a smart idea to deal with these issues with a psychologist. Still, for most of us, that are relatively normal in the head, we often prefer to blame common negative attributes such as fear or greed as rudimental causes of why we are losing money.
What is causing fear, greed, and other negative emotions in trading?
People often like to think that they are losing money because of their shortcuts in psychology that force them to make mistakes.
The truth is that there are only three reasons why people tend to lose money.
- Not knowing what you are doing
- Risking too much money
- Not taking trading seriously
The good thing is that each of these things can be fixed, and it has little to do with your “psychology”.
The bad thing is that it actually requires a lot of work rather than spending 15 minutes meditating every morning and reading your trading affirmations and manifestations before you start your trading day.
In the rest of the article, I will cover each step in more detail and try to give you actionable tips on how to fix them.
Building a trading system
Trading has been marketed online as something that everyone can do, often from their mobile phones.
All it takes is plotting a bunch of indicators on the chart, and you are good to go.
Because of this failed perception, people do not realize how complex trading actually is and how many things you need to figure out before you put your money at risk.
Fear of execution doesn’t stem from your underlying psychological issues and trauma; you are scared to execute trades simply because you don’t know what you are doing.
I have seen a lot of people blaming losing money on bad psychology, but when I asked them why they took the trades they took, they often did not have any idea.
Before you start trading, you need to have a trading plan.
Besides other things that I will cover a little later on, the most important part of your trading plan will be your trading strategy.
You need to have an edge in the market.
Without positive expectancy, it doesn’t matter if your trading psychology or your risk management is 100% on point.
I often hear that “risk management is the most important thing in trading”.
Risk management is something that goes without saying, but it is not the most important thing.
As you can see from the equity curve above, the strategy with a 25% win rate that returns 2R on each trade will simply never going be profitable, no matter what.
So how do you find a profitable trading strategy?
One of the great things about the markets is the fact that there is plenty of ways of making money, and there is no right or wrong way to do it.
You can trade crypto, forex, indices or stocks focusing on day trading, swing trading, or simply investing using technical or fundamental analysis.
I know people that are profitable using simple price action, indicators, or complex orderflow tools.
You need to find your niche, something that works for you and fits your personality and, most importantly, stick to it rather than jumping from one system to another.
Once you find something that works for you, you can either backtest it or forward-test it with a small amount of money.
Backtesting is the more popular method amongst the trades, I would say backtesting is fine, but your approach has to be 100% systematic, so there will be almost no room for subjective data interpretation.
Forward testing can take quite some time, especially if your trade frequency is lower, but you will get more realistic results from your data before deploying more capital.
If you are clueless about your edge and strategy, you can find some different techniques covered inside the blog, or you can pick up the Tradingrioot Bootcamp, which breaks down my whole trading approach across different markets.
There is an article on the website dedicated directly to building a trading strategy, which covers things in more detail as well.
No matter what system you end up implementing, your goal is to have 100% confidence in it and not doubt yourself during the trading day.
I personally forward-tested a lot of things in my trading. There is this saying you might have seen online that you need at least 10,000 hours of chart time to be confident in what you do. This is very much a truth.
Taking trades, journaling and analyzing different trading patterns will prove to be 10x more important than reading any book on trading psychology or trying to jump from one strategy to another after a few losing trades.
Realistic trading expectations
As I mentioned, risk management in trading really goes without saying.
The issue with a lot of people that are “greedy” and “over-leveraging” is that they are trading relatively small accounts and expect to make a lot of money quickly.
Unfortunately, social media, especially in crypto, paints this picture of coming into the space with very low capital and making it big in a short time.
You have to realize that for every success story you see online, there are ten, if not a hundred, people that lost everything trying to make it big quickly.
This equity curve above shows a strategy with 50% and 2.5 return on a winning trade.
As you can see, over the 100 trades, your account (compounded) would increase by 125%.
This is more than admirable, and using a strategy like this would secure you a long-lasting and profitable trading career.
But if you are going to take a look at the monetary value of the account, you see you made “only” $1,255 over 100 trades.
If you are an intraweek swing trader, these 100 trades could take months to execute.
All of a sudden, making a little over $1000 for several months of work doesn’t sound really good.
This is a main issue for newer traders starting with small account balances as they are unable to see the future and understand that trading is a long-term game.
This equity curve is plotted for the exact same strategy with a 50% win rate and 2.5R on each trade, but now we are starting with $150,000 and risking 1,5% on each trade.
Suddenly, a return of $338,802 over 100 trades looks way more attractive.
The bottom line is that you need money in order to make money in trading.
There is another (very dangerous) group of people that I would like to mention.
Those that come into trading after being successful in other ventures of their lives and funding their trading accounts immediately with large amounts of money without knowing what they are doing.
Without enough screen time and trust in your trading system, this can go very wrong as these people are not satisfied with starting slow and making just a few hundred dollars on each trade before building their record.
I know this is a smaller group of people, but I have seen several people blowing up over 6 figure accounts simply because they were not dedicated to submitting to a long-term trading process.
If you struggle with being greedy and risking too much money, you need to have a realistic look at your trading account; if you are under-funded, you need to either figure out a way how to increase your trading account (via other sources of income) or dedicate to a long-term game.
For those that have plenty of funds but not enough trading experience, you are playing a dangerous game, and you should really know your system in and out before putting more money at risk.
Trading as a business
As you probably figured by now, trading is hard.
What can make it especially hard is the fact that you are sitting in your room by yourself in your underwear for the most part of the day.
People often compare trading to a game, but in fact, trading is a business, and if it’s a game, it should be the most boring game you will ever play.
You should enjoy trading, I find trading challenging and exciting work, and I am constantly driven by the fact that I can make a lot of money in a very competitive field, but once the trade is on and money is at risk, I am not playing any games.
The minute you enter the position, you are just a walking ball of emotions, and it is very easy to make mistakes if you do not think every step ahead.
For every trade I take, I know exactly where I am wrong, how much money I either make or lose, how I will manage the position and where I will get out.
Trading can also be very time-consuming, and although making money is great, you don’t want to become a slave to the markets.
Not seeing your friends because you need to trade, waking up in the middle of the night to price alerts, and being unable to focus on anything because you have trade opened are bad habits that will catch up to you in the long run.
I am not saying that kicking these bad habits is easy, but you should work on them early on.
One of the things that will help is to focus on a routine-driven approach.
Although I can’t give you the exact layout for this, once you figure out the markets you trade and your strategy, you will know at what hours the markets are most active, how much time you need to enter the trades and so on.
If, for example, you are trading Nasdaq futures, there is really no reason to sit in front of charts outside the US trading hours.
If you swing trade on the H4 chart, you can make your market prep in the morning, set alerts and walk away, as your trade frequency will be much lower, and it will take some time for setups to form.
In the meantime, you can work on your edge or do anything else outside of trading.
Another thing why you should view trading as a business rather than a game is the fact that businesses not only make money but also lose money.
This strategy has a 40% win rate with a 3R return on a trade.
Starting with $10,000, you would make a whopping 240% over 100 trades.
There is only one small issue with this, during the 100 trades, you would experience eight losing trades in a row.
This doesn’t sound that bad on paper, but imagine you take two trades on average per week.
It means you would experience one whole month without single winning trade.
That can be hard to imagine, but it is quite possible to happen to every one of us sooner or later.
This was published by Tom Dante a while ago and can be quite a refreshing look into how many losers in a row you can experience, even if you are trading a highly profitable strategy.
What makes a good trader
I believe everyone can become a good trader.
If someone like me without any economic background from a middle-class family could do it, I’m pretty sure you can.
Although some peoples have qualities that are more suited to trading than others, trading is a skill, and as with any other skill, it can be learned.
In my eyes, a profitable trader is someone who can accept that they are trading in probabilities and focusing on a long-term game without dwelling on the outcome of every single trade.
You need to be able to embrace the unknown, be rational rather than stubborn and stick with your bias and have a healthy amount of confidence when it comes to your trades.
This article was not my attempt to trash talk trading psychology, but rather try to explain a lot of things that people describe as “psychology issues” that come from a lack of experience in trading.
If you are feeling strong emotions during trading, you either don’t know what exactly you are doing, or you are putting too much money on the line.
Trading is a long-term game, and it becomes much easier with experience and with your trading journal growing that can back up your trading ideas.
But if you are going to make silly mistakes, your trading account might not survive those hundreds or thousands of trades that will make trading a much easier and mechanical process without any bad emotions.