Trading Psychology| 4 Things That Can Happen Trading Stocks

If you are like most traders, you probably look at your account each day and ask one question:

“Did I make money today, or did I lose money today?”

Unfortunately this (on it’s own) is the wrong question to ask. For this to be useful you need to also ask a second question:

“Did I follow my trading rules today?”

The simple question “Did I make money?” is not a good debrief question on its own, because there are actually 4 things that can happen to you in the market: You can…

1. Follow your rules and make money
2. Follow your rules and lose money
3. Break your rules and lose money
4. Break your rules and make money

If you follow your rules today then you should congratulate yourself and give yourself whatever pat on the back you like to use regardless of whether you made money or lost money.

Your profits on any one day are actually not a good indicator of long term trading success, but whether you followed your trading rules IS an good indicator of trading success.

How To Improve Your Trading Psychology

The real challenge comes when you have broken your rules… if you broke your rules today and you lost money, chances are you have already chastised yourself and sworn never to do it again.

But rather than just beating yourself up, a better approach is to pull out your trading journal and spend a bit of time looking at WHY you made the mistake…

• What caused you to be tempted to step outside the rules?
• How did you convince yourself that was a good idea?
• Was there something on the chart that made you uncomfortable?
• Is there an area of your system or rules that you are not confident in?

This is a very powerful routine because it allows you to identify when your confidence in your rules needs to be reinforced and gives you excellent areas to research and backtest.

Emotional reactions that come up in your trading are NOT the enemy!

They are actually a gift from the trading gods to help you improve your trading system and build your confidence. Confidence is the key to systematic trading profits… Confidence is what allows you to follow the rules even when things are hard. Read this blog post to see exactly how you can use your emotions to improve your confidence and your system.

Back to the initial questions, it is the forth scenario that you need to be most cautious of. If you broke your trading rules AND you made money, you are on very dangerous ground. You broke the rules and the trading devil rewarded you for it… it is his way of tempting you to keep breaking the rules, to keep going with your gut, to be influenced by your emotions.

In many ways this is what causes gambling addictions. The infrequent wins you get at the casino are intoxicating, and give you an endorphin rush that you are driven to try to relive. The random payoffs are addictive, and as traders it is very easy to get addicted to breaking your rules if you find yourself making money on a day you break your rules.

The ego will tell you that it was a good decision and you are an awesome trader and it was your sound judgement that lead to the win. In fact it was most likely none of that at all… it was most likely the pure randomness of the market that lead you to make money DESPITE breaking your rules, NOT BECAUSE you broke your rules.

There is a world of difference between these two things and from a trading psychology perspective it is an extremely dangerous situation. Getting a financial reward for going outside your rules is very addictive, and you won’t even know it is happening until one day when you break the rules and the market laughs at you while it empties your account… Maybe you have been there before?

This is why for all traders I suggest you do a daily debrief on whether you followed your rules today and not on whether you made money today. Following your stock trading system rules is absolutely critical if you are to have any hope of surviving in the markets long term.

Your Next Step to Improve Trading Psychology & Build Confidence

If you are breaking your rules then it means you lack confidence in the rules and / or they don’t fit you. In either case, the best thing you can possibly do for your trading is to join The Trader Success System.

In The Trader Success System you will learn:

• how to select the right trading system for YOU so trading becomes easy
• how to backtest it and build absolute, rock solid confidence so you can follow it consistently
• how to assemble a portfolio of trading systems so that you can profit from all possible market behaviours.
• and much, much more

If you are new to trading and you don’t yet have a trading system or trading rules, then The Trader Success System is the perfect next step for you too, because it will give you everything you need to become a confident and successful systematic trader and shorten your learning curve from 3-5 years down to just 2-3 months!