Trading Psychology – 11 Traits that Separate Winners from Losers

Oct 11, 2021

Written by:
Al Hill

For may, trading can be one of the greatest personal endeavors a person can take in their life.  This is mainly because of how difficult it can be at times and how all-consuming it can be as well. Yet, despite the difficulties, the rewards can be great — and not just monetarily. It is one of the few professions in which success is correlated to who you are and what you think of yourself. And this is why trading psychology is paramount.

Throughout this article, we’ll walk you through various aspects of trading psychology and how a winning attitude can lead to greater profits.  While our list of 11 tips isn’t exhaustive, it reflects some of the more salient advice that separates winners from losers.

1. Avoid Analysis Paralysis

More often than not, new traders don’t know where to start. Most start out soaking up any information they can get. 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 you might call your foundation for trading.

Next, you will take this newly found information into the world of the market and try to apply it. 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 someone broke your heart or the disbelief you had when you heard at school that Santa didn’t exist after years of believing the cookies and presents were real.

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. Is is usually at this point that you begin to realize the importance of trading psychology.

Get Beyond the Hard Part

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. You’ve just spent hours, weeks, or months researching a system. This system 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.

At some point in your progress, 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.

The Solution

It may sound cliche, and we are not one to tell you to stop “learning,” per se, but less is usually more. Learn all you can, but condense the strategies you learn into categories that work for you, your personality, and your personal schedule. We discuss this more in depth in a recent article on discovering your edge.


2. Accept that the Market is Random

Understanding that the market is random is a key tenet of becoming profitable. 

Mark Douglas trading psychology quote

You can do it all in terms of predicting the next action of the market: Elliott Wave, harmonic trading, point and figure, classic breakout estimates, etc. At times the market will adhere to your analysis, which will make you feel a sense of control.  However, there will be just as many times when the market will pass through your plans and key levels as if they didn’t exist. 

The longer you play this game, the more you’ll realize that your analysis does not exist anywhere else but in your head. The only reason the market responds to your analysis is based on whether or not the other active traders who can influence the move of your stock are on the same page.

It Only Takes One Trader

One trader with enough capital can 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?  First, don’t think we are discouraging you from doing technical analysis. Right the opposite in fact. However, the point being made is that 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.

Once you understand that this is all a game of probabilities, but outcomes are random, you’ll find that successful trading psychology and mindset is much easier to embrace.


3. Review Your Equity Curve

Junior traders spend a lot of time analyzing their individual winning and losing trades looking for some sort of insight that will help them crack the code. Perhaps choosing a different moving average or cutting losses earlier would have helped you in hindsight. These all are helpful things when developing an edge, but how would this impact your trading psychology?

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

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. To that point, if you plot your equity curve, you will see some of the same patterns that you see in price charts.

The Endless Cycle

How does your equity curve look? Is it a nice steady trend upward? Or does it look like a roller coaster ride?

TradingSim analytics equity curve
TradingSim analytics equity curve

Chances are that if your equity curve isn’t a slow and steady march higher, you’re struggling with risk management. Every time you have a big win, you risk more and take a big loss.

Fear and Risk Management

After some healthy losses, you fear you’ll somehow lose money and begin to trade so conservatively that you slowly erode any gains you could have had when it was time to trade aggressively. You hesitate, you’re scared to pull the trigger. You begin to doubt.

In other words, you enter a vicious cycle of boom and bust to the point that you are now traumatized to pull the trigger. Obviously, this shouldn’t be so.

We discuss this more in depth with some great tips and tricks for how to overcome the cycle of overtrading in this recent article. Suffice it to say that the answer to this is very much dependent upon your ability to trust your system. As Mark Douglas advises in his seminal book Trading in the Zone, whenever your edge is there, you have to take it.


4. No More Tips

The internet provides 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, we are educator-agnostic. We like to provide material more general in nature since everyone’s system is different. We never know what the market is going to do next.

Follow as many gurus or methodologies as you want, but know that each method will tell the same story but with a slight variations. It is up to you to become self-sufficient in the market.

Heck, even some of the best gurus warn you not to “follow” them into the markets.

Too Much Noise

There is a time when following and studying and education is paramount. There is nothing wrong with picking up what works best for you from all the influences you trust. However, at some point, you’ve got to generate your own ideas, trust your own instincts, and believe in yourself.

If you find yourself confused in the markets, it’s probably time to audit your current trading. Ask yourself whether or not you’re allowing other market participants to sway your decisions. If you can answer yes to that question, make some changes. Mute some people on twitter if you have to, set solid goals, and stick to your own plans.


5. Truly Accept the Risk

How many times have you sold your position before the stock hit your stop loss level? If so, why did you place your stop loss order to begin with?

Perhaps you reason it’s because the stock isn’t “acting” properly.  Sure enough, at some point, your wise decision to cut the trade occurs 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.

Jesse Livermore quote on trading psychology

Until you truly learn to 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. Pay Yourself Along the Way

What is your trigger for exiting a trade as a winner? How exactly do you book profits?

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 an almost 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 being over, we held on for what we expected to happen.

This crucial mistake meant that instead of coming out ahead more than 1M, we lost 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.

As the old saying goes, “if you don’t take your profits, someone else will.”


7. Recognizing When You Are Wrong

Remember, the market is completely random. Understanding when you are wrong is something you need to define. Accepting that you will not always get it right will save you all sorts of time and money. 

For some, it’s simply a matter of a number of risk to reward units. If you want employ a risk/reward strategy of 1/3 for a certain setup, then stick with it. You’ll hit that 1 risk unit a lot. But as long as your winners hit the 3R reward unit that you expect, you’ll come out alright.

It is this systematic approach to thinking about your strategies and your probabilities that will help you accept when you are wrong instead of “hoping”.

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

Again, this goes back to understanding that trading is a game of probabilities. As we discussed earlier, you may find yourself in a place of trauma after suffering losses. The reason you’re in this traumatic place of hesitation in the first place is because you didn’t manage your risk properly, or you went against your rules.

The market doesn’t care if you just lost a lot of money. It will present opportunities whenever it wants to. In order to be successful at trading, you have to be able to reset and take the next trade that fits your A+ criteria.

You never know when the next big trade is coming down the pipe. And, usually, the market confounds the most people most of the time. As you lick your wounds, keep this in mind.

Just Take the Trade

If your system presents opportunities that fit your trading parameter, you need to take them on a first in first out basis because there is no benefit in further analyzing the stock. Otherwise, you’ll create a tense situation for yourself in which you’re unable to make a decision.

A good way to eliminate some of the tension is to create a check list. These can serve as reminders of your ability. Here is an example of a checklist we created to help with anxiety or hesitation before trading. Feel free to create your own!

TradingSim Daily Anxiety Checklist

Taking every opportunity as they are presented allows you to trade in harmony with the market and not overthink the trade.  This means you are 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 produced enormous gains over the years. Many took a few thousand dollars and turned it into 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 go wherever it must.

Likewise, if the system isn’t sending buy signals, they sit on their hands until it does. Patience. It’s in knowing that your system works, and not putting limitations on it that you will eventually find the gains you want. In essence, the discipline to stick to what works and shed the randomness take a lot of the mystery out of trading psychology.


10. Self-Reflection and Self-Love

Never be too proud that you are unwilling to point out your flaws. Analyzing your mistakes in the market can be therapeutic. It also forces you to realize that your issues have little to do with your system and more around how you mentally approach the market. In other words, it helps you discern and master your own trading psychology.

Reviewing your equity curve and keeping a trading journal will help you navigate times when you fall off the rails.

If we can use our losses to study our game in greater detail and make incremental improvements in our processes, then those losses are no longer threats.  They are our teachers.

Dr. Brett SteenBarger ph.d.

On the flip side, if you approach the market from a negative perspective or are too hard on yourself, you will lose money. Be sure to give yourself a high five every morning before you start trading, regardless of your outcomes.


11. Develop a Winning Attitude

Putting together a string of winning trades does wonders for your mindset. 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. Moreso, you make yourself available to those opportunities with positivism.


In Summary

Understand that winning at trading has little to do with your system, trading equipment, or internet speed. It comes down to whether or no you can accept full responsibility for your trading results. Do you accept the fact that the market gives you what you are willing to receive? Do you believe in the concept of probabilities and that you do not have to be right on every trade? 

The quest for finding the trading zone and staying in it never ends. So, remember to have fun along the way.

For more great content, interviews and trading psychology help, be sure to check out the rest of our blog. Follow us on Twitter and YouTube to stay up to date with new material!

Tags: Trading Discipline, Trading Psychology

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