Day Trading Psychology: You are Both the Problem and the Solution

Humans are not automatically programmed with the right mindset for successful trading. We have to constantly work on maintaining an objective focus. The problem is that most traders enter the market without understanding, or choosing to ignore, the true importance of trading psychology. I suspect this is the greatest cause behind the statistics that 95% of day traders lose money.



Interestingly, the majority of successful traders in the other 5% have various backgrounds that would strike an interesting dialog. Most do not have advanced education. Many have actually dropped out of college or even high school. This proves that you don't necessarily have to have advanced degrees and be well education to trade well. Contrary to what most people think, trading does not have as much to do with what you know about the market as it does with how you handle your personal decisions and exercise judgment.



Our minds are programmed to make decision based off of our emotions, and then identify reasons to justify our decisions. An example of this is a man who walks by his dream sports car. As he imagines the thrill of driving his dream car, he decides he is going to buy it… only afterwards convincing himself that it will get better gas mileage than his SUV, has the manufacture warranty, receive free oil changes from the dealership, etc…



Emotionally based decisions in the markets will be destructive to your account. And if the emotional trader doesn't recognize where his barriers are hidden, he will blame his strategy, the market, his computer software, etc. The truth is for most that "you" are both the problem and the solution.



Just like the high risks of physical injury in extreme sports, trading involves high risks of financial injury. Although the difference between extreme sports such as hang gliding and day trading is physical and mental, people still feel the adrenaline rush, euphoria, and stress that come with both. Additionally, in both activities there are guidelines and procedures that reduce the risk of injury. By taking measures to reduce one's risk, the participant will gain a greater sense of accomplishment and a greater sense of control.



If a trader can learn to keep his or her emotions in check, making decisions based on objective analysis rather than the strings attached to their emotions and money, they will have conquered the biggest battle of becoming successful in the market. Always remember, you are both the problem and the solution.