Is Trading Psychology Overrated?

Recently, I’ve been browsing through the forums, and I came across a thread discussing trading psychology and its significance to a trader’s success.

The main question that forum user pip_slayer1 asks is this: Is trading psychology overrated?

In this old man’s humble opinion, it isn’t, and I am in agreement with those who believe that trading psychology is what sets consistently profitable traders apart from the rest. I believe that a person’s ability to handle and overcome stressful situations, like experiencing a drawdown, having a losing position, and managing one’s greed, plays a central role in determining a trader’s success.

If you are not psychologically prepared to handle the stress that comes with trading, chances are that no matter how good your strategy is, you will not be able to execute it properly and will most likely see your account deep in the red.

As mikhail86 brings up, just take a look at the Turtle Traders’ experiment run by Richard Dennis and Bill Eckhardt. A group of traders was taught the exact same system, with the same exact risk management guidelines and principles. Some were very successful, while others floundered.

The difference? Trading psychology.

Some of the “turtles” were unable to handle the system’s drawdowns, or closed their trades early and were unable to maximize the best trade setups.

This is very similar to handing over the keys to an F1 car to a student driver and expecting him to carve the racing track like he’s Michael Schumacher. Even with a supercharged car, the student driver would probably lose a race to Huck’s broken-down Honda Fit as he lacks the mental fortitude to handle high speeds and sharp turns.

At the same time, we can’t overlook the importance of trading strategy. You may be the most disciplined and emotionless trader out there, able to stick to the plan and leave emotions at the door, but you’ll probably still end up in the red if the strategy that you’re following to a T is poor and not profitable in the long run.

The key is to find the proper balance between trading psychology and strategy.

Trading psychology may not be able to turn a losing system into a profitable one, but it can equip you with the right tools to develop a profitable system. Having the right frame of mind can provide you with valuable insights to tweak your trading approach to get better results. In effect, having the right trading psychology can lead to a better trading strategy.

Likewise, a lot can also be said about the positive effects a successful strategy can have on trading psychology. You may find that sticking to the plan and weathering drawdowns are much easier when you’re trading a tested and proven system.

The bottom line is this: To become a successful trader, you will need both the right mindset (trading psychology) and the right tools (trading strategy). Without either one, you’re bound to fail.

  • perezes

    IMHO psychology is crucial in determining one’s success. You can have the best system and lose if you have forgotten to learn psychological aspects of trading.

  • Joshua Pearce Gibson

    I find this article biased; Honda Fits rarely break down…. O.o

  • Moraru Cosmin

    You are also forgetting one aspect, that has a huge impact on everyday trading — H.F.T. (High Frequency TRading)

    certain companies are basicly, plugged right into the Stocks exchanges and run BILLIONS, yes BILLIONS of operations PER SECOND !

    they were responsable for the flash crashes we ve seen, and after reading an article in WSJ a couple of months ago, more and more big players are getting into this ,,game” of HFT

    that article in WSJ was about a Singapore trading company about to go HFT the very big style

    the new issue that no one at seem to wanna talk about, is how, day by day, bit by bit, the markets are becomming more and more disconeccted with the fundamentals

    tho flukes happen  (i.e. spikes in the wrong dirrection, contrary to any and all logic), when these flukes start happening quite often, it should ring an alarm bell to everyone 

    over the past 5 months or so, i ve been closely (more closely than usual anyway) watching every major (and lots of) minor pairs…. tho i didnt made a chart to upload, but i did kept a record of transactions and % wise speaking, the number of times when any decent and proven algortythm  (whether its Elliott wave based, 4hr based, day based, indicator based, news based etc) have failed, is nothing short of freightning !

    something along the lines of 1 success for 3 – 4 failures

    no, not mine ….i excluded myself from this little homework study.
    i counted ideas + some site which were well known for their sane and rational analysis + posts here about winning trades from individual not afiliated with etc

    in just, ignoring my study, all you have to do is look at a chart…just about any major (and allmost any minor too…) chart will do – starting from low time frames, aka 5 min, working your way upwards into daily even, there is no way you could miss the fact that 80% of the times, the charts look like the EEG (brain wave measurement in medicine) of a person having repeated  epilepsy seizures !!!!!!

    we re talking out-of-the-blue huuge 150 pips + spikes in the opposite dirrection of a trend, which by all algorytms, seemed to be going nice, despite the fact there was no red or even orange news, no meeting, no speech from any bank director, and in lots of cases, even no special news that day which might have accounted for this happening! 

    if i had just 5 $ each time i ve seen this happening in last 5 mo or so, i d be buying my MacBook Pro latest , with cash right now

    BOTTOM LINE:  tread extra-carefully!
       as markets become unplugged from fundamentals more and more, it gets akin to walking on moving sands, for the regular folks like us, who cant afford huge losses repeatedly

    • tradingwheels

      I just came across this and love the comments, however a few things to note in reference to Moraru’s.
      1 – Babypips is of course in the realm of the currency market.  Having said that, the majority of currency trading is not by algo’s, or speculators at all.. but by large corp, governments, etc.  So your article on HFT is probably much more relevant in other markets, but your comments on unsettled markets rings true — these are unsettling times.

      2.  Automated systems die.. and die fast.  Proven or otherwise the shelf life of one rivals that of a ripe banana.  If you can see that markets are not acting “normal”, its not a stretch to see any algo used in those “normal” markets wouldnt do well either.

      2 – large spikes in any market can help or hurt you (and be taken advantage of)… how you handle those (risk mngt / trading psy / etc)  is a different story.  just like an unexpected blown tire for the F1 driver above and all the other drivers in the same race –  (a’hem game).

  • sulaykaileana

    I think state of mind is very important. As in sports, you have to be focus when you enter the platform. Otherwise, you can have losses no matter how much psychology or strategies you have.

  • sulaykaileana

    How you make comments with your babypips ID? 

  • wirabayu06

    thank u Dr. Pipslow, I do prefer to rise my phsycological side than strategy. Maybe it just fit too my char and style….

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