I’ve read a few option books.
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Tuesday, July 24, 2007

Why Trading Psychology Is Very Important

When ones start learning about trading, normally they will focus more on learning trading set-ups, entry and exit strategies, and spend less time on studying the psychological aspect of trading.
Until they started real trading, they will realize that trading psychology is in fact one of the most important aspects for trading success, because it concerns the most crucial part of trading – the trader itself.

People can learn the same, best trading system. However, the results can be different. What makes the results different from the same trading system is the trader as a part of the system. Trading psychology is what differentiates winners from losers, even from exactly the same system.

I remember a quote I read from Jake Bernstein’s book "Momentum Stock Selection: Using The Momentum Method For Maximum Profits":

The best trading system in the hands of an undisciplined trader is a losing system.

I personally think that discipline in trading is much more difficult than discipline in normal daily life. Ones could be very discipline in daily life, but they may fail to instill discipline in trading because there are 2 monsters inside them that can greatly affect their normal self: FEAR and GREED.

I also think even extremely logical and discipline persons in a normal daily life may turn to be illogical and undisciplined, when they are facing these two monsters inside them. Yes, dealing with one’s emotion in terms of fear and greed in trading is really not an easy thing to master at all. Why? Because you’re risking something that is precious to you: your hard-earned money.

It will be a different story if you’re not trading with your own hard-earned money at risk. As discussed in the previous post, this is also one reason why some people argue that paper trading is not the right way to learn trading.
One can be very profitable in paper trading, but may lose money in real trading. Why? Because one disadvantage of paper trading is that it does not involve the emotion, fear and greed, etc., which actually plays major parts in trading success.
Therefore, Dr. Alexander Elder in his book "Come Into My Trading Room: A Complete Guide to Trading" also suggested to learn trading by putting on very small real trades. Because real trades, although it’s very small, it still engages emotions.

The essence of this article:
Never underestimate the importance of Trading Psychology. Trading is the biggest battle against your most difficult enemy: your own emotions. If you want to win the battle, you have to conquer this biggest enemy of yours.

I’d like to end this post with the following quotes:

The real reason so few succeed in trading is because the traits required for success are almost exclusively psychological.
(Gary Smith)

I haven't seen much correlation between good trading and intelligence. Some outstanding traders are quite intelligent, but a few aren't. Many outstanding intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important.
(William Eckhardt)

Related Posts:
* Why Being Right In Your Trading Does Not Necessarily Mean Making Money
* The Psychological Need To Be Right vs. Making Money
* The Fear Of Losing Money
* Trading System: What Is It and Is It Important?

You might be interested in the following topics:
* Learning Candlestick Charts
* Learning Charts Patterns
* Options Trading Basic – Part 1
* Options Trading Basic – Part 2
* Understanding Implied Volatility (IV)
* Option Greeks