Why Trading Psychology Is Important
What has trading psychology got to do with it?
Ask yourself, why do some people succeed trading commodities while others do not seem to be able to make any money?
Even when two trades are using the same trading system and are given the same information, one can make profits while the other suffers losses.
This is where no amount of individual intelligence or even determination can make a difference.
You can now subscribe to the free Commodity Universe Ezine below, and get the latest articles on the commodity sector . Just your first name and email. It's as easy as 1-2-3! As Dr van Tharp points out in his book, trading psychology is the most important factor for success when you enter the commodities market, whether going long a Nymex gold futures contract or tracking a crude oil ETF.
So what is this key element? In essence it amounts to how you as an aspiring trader or investor can cope emotionally with all the factors involved in the process of commodity trading.
Are you as a trader going to be affected by the emotion of greed or fear of loss? Perhaps you are proud that you are making significant profits on a particular trade.
So you refuse to exit when the trading system you are using is screaming “sell”. Instead you think the retracement is a small deviation and it will recover.
You sit at your screen in denial, your potential profit is being reduced, and as you didn’t put a stop loss in place, you could move into a loss.
As you sit glued to the chair the profit figure on your trading platform is getting smaller and smaller, so what do you do?
Still you sit there hoping for an upswing, suspending the trading system rule that said exit, so you can make even bigger profits.
This is a classic case of your emotions taking over from the rules of your trading plan. This is irrational behaviour and of course it is just natural part of psychology as a human being.
Otherwise new traders can find themselves wiped out within the first few months of entering the commodity markets. The best way to prevent the negative emotions of greed and fear of loss from taking over your decision making process is by developing a strict trading discipline. Your trading psychology has to allow the predetermined rules about exiting the trade to be put into action. Of course, if you have a stop loss in place which you have moved up to lock in the profits then this will be fine.
If you are to be stopped out, then just let it happen, whether for a profit or a slight loss. But moving the stop loss away to accommodate a correction and stay in the trade is definitely to be avoided. Give yourself breaks from the trading platform screen, drink more water and go for a walk and stretch your legs. Combine the trading system rules with a clear head after a suitable break so that your mind is sharp and you can take the right decision free of emotion. In the fast moving markets of futures trading or if you trade contracts for differences, the need to bring your trading psychology under the control of your chosen system rules is ever so important if you want to be successful.
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