When I was a naive, newbie trader, I didn’t pay much attention to my trading psychology. I was more focused on the technical chart patterns and trade setups.
However, I soon found out the hard way that…
Ignoring the psychology of trading was destroying my trading results.
That’s when I began making a serious effort to master my personal trading psychology.
I started reading trading psychology books, and even worked with a personal trading coach.
I was definitely on the right path to mastering trading psychology, but wished I would have started learning sooner.
That’s why NOW is the perfect time to start getting your trading psychology edge.
But why is it important to understand stock market psychology?
Understanding stock market psychology paves the way for your long-term trading success.
That’s why this exclusive new mini-lesson of top trading psychology tips is just for you.
Some trading sites advise new stock and crypto traders to gain experience by paper trading with a simulated account.
This can be helpful to learn the basics of trading, but it’s a much different ball game when real money is on the line.
Your true emotions in trading will only be revealed when risking your own money with actual trades.
Therefore, the best way to develop your trading psychology is simply by working your way through hundreds of live trades with real capital.
Keep a basic journal and note when you feel the dangerous emotions below start creeping in.
This is the only way to truly identify your personal strengths and weaknesses in trading psychology.
Investing decisions in any market in the world are driven by 4 powerful emotions of Fear, Greed, Hope, and Regret.
Left uncontrolled, these emotions can have a seriously negative impact on your trading account—but only if you let them.
Your personal ability to master these key emotions directly determines your long-term trading success.
So here’s a quick rundown of how fear, greed, hope, and regret can harm your trading results.
Most importantly, I have also included actionable ways to avoid these emotions in your trading.
Fear is a distressing emotion caused by a feeling of impending danger.
This results in a survival response, regardless of whether the threat is real or imagined.
Traders consistently report fear as the emotion they struggle with the most. Fear has even caused people to jump off buildings during market panics.
It took the Dow Jones Industrial Average 24 years (1983 until 2007) to rally from 1,000 to 14,200…BUT it only took 2 years (2007-2009) to lose HALF of that multi-decade gain.
Why?
Uncontrolled fear rapidly leads to panic—which leads to poor decision making in the markets.
When traders become driven by panic, they often sell their positions at any price. That’s why stocks frequently cliff dive when group fear starts kicking in.
Fear can also rear its ugly head after you experience a string of losing trades. After suffering many losses, fear of “yet another loss” can make it mentally challenging to enter new swing trade setups.
When paralyzed by fear, you miss out on profitable trading opportunities.
If it’s a quality trade setup, then don’t let fear prevent you from buying (be careful not to confuse this with revenge trading).
Remember that each trade you enter is completely independent of the previous trade.
Therefore, losing money on a prior trade does not necessarily mean you will lose on the next trade.
Fear is not always bad, as it can help keep losses small.
For example, fear of a bigger loss can get you out of a bad trade you should no longer be in.
If you immediately sell your stock or crypto when it hits your preset stop price, then the fear of a bigger loss protects you from major losses.
When there is fear, steer clear!
If the market is in a state of panic, don’t fight the downtrend. If you’re in doubt, get out!
Don’t try to rationalize or come up with excuses to stay in losing positions beyond their stop prices.
HINT: Ignore the news and internet forums to prevent lame rationalizations for staying in losing trades.
When there is too much fear in the markets, our flagship swing trade alerts service simply shifts to cash until a new buy signal is received. This prevents fighting strong downtrends in unfavorable conditions.
Greed is an excessive desire for money and wealth, but is a natural human emotion.
A healthy amount of greed can help drive your trading profits, but too much greed will have the opposite effect.
How to know when it’s too much greed
Greed is when you have already made a large profit on a trade, BUT are still obsessed with how much more you could have made if you stayed in the trade longer.
The mistake with this reasoning is that all gains are not real until the position is closed. Until then, a winning trade is only a profit on paper.
Greed can also cause traders to make bad trades by ignoring solid risk management rules, which signals a lack of discipline in your trading or investing.
To keep greed at bay on a winning trade, sell partial share size to lock in profits, then trail a stop higher on the rest.
Proactive trade management like this is why our exclusive Wagner Daily stock picks have been consistently profitable over the past 20 years.
Hope, a feeling of anticipation and desire for a certain event to happen, may be the most dangerous emotion for traders.
If you are an active trader or investor, the feeling of “hope” in your day to day trading activities must be avoided at all costs.
Why is hope so dangerous for traders?
Hope may prevent you from immediately selling a losing trade that hits its stop price—which is the top rule with most trading strategies.
When you blow a stop, you will usually wind up with a much bigger loss than you planned to risk.
You may get lucky with a second chance to exit (especially in a forgiving bull market). However, this is definitely not a situation you want to be in.
A weak stock typically continues much lower before bouncing, which is why you must always honor your stops.
Otherwise, that’s when hope can really sneak up on you!
Hope will convince you to just “hang in there a little longer” because:
Meanwhile, while you’re busy hoping, the price plummets and has a catastrophic effect on your entire trading account.
Rest assured, the market will eventually punish you by taking your money when you slip into “hope mode.”
But the good news is that YOU alone can easily prevent this scenario from happening.
Simply always set protective stops to pre-define your maximum risk per trade.
Be rigidly disciplined to follow your trading plan, and hope will never become an issue in your trading.
Plan your trades, and trade your plan.
Regret is defined as a feeling of sadness or disappointment over something that has happened—especially when it involves a loss or a missed opportunity.
It is only natural for a stock trader to regret entering a losing trade or missing out on a winning trade.
But to master your trading psychology, do not hyper-focus on losing trades or missed opportunities.
If you lose money on a trade, then simply evaluate what went wrong, learn from it, and move on.
Don’t waste time regretting your original decision to enter the trade. What’s done is done.
Conversely, you may feel regret when you miss an opportunity. This is human nature.
However, you must train your mind to simply move on to the next trading opportunity—which is always just around the corner.
When you allow this type of regret to control you, it becomes too easy to “chase trades” with risky entry prices.
If you chase, your risk/reward ratio of the setup no longer meets the parameters of healthy trade management.
Let’s say you plan to buy $DUDE stock at a $60 buy trigger price, with a swing trade target around $70. If you buy it, you plan your initial stop at $55.
This gives you a 1:2 risk/reward ratio (risking $5 to gain $10).
$DUDE stock rallies, but you miss your original $60 buy and instead chase the price to an entry at $65.
If you don’t significantly raise your initial stop, you now have a negative risk-reward (risking $10 to gain $5).
In this case, your regret of missing the $60 entry caused you to chase it to $65 (next time, just wait for a pullback). Avoid feelings of regret to ensure the math of trading is always in your favor.
We always target a bare minimum risk/reward ratio of 1:2 for swing trades in our stock alerts and crypto alerts services.
Successful traders keep their minds disciplined to avoid remorseful thinking.
Any individual emotion above can negatively affect your trading performance—but only if you let it.
One way to maintain a healthy trading psychology is to understand market cycles that predict exactly when fear, greed, hope, and regret may arise.
Fortunately, human psychology is quite predictable and hasn’t changed much in thousands of years. As such, any financial market in the world follows the same cycle of emotions.
This predictability of human behavior in the stock market creates a roller coaster cycle that continually repeats.
Take a few moments to study the chart below and you’ll see what I mean:
When you feel fear may be getting the best of you, it’s crucial to immediately take some time away from the market (set stops first). Don’t risk your hard-earned money when your trading decisions are driven by fear.
Keep greed in the backseat by locking in partial profits of winning stock trades along the way. Never let greed be the reason that a big winning trade turns into a loser.
Stay disciplined by ALWAYS following your trading plan to keep losses within acceptable limits. By honoring your stops, you don’t need to worry about hope (your imaginary friend) tricking you into stupid rationalizations.
Every swing trader hopes that a losing trade will somehow become a winning trade, but stock markets are not a charity. Remember that any market is a group, which could not care less about what you as an individual “hope” for.
Avoid regret in your trading by having a “no chase” rule. The temptation to chase goes away if you have a rule preventing it, and feelings of regret will quickly fade.
Simply knowing these 4 emotions are always lurking in the dark is a fantastic first step to gain your trading psychology edge.
Focus on trading psychology exercises to master your discipline and ensure your best possible trading psychology.
Above all, slow down and trade with a clear head. Remember the markets will always be around to present you with the next opportunity.
You’re now armed with powerful, actionable steps to improve your trading psychology—the rest is up to YOU!
Yours in success,
Deron Wagner, PhD (h.c.)
founder | MorpheusTrading
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“The Morpheus Team has taught me to not stray away from my discipline. Also, keeping losses small and proper position sizing is key.”
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View Comments
i suffer from all of the above. thanks for the article.
now to start working on it tomorrow first thing.
@Stanley - Glad you liked the article. Just let us know if you have any more questions after you start focusing on improving your trading psychology