It is entertaining to me to watch the shifts in sentiment among young traders regarding this topic. A new trader does not think at all about psychology, but gets shafted because he has a poor system. Then he reads about successful traders battling psychology, and he believes that psychology is now the sole key to success, and he will forget about system development and focus only on psychology. He will still lose, because the same problem exists now as it did when he was newer: which is that his system just plain old sucks. So then he finally figures that out, and decides that psychology is not all that it is cracked up to be, so its back to the drawing board looking for the perfect entry grail.
From a trader who has been there and done that, let me run through some of my thoughts. First, I dont think that a new trader needs to worry much about psychology. I am talking about the baby trader. What this trader needs to focus on are the basics and mechanics of the market in which he wants to trade. Learn how to use a trading platform, what market vs limit order are, the value of a stop loss, etc. He should spend some time in front of a chart as he is learning all of this to see some of it in action.
After that, it is time to speculate. Two seconds later he will realize that he sucks, and wonder why. Of course he will blame his system, but it is also important that he gain a basic understanding of money management, specifically the dangers of over trading and the cost implications, as well as the importance of cutting losses and running profits. At this point psychology is still not important, because as he solves the money management problem, he will be trading so small (or not live at all), that he will be pretty mechanical and unemotional about trading. Which is good.
Many years later, if he ever even makes it to this point, he will begin to profit consistently. The natrual result is that before he knows it, he will be trading larger sizes.
But a strange phenomena happens as trading size increases, and you guessed it, psychological factors begin to kick in. It can be easy to tame the fear/greed beasts as a baby, but as the account grows, so do those feelings. (As a side note, everything gets amplified once the step is taken to trade for a living.) It IS possible to over come those feelings. In fact, I should say, it is NECESSARY to over come those, but it is not easy. However, psychology extends beyond the open and close of a trade. Let me elaborate:
First, your trading habits can change. Lets say you have a great string of winners, and you make $50,000 in a month. If you are not used to swinging those kind of lines, or more so you are not used to having $50,000 fresh in your account, then you will be tempted to "spend" the money until your account resembles something more psychologically comfortable. If your psychological comfort level exists around $20,000, you will be surprised to notice your trading habits will change until your account matches that level. Think supply and demand, where equilibrium is fixed and demand will adjust to dampen supply. Same thing happens to lottery winners or homeless people when they are quickly elevated in monetary success. They end up losing everything they had because they just could not handle the money. You cannot understand this principle fully until you experience it first hand, but don't worry, many of you won't.
But where psychology changes outside of trading comes after that. Consider when you just made or lost the equivalent of a new car in 1 hour. The first time you do that can be scary shit, and what can happen is that you can easily begin to compare the win or loss you just had with something in real life. Over a long enough period the values you hold for material items will decrease not just because you are making money but because that $900 flat screen doesn't look so expensive when this morning you just risked $5000, lost $2500, but ended the week $10,000 in profit. This mindset can also lead to financial ruin.
So anyway, I know a lot of these are abstract statements that can be hard to truly understand, but I just want to add a different perspective about how psychological fortitude is an essential in trading. If you think otherwise then later in the game you will have a very hard time. My belief is that psychology has its place in trading, but that it usually gains more importance later in trading, and eventually extends beyond the trade.
http://www.forexfactory.com/showpost.php?p=2791750&postcount=17
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