Becoming a better day trader requires that you not only focus on textbook knowledge, but also on yourself. As a day trader, you are the independent driver of your own success. Often times, traders tend to focus solely on the market and forget that their own behaviors could be holding them back.

Trading psychology is centered around understanding the mind of a day trader. As I’ve mentioned in previous articles, you can’t control the market but you can control how you react to it. Studying and understanding trading psychology allows you to analyze your own behavioral patterns and make the necessary improvements. A focus on trading psychology, your behavior, and emotion is the ultimate compliment to market research, technical analysis, and tape reading. For example, after experiencing an outlier big loss event, you may find yourself asking, “What was I thinking? Was this due to the market or an extrinsic event during my day?”

The ultimate goal of all lessons in trading psychology is to help you become more self-aware. If you lack self-awareness, you cannot make the changes necessary to improve. Self-awareness can be challenging to master. After all, every trader has a number of different blind spots when it comes to self-evaluation. That being said, consistent introspection and objective self-analysis can help to pinpoint those blind spots and identify areas to improve upon.

When you begin to understand your strengths and weaknesses, you become more self-aware. Self-awareness is one of the most important concepts for a trader to master, as detailed in a recent article I wrote on the topic.

However, there are a number of other trading psychology components to strive for mastery in as well.

Know Your Strengths

Knowing your strengths is a crucial part of trading. It’s important to understand and focus on what you are good at so that you concentrate your attention in that area. For example, determine what times of day you trade best, what setup or strategy you are most successful with, which ticker symbols, etc. The best way to know your strengths is by keeping a highly detailed trade log.

Develop Confidence

Place trust in your strategy. With a proven strategy and the Law of Large Numbers (a probability theory) traders can rest assured that long-term results will be favorable (this concept is also sometimes referred to as a positive mathematical expectancy). However, all too often I have seen traders lose confidence after a few small losses.

Developing confidence not only removes some of the stress from trading, but it also allows you to become more competent. If you always feel like you are going to fail, you may create a self-fulfilling situation. Find your trading niche and give yourself credit when credit is due.

Know Your Weaknesses

Knowing your weaknesses is just as important as knowing your strengths. This is what keeps you out of trouble and allows you to preserve your capital. You wouldn’t enter a powerlifting competition if you’ve never stepped foot in the gym. The same logic applies to trading. Don’t put yourself in a position that your skillset is not equipped for, or one that you’re not familiar with. For example, if you tend to have a poor performance with a particular ticker, avoid it. If you always lose money when trading the first 15 minutes after the open, avoid that time period. Don’t waste energy and capital in areas that you knowingly do not excel in.

Know when to take a break

Day trading can be stressful. As day traders, we have the tendency to always want to be a part of the action - This anxiety is often referred to as the fear of missing out (FOMO). If you take a big loss, you will have the desire to get back into a trade and recoup the losses. In my own trading experience, this approach is usually a slippery slope to even greater losses. The moment you’re trading in a negative mindset (“make it back” mentality), you’re susceptible to greater risk.

That being said, needing a break isn’t specific to trading losses - There are other periods in a trader’s day where a break is needed. Successful traders know when they need to take a break or stop trading for the day.

Learn to change

Changing your behavior and potentially bad habits usually requires you to leave your comfort zone. If you want different results, you have to make changes - This is particularly true when it comes to trading, as strategies that work today may not work tomorrow. Use your trade log to identify trading behaviors that aren't benefiting you, and work on removing them. Old habits die hard, but this practice will give you the agility necessary to continuously improve as a day trader.

Furthermore, stay conscious to how life events outside of trading impact your performance. Adjusting your trading style to what your life circumstances allow is one of the most overlooked skills in trading.

Control your environment

Both physical and mental cues within your environment can have an impact on your trading. Do you know what your ideal trading environment is? This will vary widely for individuals. Some traders can handle watching 5 screens while listening to music, while others may prefer a more serene environment with a narrow focus. What is in your physical surroundings and in your mindset that will help you trade at an elevated level?

reduce stress

Trading on its own can be a stressful endeavor. While too much stress can be a sign that you are doing something incorrectly (sizing too large, trading without a plan, etc), it would be naïve to think that you can completely eliminate stress from day trading. That being said, there are good ways to manage it.

For example, a rules-based approach to trading can help to keep stress at bay. I personally use rules that are structured around my trading process. A couple of these include always trading with a plan, as well as following profit/loss guidelines to determine when to keep trading and when to walk away. Those rules paired with a handful of others has helped to create a structured approach to trading that reduced my overall daily stress in a tremendous way.

However, even with rigid structuring you can still find yourself in overly stressful scenarios. In those moments, consider stopping trading for the day, going on a long walk, or perhaps trying stress-reducing breathing techniques. Whatever the case may be, find a way to deal with stress so you can avoid trading in less than ideal conditions.

Pinpoint your emotions

I frequently discuss the importance of self-awareness for traders. A large part of improving your self-awareness is understanding the emotions that trigger your actions. You can’t diagnose a problem with your trading until you pinpoint its origin. For example, many new traders I come into contact with struggle with overtrading or chasing entries. What causes this behavior? Were you overly excited after coming off of a winning trade? Were you revenge trading after taking a loss? Did you make the decision out of fear (FOMO)? Use your trade journal to help you identify the emotion that triggered your behavior, then look for a way to combat this emotion in the future.

Develop a routine

The markets are chaotic. Becoming and staying organized is going to be key to the longevity of any trader. Develop a routine, and stick to it - This is part of every successful traders overall process. Not only does a routine provide stability, but it gives you a baseline to make future comparisons too. I can easily recall occasions where my morning routine was thrown off and it impacted my trading.

For example, let’s say you usually create your watch list the night before the trading day, wake up, workout, have breakfast and begin scanning for setups. If you have a day that strays from your normal premarket procedure, you can see if this may have influenced your trading decisions. Perhaps you didn’t sleep well and became more willing to take on unnecessary risk. Create and refine a routine that allows you to trade in the best conditions possible.

Challenge your ideals

We’re blind to some of our own behaviors. Occasionally, it’s important to challenge some of your own ideals and seek improvement. This is why a detailed trade log or trade journal and frequent review is so important. Don’t fix what isn’t broken - Instead, focus on finding areas of weakness that you were not previously aware of.

Conclusion

As mentioned multiple times throughout, one of the best ways to work on your own self-awareness and trader psychology is through the use of a trading log or trading journal. Additionally, are you utilizing social support and resources available to you (i.e. the Trader’s Thinktank)? Using a trading group to confirm that other traders reflect back to you that your decision making is prudent can serve as a key validation that your trading psychology is on point (or at least not far off base).

When it comes to trading psychology, there is no one-size-fits-all approach. Every trader is different and will need to take different approaches to understanding their own psyche. However, the end goal remains the same - Maintaining awareness of your own trading behaviors so that you can improve them in the future.