There are two parts to trading psychology that when understood lead to better trading decisions.
First let’s look at the outside. The market itself is not an objective, rational Spock -like machine. The markets are made up of the emotional decisions and inputs from an aggregation of millions of humans.
The good news about this is that the human brain operates much the same way for most humans. The processes and patterns that it generates can be seen in charts of most asset classes. So to be clear, what we are really trading is not the reality of the underlying asset class, but patterns of human decision-making that are skewed by the the brain biases.
So what we are really doing as traders is to use trading psychology as a way to elicit brain patterns of our fellow fallible humans as a way of creating a predictive edge.
The more we understand the markets as a reflection of trading psychology, the more we are able to view the patterns that it creates in a proper context. Now we are able to connect that context with the reality of the market drivers, the human condition.
That said, the more critical piece in successful trading is to understand the inside, or our own psychological state of mind. It is been argued that our own state of mind is anywhere from a 25% to 100% contributor to trading success. In my model of trading psychology, I prefer to think of our own internal state of mind closer to the 100% contribution.
In order to survive in the world, our brains need to take an immense amount of information filter, categorize, compress, and take shortcuts to be able to manage the information. Because survival depends on making decisions, we can’t make decisions with an infinite amount of information. Thus before we even start the decision process our reflection of reality is already significantly distorted. So our own psychological state and how we manage this information becomes a significant impediment or tool depending on our own self-awareness.
In my model of successful trading we can improve our results significantly by first understanding the psychology of the markets. In this model we shift fundamental information from supply and demand to the psychological and emotional inputs from the market players. Then we look at our own psychological states to be able to handle this new fundamental information and own decision processes in order to improve our trading results.
Needless to say the skill of market awareness as a psychological phenomenon, and personal awareness in real time of own psychological states is a lifelong journey. These are not easy skills to obtain. However it is much better to work on the right hard problem than to work on the wrong hard problem. Simply understanding that this is our job as traders in and of itself is a huge step in the right direction.
Mind Muscles for Traders Trading Psychology Courses 