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Why Trading Psychology Matters

The market reflects the actions of its participants and those actions are influenced by what everyone is thinking. Consider how you think about trading and how that can support and or impair your actions.

It is easy to get caught up in the excitement and activity of trading. Finding trades, learning trading platforms or tools, and searching for information on the internet are just a few of the ways in which we actively engage in trading. In this rush of “doing”, you may miss an important exercise: reflection. The way you think about things like risk, rules, and planning will impact your trading actions. For example, think about how you acquire and internalize information. Do you bounce back quickly or do you dwell on setbacks? How do you make entry or exit decisions? Each trader will have different answers to these questions because everyone has a certain level of emotional response when it comes to their money and finances.

Trade plans help take some of the emotion out of trading, however even the best laid plans can be eroded by emotion and impulse. Understanding some of these psychological challenges is an important part of managing yourself while you are managing your trades.

It’s also vital that you can recognize if you come to a point in your self-directed trading where you are becoming concerned about your performance or aren’t comfortable with the approach that you’re taking, At times like this you should pause and reflect on your goals and approach, and perhaps consult with a Schwab professional who can help you reflect and understand the options that are available to you.

Taking inventory

As you engage the markets, you will learn things about yourself that may surprise you. A central challenge of successful trading is identifying those tendencies, attitudes, and behaviors undermining your trading objectives. There is usually a gap between how we actually do things and how we think we do them. In order to make any changes, one needs to measure this gap and then build a plan to close it. This process begins with a realistic assessment of where your trading is right now.

This inventory will be your foundation for setting realistic trading objectives and then making necessary adjustments. Trading psychology is an important part of this plan. Many traders have gone through past trades and found that the trouble was not with how they first planned the trade, but in their failure to execute on their plan.

Market stimulus and trader response

Psychology has been described as ‘the study of stimulus and response.’ In the field of trading, the market offers the stimulus and the trader responds. The job of a trader is to anticipate the stimuli for a trade and be prepared with an appropriate response. What will I do if it goes up? Down? Sideways?

Remember, your response can still be appropriate even if the outcome is not what you wanted. A good example of this is closing a trade for a small loss before it becomes a big one. It is also important to remember that whatever the market may bring, we almost always have a choice about how we respond.


In trading and life, some things work and others do not. Trading psychology is about taking inventory of both and making adjustments to improve not only your performance, but also to enhance your experience along the way. The primary objective of trading psychology is to help you stick to your plan. It is hard to reach your destination without it. It is said that ‘luck is when opportunity meets preparation’. Trading psychology helps the mind prepare to meet both the market’s opportunities and its risks.

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