Day trading is more than clicking on buy and sell buttons for a few hours. Psychology plays a huge role in your success because your mind and emotions can get in the way of your profitability.
How? Impulsiveness, aggression, revenge trading, and other behaviors are just the touch of the iceberg of the many obstacles traders face.
Read on the find out more about trading psychology in day trading.
Table of Contents
The Most Common Emotions and Mistakes in Trading
Day trading seems like an exciting career for working just a few hours a day. However, more goes into this job than just looking at the charts. Let’s look at the most common mistakes day trader will encounter due to their emotions or missteps in their psychology.
Greed
Everyone wants to become a profitable trader but isn’t willing to be patient. Greed consumes many traders and is one of the main reasons why 99% of traders fail. Overleveraging your account is part of greed when you try to change $500 to $5,000 overnight.
It’s entirely possible to make huge gains, but only if you’re lucky with some experience.
Greed also trains your account and will cause you to waste money over time. For instance, novice traders start small, only to blow the account. Yet, it would make more sense to start with a more significant account and practice risk management.
Prepare to lose thousands of dollars if you do not get your greed under control. Pressure to succeed also contributes to greed, which is why you must approach trading as if it were in school getting your 4-year degree. Learn from the market, or it will teach you—at your own costs.
FOMO
The market will always have announcements, such as earnings calls, the Fed rate changes, non-farm payroll, and much more. Trying to trade and guess the market during these times will not be profitable if you do not know when to enter or exit.
FOMO was always a hip term with the youngsters, but it’s also prevalent in trading, which means Fear Of Missing Out.
As a result, the volatility of the market increases, and if you’re part of the trend, you can earn significant gains. However, the market isn’t always what it seems.
For example, it’s the New York session at 8 am, and you’re trading forex when the market opens. A little-known secret is that the stock market also moves the forex market, with 9:30 am boosting volume for USD pairs.
Suppose you haven’t entered the market and begin to see considerably large candlesticks moving in one direction. In that case, you may take that trade without analyzing and assume the market will continue with that trend.
Unfortunately, the price was reaching resistance, only to reverse once the stock market opened. Banks also open at 9 am, boosting volatility.
As a result? Your stop loss gets hit, and you lose the trade. The key is to be patient enough to wait for setups instead of trying to ride waves.
Revenge Trading
Over time, some traders start to think the market is against them. They’re on a losing streak and try to take from the market, only to continue losing.
Revenge trading will quickly deplete your account, faster than greed, because you begin to try and beat the house.
Some traders have a set amount of times they trade a day to avoid revenge trading or overtrading because the market only moves during certain times of the day.
It’s said that the market is 70% consolidation. Meanwhile, London and New York session brings the most volume.
If you lose during the NY session and try to trade during the Tokyo session to win back your trades when there’s no volume, you will not be successful. Only trade when there’s a profitable setup based on your trading strategy.
Nervousness
It’s okay to be nervous when you’re starting a new journey, significantly when it can change your life.
Many excellent traders don’t know they’re good because they are nervous about entering the market and possibly losing their money. Except, taking risks is part of the day trading game.
Day traders in the beginning also develop some trauma that causes them to be nervous. For example, once they enter the market on a bullish trend, suddenly, the trade starts to go against them.
After a while, you will begin to second-guess your entries and become hesitant to enter the market, only for the market to go in your intended direction.
The best way to overcome nervousness is to keep pushing and never give up.
Overconfidence
Let’s say you’ve started to day trade, and you understand the risk, have trading rules, and practice risk management.
This step is where other emotions, such as greed, can be mixed with overconfidence.
Because you’re eager to grow your account and you see you’re winning while making small gains, you may break your rules to try and have a huge winning day.
Even if you have a proven strategy, you can quickly turn a healthy account into an anemic account if you over-leverage or break your risk management rules.
One of the biggest lessons you’ll learn is not to be overconfident or have a huge ego, as the market will humble you.
Doubt
Trading is a difficult journey because it will make you question if this is the right profession for you.
Doubt will then creep in, especially if you’re losing or blow accounts regularly.
Especially on the charts, you’ll see a potential trade with all of your confirmations lining up, only to doubt yourself and your strategy. What usually comes next is the exchange going exactly how you thought it would.
Exiting a trade too early is part of doubting yourself, thinking the transaction won’t go a certain way, even though you have your confirmations. Always set a stop loss and take profit and let the trade play out.
Always apply yourself in trading as long as you manage your risk and trade during a high-volume session.
Impulsivity and Overtrading
Getting too excited can exhaust your account, especially if you’re erratic with your entries.
For instance, let’s say you’re trading GBPUSD during the London session at 4 am EST, which is when the market will begin to move.
However, the London session ends at around noon EST, with colossal volume coming in at the London-New York overlap, followed by the US stock market opening.
GBPUSD has been bullish, and you decide to take a buy after it has touched yesterday’s daily support. The trade is beginning to go your way after a few spikes, as GBP pairs always have some action to them.
However, you’re becoming a bit overconfident in your abilities and the trade itself and begin to add to your bullish positions. Your new entries are not as good as your first entry, and the stock market is about to open.
Unfortunately, the market spikes down, causing your trades to cancel each other out collectively. Your first trade was profit, only for your second and third trade to be in the negatives. As a result, you turned a winning day into a losing day because of overtrading.
Only take trades in high probability scenarios to avoid losses.
Analysis Paralysis
Day traders have a dilemma called analysis paralysis, which means you overanalyze to the point you don’t take a trade. You may overanalyze and think you don’t see a trade when it’s as simple as a price breaking and retesting a fundamental level.
Once you develop a strategy, you will learn your confirmations to take trades to prevent analysis paralysis.
9 Ways to Improve Your Trading Psychology
It’s possible to overcome all the woes of day trading in 9 simple ways, such as keeping a trading journal, managing your risk, developing a strategy, and more.
Keep a Trading Journal
A trade journal is a day trader’s best friend, as it tells you everything about yourself.
Use a trading journal to write down your wins, losses, how you’re feeling, and anything else that impacts your trading.
Some people draw in their trading journals to get a hands-on feel for the market, which can be beneficial.
Practice Risk Management
If you’re a struggling trader, the answer to becoming a profitable trader will always lead back to risk management.
Many traders don’t want to hear that they may have to grind for a few years to become profitable.
Most beginner traders will experience every emotion, only to realize risk management is the key to keeping your psychology at bay.
Have a Proven Strategy, Including an Entry and Exit Methodology
It takes years to find a strategy that works for you, which is why many people look to gurus and successful traders to find the holy grail.
The truth is, you may find a strategy that is unique to you. Test out indicators or try trading on a naked chart to see what fits you best.
A proven strategy will give you the confidence to enter the market and know when to exit.
Be Consistent With Your Trading Schedule
Novice day traders tend to be nervous when they’re in the unknown, but once you develop a consistent trading schedule, you’ll notice which times are the best to trade.
It’s more than just the London session or New York session. There are certain times of the day where you will gain profit.
Once you pick a window when to trade, such as 6 a.m. to 9 a.m. or 5 a.m. to 12 p.m., show up every day.
Focus on One Market at a Time
Day trading is more than the stock market. There is crypto, forex, NFTs, futures, metals, and much more.
Because it can be overwhelming, it’s best to stick to one market at a time. Once you become profitable, it will be okay to branch out and diversify.
However, beginners also make the mistake of trying to correlate markets together when they should just read and react to the charts.
For instance, because US30 is spiking down doesn’t always mean the USD in forex will have bearish momentum.
Transform Your Health
It’s true—keeping a healthy body also can translate to a healthy mind.
Mental and physical health can play a crucial role in your success. Keeping hydrated, eating enough, working out helps you to prepare mentally for the market every day.
Be Obsessive With Outcome, Not Money
Focusing on the money, especially as a beginner trader, is the worst thing you can do.
Be obsessive with the trade outcomes, such as earning 5% or targetting a 1:3 risk to reward ratio.
From there, you will begin to start winning trades without focusing on the money. The money will follow.
Develop a Winning Attitude
It may sound cheesy, but developing a winning attitude and being positive can help you overcome your psychological hurdles when it comes to trading.
However, a proven strategy mixed with a winning attitude can help you succeed since it boosts your confidence.
When you see your confirmations and the trade playing out, especially hitting take profits—there’s no feeling better than that in day trading!
Take What the Market Gives You
Accepting the market for what it is and how much it can give you will keep your mind at ease.
It’s why indicators such as the Average True Range is so powerful, as it gives you a realistic view of how an asset or trading pair moves a day.
Sometimes, the market consolidates and doesn’t give you anything. Just know that there’s always another day, and all you need is one day to make a successful week, translating into a successful career.
Final Thoughts
Trading psychology is all about keeping your emotions in check, as the market can make you do things you didn’t know you were capable of, such as impulsivity, greed, and gambling.
Use our tips to help you boost your trading psychology. There are also books on trading psychology. One of the best is called In the Zone by Mark Douglas.
Overall, trust the process, learn from your mistakes, be patient, and most importantly—don’t risk more than you’re willing to lose!