What’s More Important: Trading Method or Trading Psychology?

Ancient argument: What determines success in trading?

1. A successful methodology
2. Psychology and discipline

Answer: BOTH!

But this is not a “chicken or egg” dilemma. Clearly in this case method comes before psychology.

I don’t care how much self-discipline you have. If you don’t have a viable trading methodology, then you will lose money.

So method is more important.

Well, maybe “more important” isn’t the right phrase to use. But it definitely comes first.

The reason I say it may not be more important is because there are many valid trading methodologies available. Yet ironically, traders keep jumping from one method to another…

  • one indicator after another
  • one book after another
  • one mentor after another
  • one seminar after another
  • one theory after another

This is the infamous “search for the Holy Grail.”

Sorry…the Holy Grail doesn’t exist.

Like most things in life, people keep looking for the answer outside of themselves, when the answer was always inside of them.

Like Dorothy in the Wizard of Oz…you had the power all along.

Okay, we’ve all heard that the psychological aspect of trading is the key to success. But HOW do you tap into it?

There’s only one way I know.

Though the hard work and the daily drudgery of keeping a log of every trade you take.

By recording, and reviewing your every trade (along with the ones you didn’t take, but should have), you’ll learn more than from any book, seminar or video.

This feedback mechanism is the key to success.

The path to mastery is the same for every subject:

  1. You begin by adding. You need to acquire the information, the principles, and rules of successful trading.
  2. After you spend a long time accumulating all the information, then you strip it away. You simplify until you find an approach that works for you.
  3. Then you simplify further by eliminating your mistakes.

We’re not aware of how many mistakes we make on a regular basis until we keep a trading log, and then review it every day and again at the end of every week.

I haven’t met a trader yet, who following this discipline, hasn’t been absolutely amazed at what a large percentage of their trades broke their own trading rules (the definition of a “mistake”).

Beginners work on trading.

Masters work on themselves.

One of my mentors told me:

“Successful trading is simply a business of not making mistakes.”

That has become such a cornerstone to my trading that I framed that saying and put it on my wall over my flat screens.

Awareness is the first step.

One of the most productive things you can do to become a profitable trader is to make a list of your most common mistakes.

Then watch your behavior and don’t allow yourself to make those mistakes any more.

Each of us has her or his own challenges, so you must make your own list. But to get you started, I’ll expose my sins and share with you what have been my most common mistakes over the years. This is the official list of my own 7 most common mistakes. Perhaps you’ll find it helpful:

  1. Missing trades. When my setup occurs I need to make sure I’m aware of it and haven’t been distracted by chat rooms, email, phone calls or lulled into boredom by a consolidating market. I also need to make sure I don’t hesitate to pull the trigger when I do see my setups.
  2. Trading reversals that are not in extended trends and during which the internal market energy has not reversed.
  3. Trading only one time frame without the confirmation of a longer-term chart.
  4. Trading when I’m tired.
  5. Over trading. Never try to make up for losses or missed trades. Never trade out of boredom. Never take any trade that doesn’t match my rules 100%.
  6. Not taking profits on my first exit soon enough. It is critical to adjust my cost position in the trade and therefore keep losses small.
  7. Exiting my entire position too soon. I must keep at least part of my position alive until the energy of the trade has shifted so I can ride the big moves.

Well, that’s my confession. Now you know my sins, but I imagine they’re not so different than yours.

Have you committed these trading sins…or your own unique ones?

The only solution is to REPENT!

That doesn’t simply mean to say you’re sorry. It means to change your behavior.

Many people treat trading as:

  • An intellectual exercise.
  • A mathematical challenge.
  • A research project.

Actually it’s more about managing your behavior than anything else…of course that’s often the most difficult thing of all!