Importance of Trading Psychology

A short story explaining the concept →

Hey there!

Today we’ll not be talking about a trading strategy… Rather, we would like to share an interesting story!

There was once a flight named ‘Airbus A380’ which was flying across the Atlantic Ocean at a 35,000 ft. altitude and with a speed greater than 800 kmph. Suddenly, a Fighter Jet came near the Airbus.

So, here’s the conversation between the two pilots - Pilot 1 was flying the Airbus and Pilot 2 was flying the Fighter Jet.

Pilot 2: Would you like to see something interesting?

Pilot 1: Sure!

(The Fighter Jet pilot began to fly the Jet rapidly demonstrating various stunts)

Pilot 2: Did you see it? How was it?

Pilot 1: It was awesome. It’s very hard for me to do any of these stunts but let me show you something.

(Pilot 1 switches off his radio and disappears for some time. Pilot 2 was patiently waiting for him to do something. Meanwhile, the Airbus was moving at the same speed and altitude.)

Pilot 1: Did you see what I did?

Pilot 2: No, I didn’t see any difference. It was going at the same speed, at the same altitude. What did you do?

Pilot 1: What I did was, I stood up from my place, took a washroom break, had my coffee and cake, and came back to my seat. And still, I am going to reach my destination at the same time. I’m sure this is something you’ll never be able to do…

The above example teaches a very important lesson…

The major difference between a successful and an unsuccessful trader is the right mindset.

Let’s understand the importance of trading psychology with the example of Jenga blocks. The Jenga pillar is divided into 3 segments - trading strategy, money management, and trading psychology.

Most traders will give importance to trading strategies and directly start learning those strategies as they believe that successful traders have some ‘secret trading strategies’ up their sleeves.

If we remove blocks from the trading strategy or money management section, the pillar stays still. But if we take out the block from the trading psychology section, the pillar will fall…

This shows that trading psychology, i.e., the bottom-most block forms the foundation of the pillar.

Successful traders have control over their emotions and always stick to their rules. For example, a successful long-term investor will not sell their position in 3 months only because the stock is showing a downward short-term trend. On the other hand, an unsuccessful trader might exit before time due to fear.

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