Trading Psychology | Why Normal Doesn’t Make Money | Part 1

Introduction

This tutorial is based on the first part of the trading psychology series titled "Normal doesn't make money" by Tom Hougaard. It aims to shift your mindset towards trading stocks and indices by addressing the psychological barriers that often hinder successful trading. Understanding and managing these psychological factors is crucial for developing effective trading strategies and improving your overall trading performance.

Step 1: Recognize the Role of Fear in Trading

• Acknowledge Fear: Understand that fear is a natural emotion in trading, often stemming from the risk of losing money.
• Confront Your Biases: Identify common biases that affect your trading decisions, such as loss aversion or overconfidence.
• Develop a Plan: Create a trading plan that includes risk management strategies to mitigate fear. This may involve setting stop-loss orders or defining your maximum acceptable loss per trade.

Step 2: Embrace Risk Management

• Understand Risk Tolerance: Assess your personal risk tolerance to define how much capital you are willing to risk on each trade.
• Position Sizing: Learn about position sizing to determine how many shares or contracts to buy based on your risk tolerance and account size.
• Diversification: Spread your investments across different assets to reduce risk exposure.

Step 3: Analyze Stock Charts Effectively

• Study Historical Data: Use historical charts to identify key levels where significant price movements occurred.
• Look for Patterns: Familiarize yourself with common chart patterns (e.g., head and shoulders, double tops) to anticipate potential market movements.
• Mark Entry and Exit Points: Clearly mark where you would enter and exit trades based on your analysis of these charts.

Step 4: Take Action Against Natural Biases

• Counteract Natural Instincts: Learn to recognize when your instincts may lead you astray. For example, the urge to sell a losing position quickly.
• Practice Discipline: Stick to your trading plan and avoid making impulsive decisions based on emotional reactions.

Step 5: Continuous Learning and Adaptation

• Stay Informed: Regularly consume educational content on trading psychology and market analysis to enhance your understanding.
• Reflect on Trades: After each trade, reflect on what worked and what didn’t. This will help you improve your strategy over time.
• Adjust Strategies: Be open to adjusting your trading strategies based on your experiences and market conditions.

Conclusion

To succeed in trading, it is essential to address the psychological elements that impact decision-making. By recognizing fear, embracing risk management, analyzing stock charts effectively, counteracting biases, and committing to continuous learning, you can enhance your trading performance. As you move forward, consider exploring the subsequent parts of this series to further develop your trading psychology skills.