There is a great paradox in the trading market. Trading can be simple, which many experienced traders refer to their trading approach as very simple - such as connecting two dots with a line to know the HH or LL to understand the trend. However there is a catch to it, as what is simple, does not mean its easy.
Psychology is a part of traders education which is usually put off until later. It is only after a certain amount of struggle and losses that traders realize the importance of psychology in trading. There are two sides to the psychological aspects. First is defensive, which is avoiding incorrect mindset and putting oneself in the right state of mind necessary for successful trading. The second side, is offensive, which comes into play with experience when a trader is moving to a more advanced level when he can act with certainity in uncertain environment, be able to think in terms of probabilities, be able to accept risk, and reverse many of the reactions habitual for human beings including suppressing the ego.
In other aspects of our life, we are taught to influence the way things go. We convince the people around us, we argue and defend our position. In the external world, to be successful, we try to change the things around us, to make things work and to lead. In trading however, it does not work that way. Any attempt to impose our opinion on the market will lead to destruction. The key to successful trading is listening to, and following the market. Thinking and acting in this manner, we forfeit our ego, accepting that if the market does something opposite to what we expect, we are wrong.
When we accept the thesis that the market is always right, we accept the idea that there is no place for emotional response in trading. We simply need to internalize the thought of necessity to follow the market's lead and execute decisions accordingly.
We are accustomed to having a certain safety net in many areas of our life, such as health insurance, and warranty for purchases. This environment is friendly. However in the market, we face an environment with no mechanism for protection when we are wrong (other then our SL) No one is going to stop you from making an error or compensate you for poor judgement. So being humble towards the market, fully in control of yourself, taking full responsibility for your action is the psychological profile for an ideal trader.
In order to win, a trader has to learn how to correctly lose. A good trader loses gracefully with an understanding that losses are a part of trading. He has to take losses before they get large. A stop loss taken correctly is not a loss for him - it is a way to stop the loss from growing. It is his protection, his safety net.
One of the ingrained human belief is that the more harder we work, the more you will be rewarded. In trading this direct connection is not true. What many trader however do is try to trade all the time. Sitting, watching the screen all the time feels like waste of time. This results in a trader taking unnecessary trades and poor setups. Sitting on the sidelines when there are no trades matching your criteria is one of the most important skills you can learn. A good trader will take only the best trades and avoid marginal ones, keeping his probability for winning as high as possible.
Our entire education and in our profession we are told to gather as much information possible to be able to predict the outcome of our action. E.g an engineer designing the bridge has to know the load it would hold, traffic patterns etc. It does not work this way in trading. There is no way to know what is going to happen after we put the trade. We can only expect a few scenarios and prepare our response to them. A chess player does not know his opponents move. However, a skilled player will anticipate his opponents moves and prepare for If-Then scenario. It works exactly this way in trading too. The ability to work in an uncertain environment is essential trait of a trader.
Hope and fear are two inseparable human instincts. The successful trader has to fight these two deep seated instincts and hold back his natural impulse - unless it works in his favor. A trader must fear that his losses will get bigger and must hope that his profits may become a bigger profit as well.