gh-jamesrochabrun-skills-all-skills/skills/trading-plan-generator/references/trading_psychology.md

Trading Psychology

Master your mind, master the markets.

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Why Psychology Matters

Technical analysis: 20% of success
Risk management: 30% of success
Psychology: 50% of success

The hard truth:

• You are your own worst enemy
• Emotions destroy accounts
• Discipline beats intelligence
• The market exposes psychological weaknesses

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The Emotional Cycle of Trading

Stage 1: Optimism

• First wins
• "This is easy!"
• Overconfidence building
• Taking bigger positions

Stage 2: Excitement

• String of wins
• Feeling invincible
• Breaking rules
• Maximum risk

Stage 3: Thrill

• Biggest position yet
• Ignoring warnings
• "I can't lose"
• Peak overconfidence

Stage 4: Euphoria

• Top of cycle
• Taking ANY trade
• No risk management
• Disaster imminent

Stage 5: Anxiety

• First big loss
• "Just bad luck"
• Revenge trading starts
• Doubling down

Stage 6: Denial

• "Market is wrong"
• Moving stops
• Averaging down
• Refusing to accept loss

Stage 7: Fear

• Watching losses grow
• Paralyzed
• Can't exit
• Hope replacing strategy

Stage 8: Desperation

• All-in trades
• Gambling, not trading
• Breaking all rules
• Account in danger

Stage 9: Panic

• Forced exits
• Margin calls
• Capitulation
• Major loss realized

Stage 10: Capitulation

• Give up
• "Trading doesn't work"
• Blame external factors
• Quit or start over

Stage 11: Despondency

• Depression
• Lost confidence
• Consider quitting
• Seeking answers

Stage 12: Depression

• Lowest point
• Questioning everything
• But...learning begins

Stage 13: Hope

• Education phase
• Developing plan
• Paper trading
• Slow rebuild

Stage 14: Relief

• Small wins return
• Following plan
• Confidence building
• Sustainable approach

Then cycle repeats at smaller scale

Goal: Flatten the cycle through discipline

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Common Psychological Traps

1. Revenge Trading

What it is:

• Trading to "get back" losses
• Emotional, not strategic
• Larger positions
• Breaks all rules

Why it happens:

• Ego hurt
• Feel need to "win"
• Loss aversion
• Impatience

How to avoid:

• Hard daily loss limits
• Mandatory cool-down periods
• Accept losses as business cost
• Focus on process, not money

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2. FOMO (Fear of Missing Out)

What it is:

• Chasing moves without setup
• Entering late
• Ignoring risk
• "Everyone else is making money"

Why it happens:

• Social comparison
• Greed
• Impatience
• Scarcity mindset

How to avoid:

• Wait for YOUR setup
• Ignore what others are doing
• Abundance mindset (opportunities come again)
• Follow plan strictly

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3. Overconfidence

What it is:

• Taking outsized risk after wins
• Ignoring risk management
• "I can't lose"
• Breaking rules

Why it happens:

• Recent wins
• Confirmation bias
• Ego
• Misunderstanding edge

How to avoid:

• Fixed position sizing always
• Review losers, not just winners
• Remember: market is humbling
• Track compliance, not just P&L

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4. Analysis Paralysis

What it is:

• Over-analyzing
• Can't pull trigger
• Waiting for "perfect" setup
• Missing trades

Why it happens:

• Fear of being wrong
• Perfectionism
• Too many indicators
• No clear plan

How to avoid:

• Simple setup criteria
• Binary decision framework
• Accept imperfect trades
• Losses are part of game

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5. Loss Aversion

What it is:

• Refusing to take small loss
• Moving stops
• Hoping for recovery
• Small loss becomes big

Why it happens:

• Pain of being wrong
• Sunk cost fallacy
• Ego protection
• Loss hurts more than gain feels good

How to avoid:

• Stops are non-negotiable
• View losses as business expense
• Protect capital first
• Smaller losses = stay in game

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6. Confirmation Bias

What it is:

• Seeking info that confirms view
• Ignoring contrary evidence
• Refusing to exit losing trade
• Doubling down on mistakes

Why it happens:

• Need to be right
• Selective perception
• Ego protection
• Prior commitment

How to avoid:

• Actively seek contrary evidence
• Play devil's advocate
• Follow price action, not opinion
• Be wrong quickly

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Discipline Framework

Pre-Trade

Checklist before EVERY trade:

• Meets setup criteria?
• R:R acceptable?
• Position size calculated?
• Stop-loss identified?
• Within daily risk limit?
• Calm and focused?
• Following plan?

If ANY "no" → Don't trade

During Trade

Rules while in position:

• Check portfolio 2-3x max per day
• Don't watch every tick
• Trust your stop
• Don't interfere unless rule-based
• Avoid social media/chat

Post-Trade

After every trade:

• Log trade in journal
• Note what went right/wrong
• Capture lessons
• Review compliance
• Don't dwell on outcome

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Emotional State Management

Pre-Market Routine

Daily checklist (15-30 min):

• Adequate sleep (7+ hours)?
• Hydrated and fed?
• Calm and centered?
• No major life stress?
• Ready to accept losses?
• Following plan today?

If feeling off → Reduce size or skip day

Recognizing Tilt

Warning signs:

• Increasing position size
• Abandoning stops
• Taking marginal setups
• Checking P&L constantly
• Feeling anxious/desperate
• Anger at market
• Rushing into trades

When tilting:

1. STOP immediately
2. Close positions
3. Walk away
4. Physical reset (exercise)
5. Don't resume until calm

Cool-Down Periods

After any loss:

• Minimum 15-30 minutes
• Walk, breathe, reset
• Review trade objectively
• Return only when calm

After 2 consecutive losses:

• 1 hour minimum
• Full review of both trades
• Confirm plan compliance
• Reduce size if continuing

After 3 consecutive losses:

• DONE for the day
• Full day review tomorrow
• Don't force it
• Tomorrow is new day

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Mindset Shifts

From Outcome to Process

Wrong focus:

• "I need to make $X today"
• "I need to win this trade"
• "I can't afford to lose"

Right focus:

• "Did I follow my plan?"
• "Was my risk management correct?"
• "What can I learn?"

From Prediction to Probabilities

Wrong thinking:

• "This trade WILL work"
• "I know what market will do"
• "I can't be wrong"

Right thinking:

• "This has good probability"
• "I don't know, but R:R is good"
• "I can be wrong and still profitable"

From Money to Process

Wrong focus:

• Daily P&L
• "How much did I make?"
• Comparing to others

Right focus:

• Plan compliance
• "Did I execute well?"
• Personal improvement

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Handling Losses

Accept Losses as Business Cost

Truth:

• Losses are inevitable
• Even 70% win rate = 30% losses
• Losses are data, not failure
• Cost of doing business

Mindset:

• "This is expected"
• "I planned for this"
• "On to next trade"
• No emotion

Learn from Every Loss

After each loss ask:

• Did I follow my plan?
• Was setup valid?
• Was risk management correct?
• What can I improve?

Categories of losses:

1. Good loss: Followed plan, just didn't work
2. Bad loss: Broke rules
3. Learning loss: New insight gained

Good losses are OK. Learn from bad ones.

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Handling Wins

Don't Get Overconfident

After big win:

• Resist urge to increase size
• Follow plan as always
• One win doesn't mean edge
• Stay humble

Avoid Euphoria

Warning signs:

• Feeling invincible
• "I figured it out"
• Itching to trade more
• Looking for any setup

Remedy:

• Stick to plan
• Take break if needed
• Remember: regression to mean
• Past performance ≠ future

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Daily Practices

Morning

Before market open:

• Review plan
• Check emotional state
• Set intentions
• Prepare workspace
• Identify setups
• Set risk limits

During Session

While trading:

• Follow checklist
• One trade at a time
• Take breaks
• Stay hydrated
• Avoid news during trades
• Trust process

Evening

After market close:

• Journal all trades
• Calculate P&L
• Review compliance
• Note lessons
• Prepare for tomorrow
• Disconnect from markets

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Accountability Systems

Trade Journal

Required entries:

• Setup and reasoning
• Emotional state
• Rule compliance
• Mistakes made
• Lessons learned

Performance Review

Weekly:

• Win rate
• Avg win/loss
• Compliance %
• Emotional patterns
• Improvement areas

Monthly:

• Full performance analysis
• Goal progress
• Strategy refinement
• Psychological assessment

External Accountability

Consider:

• Trading buddy
• Mentor
• Trading journal app
• Community (carefully)

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Meditation & Mindfulness

Why It Helps

Benefits for traders:

• Emotional regulation
• Impulse control
• Focus and clarity
• Stress reduction
• Better decisions

Simple Practice

Daily meditation (10 min):

1. Sit comfortably
2. Focus on breath
3. Notice thoughts
4. Return to breath
5. No judgment

Before trading:

• 5 minutes breathing
• Center yourself
• Set intention
• Begin calm

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Physical Health

Sleep

Critical for trading:

• 7-9 hours minimum
• Consistent schedule
• No trading if tired
• Sleep > trading

Exercise

Benefits:

• Stress management
• Mental clarity
• Emotional regulation
• Energy levels

Recommendation:

• 30 min daily minimum
• Before or after trading
• Not during market hours

Nutrition

Avoid:

• Excessive caffeine
• Sugar spikes
• Trading hungry

Prefer:

• Balanced meals
• Steady energy
• Hydration

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Dealing with Drawdowns

Normal Part of Trading

Reality:

• All traders have drawdowns
• Expect them
• Plan for them
• Survive them

During Drawdown

Actions:

1. Review all trades
2. Verify plan compliance
3. Reduce position size
4. Take break if needed
5. Focus on process
6. Trust recovery

Don't:

• Increase size to "get back"
• Abandon plan
• Change strategy mid-stream
• Panic

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Quotes for Mindset

"The goal of a successful trader is to make the best trades. Money is secondary." - Alexander Elder

"In trading, the impossible happens about twice a year." - Henri M. Simoes

"The market is a device for transferring money from the impatient to the patient." - Warren Buffett

"The most important quality for an investor is temperament, not intellect." - Warren Buffett

"Rule No. 1: Never lose money. Rule No. 2: Don't forget rule No. 1." - Warren Buffett

"It's not whether you're right or wrong, but how much money you make when you're right and how much you lose when you're wrong." - George Soros

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Psychological Checklist

Before trading session:

• Adequate sleep
• Calm and focused
• No major stress
• Following plan
• Prepared to lose
• No revenge mindset

During trading:

• Checking P&L minimally
• Following checklist
• Taking breaks
• Trusting stops
• No tilt signs

After trading:

• Journaled all trades
• Reviewed objectively
• Noted lessons
• Disconnected
• Ready for tomorrow

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Summary

Trading psychology is:

• 50% of success
• Controllable
• Improvable
• Critical

Master these:

• Emotional control
• Discipline
• Process focus
• Loss acceptance
• Patience

Remember:

• Markets are uncertain
• Outcomes are random
• Process is controllable
• Discipline wins long-term

Your edge isn't prediction. It's consistency.