The psychology of trading

aaron's profile image
By aaron

This is a great video about the psychology of trading. He talks about the relationship between psychology and probability when creating a trading system.

Generally, a trading system should follow this format:

* Pick the stock using a long term trend based on fundamentals. The stock should show consistent earnings growth.
* Use your favorite moving average to start looking for an entry
* Use your favorite chart pattern to pick a specific moment to enter the position
* Only trade in direction of the general market moving average
* Only bet 1-2% of your portfolio on any given trade

Every trading system will experience periods of multiple losing trades in a row. But if your system has a higher percentage win rate, then those runs will become less frequent. That's where psychology comes in. If you win more frequently than you lose, then you won't get discouraged by the losing streaks and you will only need to stick with the system for 8-15 trades before it becomes a habit and it will be easier to continue sticking with the system.


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