How Important Is Trading Psychology?
Many traders already know that trading success are determined by the 3M factor, as described by Dr. Alexander Elder, a professional psychologist and trader. He said that there are three pillars in trading, which is 3M (Method, Money, and Mind). A successful trader must have all three. But most traders have a misconception about these three pillars. Generally they consider these three elements has the same role in determining the success of trading. Yet the facts say otherwise. There are elements that play a bigger role in determining the success of trading. Read this article to find out more.
Let's recall the 3M concept. The 3M is:
- Method, ie trading strategy or analytical ability.
- Money, which is money and risk management.
- Mind, which is related to trading psychology, the ability to control emotions such as fear and greed.
Most traders focus more on trying to learn Method than Money, let alone Mind. They think hard, racking their brains and energy to find a perfect way of analysis (holy grail). Actually it's okay to learn any method of analysis, be it Technical Analysis or Fundamental Analysis. The problem is to focus too much on Method, and forget about Money and Mind.
Method only accounts for a small part of the success of a trader. If it's true that Method has the most important role in determining trading success, all the genius people should had already found the magic formula to become rich from trading. But reality says the opposite. High IQ does not guarantee a person's success in trading. That is the proof that trader's success is more influenced by Money, and especially Mind (Trading Psychology).
There are several reasons why most traders do not care about Money, let alone Mind:
- The first because psychological factors are not easily measured. Learning Technical Analysis or Fundamental Analysis and applying it in trading is easy, because analysis is measureble. Analysis can be applied using sophisticated computer software, but not Trading Psychology.
- The second because psychological factors are not properly understood by most traders. There are not many books on Trading Psychology. Most traders think that they already understand themself. But actually they are not. In fact, only a few traders understand themselves, that their human weaknesses can affect the quality of trading
Every trader who want to succeed, should not forget the Trading Psychology factor. Instead every trader should learn more about Trading Psychology, because this has major role in determining the trading success.
Hope this article inspires