Top 7 Trading Psychology Books and Their Key Points

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The only step to becoming a successful trader from a struggling trader is the right trading psychology. How to develop it? Described below is a list of top books on trading psychology. The crux of these books containing, key issues in individual trading psychology and practical ways to address these issues, is also described.

Best Books on Trading Psychology:

  1. “Trading in the Zone” by Mark Douglas:

It is by far the best book on trading psychology. Mark emphasizes the importance of mastering the psychological aspects of trading. The book explores the impact of fear, greed, and discipline on trading decisions and provides practical techniques to develop the right mindset for consistent success.

  1. “The Psychology of Trading” by Brett N. Steenbarger:

This book delves into the psychological challenges faced by traders and offers insights into understanding and managing emotions, improving decision-making processes, and developing effective trading strategies based on self-awareness and discipline.

  1. “Reminiscences of a Stock Operator” by Edwin Lefèvre:

Although not directly focused on trading psychology, this book is a fictionalized biography of Jesse Livermore, one of the greatest stock traders in history. It offers valuable lessons on the mindset, emotions, and psychology of a successful trader.

  1. “Mind Over Markets: Power Trading with Market Generated Information” by James F. Dalton, Eric T. Jones, and Robert B. Dalton:

This book explores the psychology of market participants and how their behavior shapes market dynamics. It provides insights into interpreting market-generated information, such as auction market theory, for better trading decisions.

  1. “The Disciplined Trader: Developing Winning Attitudes” by Mark Douglas:

This book focuses on the importance of discipline in trading and addresses psychological barriers that hinder traders from achieving consistent profitability. It offers practical techniques to develop discipline, manage emotions, and maintain a winning mindset.

  1. “The New Trading for a Living” by Alexander Elder:

This comprehensive guide covers various aspects of trading, including psychology, technical analysis, risk management, and trading systems. It emphasizes the psychological dimension of trading and provides strategies to control emotions, manage risk, and improve trading performance.

  1. “Market Wizards” by Jack D. Schwager:

This series of interviews with successful traders provides insights into their mindset, psychology, and trading approaches. It offers diverse perspectives on trading psychology and showcases the importance of discipline, adaptability, and self-awareness in achieving trading success.

Condensing the wisdom of top books on trading psychology, some common issues found in individuals’ trading styles are described below. Additionally, practical ways to develop the right trading psychology according to the above books are also summarized.

Key Issues in Individual Trading Psychology according to all Books:

i. Emotional Decision Making:

During a trade, market volatility drags emotions into trading. These emotions distort rational decision making and the trader gets pulled toward hunch trades which results in a loss in capital. So emotions destroy the normal trading mindset of individual traders.

ii. Greed for Profit:

Everyone trades for profit but an unusual urge for profit deprives traders of legitimate profits. Many times it happens, that when the market price is near to hitting the target price during a trade, a trader revises the take profit target to get more profit. Whereas the market returns and the trader is deprived of legitimate gains.

iii. Fear of Loss:

Many beginners either don’t put a stop loss or revise it whenever a trade goes wrong. It is done to avert the evident loss but many times such trades end in a loss greater than that of a stop loss.

iv. Revengefulness:

When a trader faces a series of losing trades, it develops a feeling of revenge from the market. In such cases, to recover from loss quickly, beginners increase their position size to an illogical level which further magnifies losses and aggravates trading.

v. High Leverage:

Under the excitement of getting rich overnight, many beginner traders take high leverage which multiplies emotional involvement. Ultimately, it results in poor trading decisions.

Practical Ways to Develop the Right Trading Psychology according to the Books:

1. Develop Trading Plan:

Devise a sound trading plan that clearly states the criteria for selecting a trade, entry and exit levels, stop loss, and position size. The plan should manage risk by restricting the allocation of capital for trading over a specific period.

2. Observe Strict Discipline:

The only way to avoid emotional bombardment during trading is to observe discipline and religiously follow the trade plan. If you exhibit discipline for a dozen trades, you will find your mindset tuned to the right trading psychology. 

3. Never Increase position size too much too early:

Increasing position size magnifies emotional involvement and thus impairs your ability to think rationally. So never take large at the beginning of your trading career.

4. Avoid Overtrading:

Overtrading affects trading psychology in two ways; 1) increases excitement in case of winning trades 2) inserts mental stress. Both factors push towards wrong trades. So avoid overtrading.

5. Form Trade Diary:

Record your trades and regularly review them. Learn the positive and negative aspects of your trades and trading style. Also, enlist how you responded during various trades. Be on the path of continuous improvement to have a sound trading mindset.

End Note:

Best books on trading psychology provide a road map for developing the right trading mindset. Practicing the above-mentioned ways can enable you to cultivate the right trading psychology and make your trading journey successful.

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