In his book, Trade Your Way to Financial Freedom, the renowned American psychologist Dr Van Tharp discusses in several parts how important your psychology or mindset is to your trading success. He graphically depicts the significance of your psychology using a pie chart and explaining that there are three Ingredients to Trading. They are System, Money Management and Psychology. In the pie chart, the System is 10%, Money Management is 30% and the remaining 60% is psychology.

Why does a psychologist who has spent his entire professional life counselling traders of all experience levels say that so much of your trading hinges on your psychology?

The key is that your mind drives everything you do in your life and trading is no exception. Your emotions are a part of who you are and your decision making process. Decision making is a large part of trading, as you need to make decisions often and many of them are difficult decisions. Furthermore, people like to break rules, even ones they set themselves. There are some simple trading rules that have stood the test of time, and will always work yet most people cannot follow them. It is essential that you realise how important it is that you demand of yourself the highest level of discipline to ensure you implement the requirements of your trading plan ruthlessly and follow some of the time tested trading rules.

Trading is like running a business and anyone who has run a business successfully will tell you that emotions should have little place in your decision making. Although because of money and your natural instincts, many people cannot remove their emotions from their trading, sufficiently.

Books like Market Wizards by Jack Schwager and other similar texts illustrate how successful traders have found a trading methodology that they are very comfortable with. None of them have found any magic solution to trading but they all clearly possess an inner confidence in their own ability to follow rules and their own trading plan. To develop a solid trading plan requires commitment and discipline, but more importantly time to sit down and work through it methodically. At the end of the day, if you are not comfortable with the way you approach the market, then you will likely drift away from your plan and fall into bad habits. In this situation, it is highly probable that you will lose money.

If you want to trade well and therefore develop a trading plan and follow it, you need to convince yourself that it is something you really want to do. Commit to it and there really shouldnt be anything stopping you developing a robust trading plan that will over the long run be profitable.

Do you have a trading plan? Have you fully committed yourself to following it? Remember that in trading, if you fail to plan, you are in fact planning to fail.