There is no doubt that trading is stressful and that the psychology of a trader hugely influences their profit and loss profile. There are a plethora of books and articles on this subject with many claiming to give ways to "beat the market" so let's debunk that one from the start and accept the age old adage that the Market is always right. That is not to say however that understanding one's own personality and having rigorous trading discipline won't result in greater profitability.
It is said the market has no emotion, conscience or memory. That is true literally but, when you consider that pivot points are usually established by historic congestion or trading decisions, whole figures are often support or resistance levels and that markets can move on optimistic predictions or dire warnings without the backing of solid current economic figures, you can see that market traders do in fact imprint their emotions and memories on the market.
Traders cannot be expected to totally change their personalities but an understanding of the strength of the various personality traits that one possesses will help mitigate some of the main biases that afflict traders:
The naturally optimistic trader is probably the most abundant of the trading 'types' as we humans are innately optimistic and as a trader has to be optimistic that they will make money to actually place a trade. 'The trend is your friend' is often thrown around and that is true, however a trend by definition is a prevailing inclination or tendency and thus will have an end. Traders must ensure that they don't get married to a profitable trade and let it run when targets have been met or breached. Discipline, sticking to targets and stop losses will minimise this risk.
An overconfident trader who is convinced that they have 'the strategy' to win may fail to continually understand the relevance of the strategy whilst also missing out on new opportunities that the market offers. "If it's not broke don't fix it" could be the motto when a trader has had success with a strategy and continues to repeat it. The problem with this is that the market and the influences on it are always in flux and the adopted strategy may become irrelevant. Recognising this and continually monitoring the trading environment will make sure that the trading strategies are relevant.
A pessimistic trader or one lacking confidence in their research and strategy may be reluctant to place a trade or will close out potentially profitable trades when a small setback occurs. One has to remember that the market is not performing correctly if it is offering a risk free trade. Such anomalies only occur when a market is imperfectly priced and are thus rare and fleeting. Thorough research, and the resulting confidence in that research, acknowledgement of what has gone right in a strategy whilst maintaining trading rigor by sticking to stop losses are useful methods in mitigation.
A person new to trading or a less confident trader may seek out news or opinion that backs their decision. There is no doubt that research and analysis is imperative for a sensible trading strategy but equal weight must be given to the news and analysis that challenges the trading idea as to that which supports it. Having said that one must always be careful to sort fact from rumour and unsubstantiated claims from reasoned opinion.
In short, these biases or personality traits can be bundled up into the terms Greed and Fear, which makes perfect sense when one considers that a price results from a battle between buyers and sellers and a price movement only occurs when one side prevails over the other. So simplistically all a trader needs to do is predict who will win that battle. However, this is usually easier said than done.
There are a few things a trader can do to help them navigate the markets: