I am often asked, "How important is psychology in trading the financial markets?" The answer, VERY IMPORTANT!

Most traders, when analyzing charts and "back testing" trading systems, fail to realize how different the results would be if they were actually trading with real money as the market is unfolding instead of looking at the market after the fact. This is why I am not a "back testing" fan — because the results are usually nowhere near the reality of how YOU would actually trade.

Most new traders fall victim to their own fear and greed when trading, which causes them to exit profitable trades prematurely or enter trades caught up in the excitement of the moment.

We have all felt the anxiety that can creep into our souls as a trade becomes profitable in a short period of time. That anxiety wants us to exit the trade now and take the quick profit. Taking the quick profit will relieve the anxiety and make us feel good.

Maybe the cause of the anxiety is the greed to take the quick profit or the fear that the market will turn against us and cause a loss. Whatever the reason, exiting the trade because of anxiety makes it an emotional trade, and good traders do NOT trade on emotions.

Or, perhaps you have trouble "pulling the trigger" and entering trades when your trading system indicates you should. Most often, fear is at work here. The trader fears another loss! Not trusting your trading approach and yourself can make you a victim of fear.

Or, perhaps you live in the past and not the present, and you are, again, afraid of reliving past losses or even failures.

Or, perhaps you don't like using "stops" or correct "trade size" or don't adhere to "stops" you have already set. Dig deep enough into your psyche, and you will uncover the reasons.

This is why I say that I could give a good solid trading system to 100 traders, and almost all of them would trade it slightly differently based on how their emotions caused them to trade. In the end, only those traders who can best manage their emotions will have a chance to win consistently.

So, while a trading system or approach is important, so is money management and learning how to manage your psychology. It will take time, experience and dedication to overcome your human shortcomings, something we all have to deal with. This is why 90 percent of the traders lose in the financial markets. We are all subject to fear and greed, but only a small percentage of traders can manage their emotions well enough to let themselves win.

*Reprinted (and modified) with permission from Bennett McDowell