Trading psychology refers to the mental and emotional states of a trader dealing in the financial markets. It is very instrumental since it determines whether an individual will experience success or losses. In trading, there is always a potential for losses. Studies even show that a majority (80%) of traders encounter losses regularly. Only a minority experience long-term profitability. This underscores the difficulty associated with trading. All in all, there is still a likelihood of success. This is where trading psychology comes into play.
Importance Of Trading Psychology
The knowledge of trader’s psychology predicates success. This is because a winning attitude can result in increased finances and cash, online or otherwise. Making money in the financial markets is dependent on the realization that belief in oneself is also important.
Although earning is a priority, a trader should not primarily dwell on the fact that they might make money or not. Instead, they should concentrate on instilling confidence and trust in themselves. This will bring them more success. This is one of the primary aspects and goals of trading psychology.
It is noteworthy that skills such as the ability to analyse the markets and determine the trajectory certain securities will take are important. However, their importance does not supersede a trader’s ability to contain their emotion and bias, have discipline, and think through possible choices quickly. A trader’s mindset is extremely vital.
Understanding and mastering trading psychology entails being cognizant of the snares associated with having negative psychological characteristics. Knowing what is not necessary will subsequently enable traders to develop positive traits. It has been documented that being familiar and knowledgeable about trading psychology helps a trader earn profits or minimize losses, in the worst-case scenario. This knowledge is what separates winners from losers.
In just a single day, the trader may be required to buy and sell a financial instrument in quick succession. They also need to stick to previously identified strategies despite the market moving in an unexpected direction and know when to place stop orders to curb losses. This necessitates a sober mind that is not easily swayed by emotions. The hectic and stressful nature of the marketplace makes these positive psychological characteristics important. Possessing these traits also separates winners from losers.
Pros Of Trading Psychology
- It helps traders contain their emotions. Emotional trading is disastrous. The psychology of trading posits that an individual’s psychological state determines whether the trader will experience success or losses. Greed and fear have the most significant impact on a trader’s performance in the market. They instigate certain decisions that may not be in accordance with proven trading strategies. Practicing trading psychology, therefore, helps a trader avoid these pitfalls. It permits them to make sound decisions that are not backed by emotions but by strategies.
- It enables traders to do away with their biases. A bias is a fixed personal preference that makes one choose one thing over another. It, in a way, informs the trader instinct. For instance, in forex trading, they may choose to sell a currency from which they have realized high profits previously and avoid one which they incurred just a single loss. Such forex trading psychology can block sound decision-making. Trading psychology helps one avoid biases.
- It is instrumental towards instilling discipline which is a key requirement for anyone hoping to make money online or by trading with brick-and-mortar brokers. For instance, it mandates a trader to follow a trading plan instead of making decisions on impulse or using emotions.
Cons Of Trading Psychology
- Trading psychology is different from one trader to another because the underlying emotions and biases are distinct. As such, there is no single template that everyone can use.
How To Master Trading Psychology
Trading psychology refers to a trader’s mindset or emotional wellbeing. It is crucial since it determines whether a trader will experience losses or success. As such, mastering it is crucial. Developing trading psychology requires an individual to understand their emotions, biases, and personal characteristics. They should then develop a trading plan that takes into account what they have identified. They should also exercise patience and not let their emotions come in the way of decision making whether they experience wins or losses.
The first step is recognizing your personal characteristics, biases, and emotions. Secondly, you should come up with a strategic trading plan that takes these factors into account. This endeavour is bound to help you moderate any impact that they may have on any future decision-making.
Thirdly, you should exercise patience with regard to holding positions. Patience is a crucial prerequisite to mastering discipline. Fourthly, you should be adaptive given that the financial markets are ever-changing; no two days are the same. As such, you should always analyse the market every day and make changes in the trades you made/make.
Fifthly, if you encounter a loss, take a break. This will help you deal with any emotion that may accompany losing. The sixth step is accepting winnings and, again, manage the emotions such as happiness which may cloud judgment. Lastly, always keep a record of the trades you made.
Trading psychology is a positive concept that should be mastered instead of being overcome. However, if as a trader you find yourself making trades based on biases and emotions, you should make a point of avoiding emotional trading by following the steps highlighted in question 1.
Forex trading psychology is the emotional and mental state of a trader that is trading in fiat currencies or participating in the foreign exchange markets.
Greed is characterised by taking huge risks, not defining your profits or losses, and overtrading. To control this, follow the next steps. Firstly, set realistic and periodic goals based on your performance. This is an important way of measuring performance. Secondly, you should come up with your specific trading rules. This undertaking will help you become disciplined and dictate when you buy or sell and the length of a trading session.
Thirdly, you should have a mechanism and strategy to manage your money. Doing this will help you be cognizant of the possible wins or losses you may experience. It will, therefore, deal with any anxiety that arises.
Yes. A trader should constantly monitor the market before making decisions. They should implement trading practices which they should stick by regardless of whether things are not going according to plan. This becomes stressful since they should contain their emotions by not acting on them.