Trading psychology is an essential factor in money making. Actually, it is no less important for creating a successful trader than trading knowledge and experience. The trading psychology refers to the mindset of any trader that guides the decision making.
What is Trading Psychology?
Trading psychology is used to describe the emotions and feelings generated through the trading process that a typical trader will encounter. It is the mental state that shapes how a trader reacts to gains and losses occurred from trading. The ability to handle emotions and stick to the trading plan. Similar to other trading aspects, like knowledge and experience, trading psychology is a key factor for profitable trading. While some emotions can be justified and managed like fear and greed, other emotions can be more complex and harder to be contained. Developing a successful trading mindset is very helpful in fully mastering the trading psychology. Check top 4 steps to develop a successful Trading Mindset.
Why is Trading Psychology Important?
When trading in financial markets, traders usually focus on the skills that enables maximizing profits and minimizing losses. Equally important as trading knowledge and experience, mastering of trading psychology is highly critical.
You’ve probably heard that many traders who entered the forex market ended up losing money even when following a solid plan. Actually, this is mainly because they couldn’t handle their emotions nor expectations. Most of forex newbies are victims of their own mentality and expectations. This is because most people step into the market loaded with unrealistic expectations, thinking that it is a shortcut for a wealthy life. Such expectations generate overwhelming emotions like greed and anxiousness that traders can’t handle, followed usually by irrational decisions and money losses.
Some specific emotions and behaviors are associated with trading in financial markets. Most emotional decisions are driven by either greed or fear, the two most common emotional outcomes from trading. The two have a powerful influence on a trader’s decisions. For instance, greed pushes the trader to make too risky decisions aiming for unrealistic profits. Fear, on the other hand, restrains the trader from seizing opportunities in order to avoid risks.
Developing a Healthy Trading Psychology
When it comes to developing a healthy and successful trading psychology, it is important to start with embracing losses and mistakes. Both are inevitable in the world of trading and investment. The key point is to contain your emotions, learn from mistakes and never let any of them drive your trading decisions.
A good way to do so is through maintaining self-discipline, following a trading plan and focusing on overall performance. Learn how to measure your trading performance.
How to Develop a Sound Trading Psychology
- Manage Your Emotions
Remember that fear, excitement, greed, nervousness and overconfidence are typical emotions experienced by all traders at some point. Mastering how to control these emotions can make all the difference between the success and failure of the trading process. Make sure you never make a trading decision based only on how you feel. Instead, let any decision backed by rational reason, market analysis or according to a trading plan. This way you’ll avoid emotional trading and bad decisions.
- Learn from Mistakes
Regardless of experience, traders make mistakes. The key concept is to embrace your own mistakes, learn from them and avoid repeating any. Check common trading mistakes to avoid in forex trading.
- Overcome Greed
Greed is an overwhelming feeling that can lead to devastating decisions if not handled in the right way. It is the most common experienced emotion among traders, whether they are beginners or experienced. Learning how to control this feeling by acknowledging that you can’t seize every opportunity in the market is very critical. Knowing how to achieve steady process is also helpful.
- Realize the Importance of Consistent Trading
Beginner traders often look for different opportunities which get them distracted between multiple opportunities without any sufficient experience how to handle any. If you’re a beginner, try to focus on specific market and learn its fundamentals. The true success is to keep your trading as constant and profitable as possible.
- Follow a Trading Plan
Developing a plan to serve as a guiding framework is very crucial to achieve consistent profitability in trading. It is pretty much like a road map that keeps you on track to your trading goals. A good plan will help you in taking rational trading decisions, by sticking to its rules. Check how to develop a successful Forex trading plan.
- Apply Risk Management Tools
Risk management is the process of identifying potential risks to your investment in advance, analyzing them, and taking precautionary steps to avoid their impact. In the world of investment, risks are always there. Hence, risk management is inescapable and should always be prioritized when it comes to evaluating an investment’s return. Following a solid risk management plan will keep you guarded against irrational trading decisions.
Read Also: 10 Steps to Manage Forex Risks Effectively
- Understand the Fear of Missing Out (FOMO)
A skilled trader knows how to detect the suppressing feeling of FOMO and manage it wisely. While it is never easy, realizing that the markets are never out of opportunities and that a calculated rational decision is always a better opportunity, can be very helpful in this regard.
- Take a Break
You are more likely to make irrational trading decision if you are overwhelmed and stressed. It is ideal to take a break when you feel that the market is against you. Take some time off trading and review your trading activity. Start by sorting out the weaknesses and mistakes to work on them.
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