Do you remember how you felt the last time you opened a position? Were you anxious to jump in, or afraid of losing out? Did you procrastinate before opening your position? When you closed out the trade, did you feel elated or disappointed? The emotions of thousands of traders coalesce into huge psychological tides that move the markets. Trading psychology involves the process of analyzing behavioral and decision-making patterns in order to make informed trading decisions.
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Why is trading psychology so crucial?
The mentality of a trader is mirrored in his or her trading behavior. It doesn’t matter how well-conceived your trading strategy is — in the end, your success or failure is determined by how you feel about the market.
Anxiety, fear and greed are all emotions that traders experience from time to time. Some of these feelings may be helpful to trading, while others can have a negative effect and should be controlled.
“You need to know when to move away, or give up the loss, and not allow the anxiety to trick you into trying again.” — Warren Buffet
When it comes to making judgments, traders who have a good knowledge of trading psychology are less likely to let their emotions or biases get in the way. One’s chances of generating money during a session, or at least limiting their losses, can be improved with a positive mental attitude.
In an attempt to get the most out of a deal, greedy traders remain in it for too long. At the tail end of a bull market, it’s customary for traders to take on riskier, speculative positions in an effort to make a profit. Conversely, fear is the reason why traders cut their losses short or avoid taking up dangerous positions in the first place. Investors’ illogical hurrying to get out of a deal is a direct result of their fear of losing money.
Top four tips to master trading psychology
Below, you’ll find my four tips for mastering trading psychology 🔽
1️⃣ Practice
In the market, there are four types of animals that I want to note: bull, bear, pig and sheep. Bulls and bears both make money, but pigs get slaughtered and sheep are fearful of trends. So the moral of the story is you need to have an eye for identifying the market, and that can be done through practice. If you practice a lot every day to the last day of your trading career, you will earn either as a bull or a bear, and will never become a pig or a sheep. It’s better to take a break once every few weeks so you can take a step back, discover your inner strength and feelings and then implement your findings.
2️⃣ Create a trading plan
The best way to control your emotions while trading is to remove them completely from the process itself. Creating a trading plan can help you manage the emotional side of things. The plan must include factors upon which to enter the market, daily profit target, trading timings and exits. Once created, follow it religiously. Simply put, backtest, analyze and repeat.
3️⃣ Use a Take Profit and Stop Loss
Trading is a balancing act. By keeping in line with your trading plan, you can plan your profits day by day. The most important part is cutting losses, which can be achieved by putting proper Stop Losses in place. Beginners tend to neglect risk management, and that’s why they lose. Knowing when to stop is very important.
4️⃣ Don’t quit your job
It’s very, very important to keep in mind that nobody becomes a successful trader overnight. The biggest problem with all newcomers is that their target is to become immensely successful from day one, which is not possible. This mentality puts a tremendous burden on your mind and makes you act differently, which ends up in losses. So, it’s always better to have a primary source of income while avoiding trading with others’ money, borrowed money or your non-disposable income. This will take some pressure off of trading and provide more clarity.
Takeaways
At the end of the day, much of your trading success or failure depends on your mentality. How long you’re able to hang in there will determine your fate. If you’re interested in truly mastering your own emotions, Olymp Trade’s webinar series on trading psychology will guide you through it, while keeping a trading journal will ensure the best results and fastest route to success.
Put Your Mind to the TestRisk warning: The contents of this article do not constitute investment advice, and you bear sole responsibility for your trading activity and/or trading results.
