Trading psychology is the most important thing for a trader
While knowledge of the market and trading strategies is extremely important, the psychology of trading is even more important: how a trader controls his emotions and deals with losses. Traders experience many negative emotions throughout the day. Fear, insecurity, anger, greed, frustration, and more in the same spirit. The ups and downs in the sentiment of a newbie trader are largely dependent on the results of trades, which can harm overall well-being.
When a trader is caught in an endless cycle of bad trades and bad decisions, it can be difficult to break out of it and manage the situation rationally. Let’s take a look at the ingredients of a trader’s psychology and see how a trader can positively influence it.
What is meant by fear
The fear of loss is understandable. But it can be extremely harmful, as it deprives the trader of the ability to make rational decisions, and moreover, fear can turn into anger and a drop in self-esteem. It is important to understand that fear is a natural response to a threat. Fear does not always reflect the seriousness of the situation: quite often it does not correspond to reality.
Another type of fear is the loss of profit syndrome. It leads the trader to make hasty decisions, which arise from the fear of not getting a profit when everyone, it would seem, is getting it. Traders with this syndrome buy high and sell low, and panic and disorientated decisions are made.
Face to face with greed
Another value on the trader’s mood scale is greed. This emotion forces traders to take higher risks when they can be avoided, for example, when a trader holds successful trades until the very trend reversal, which reduces profits to zero. Greed, fueled by fear, can have serious consequences.
Greed is not easy to overcome, and rarely fully controlled. It will still manifest itself in certain thoughts, for example: “if I open another deal, the profit will be even greater!”. But identifying and addressing these thoughts is a step towards more informed trading.
How to deal with this
Emotion management is a priority. A healthy trading psychology implies strict adherence to certain rules. These rules can include a goal — the end results a trader is aiming for, risk management tools such as a stop loss, and a cap on the size of the trading balance. The rules also include a detailed algorithm in the form of a trading plan that describes the conditions for entry and exit. It also makes sense to set the amount of acceptable losses and desired profit for each day.
This set of rules will help the trader create a work instruction that he can navigate in times of emotional turmoil. It is helpful to refer to this manual when fear or greed comes into play, and use it as a benchmark for judging your decisions.
What else can you do
In addition to setting rules, traders should document their work and critically evaluate it over time. Tracking your psychological state is also beneficial as it allows you to develop a plan to deal with negative emotions in the future. Many experienced traders monitor trading activity and adjust their actions accordingly.
Gaining professional trading experience also helps to control irrational behavior — novice traders should devote more time to studying the market. This potentially helps you feel more confident and less influenced by emotions.
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