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June 17, 2021

Psychology of trading: essential information

Image by TRADERS CLUB (PRAVIN CHOUDHARY)

Successful traders are not born, they're made

Tens of thousands of traders work the markets every day. Many of them even choose the same order at the same time by using the same indicators. However, not all of them are making the same profit. What other variables impact success and failure?

Even if traders have access to the same information, their perception varies. This is known as the psychology of trading.

Overcome emotional traps

Trading brings out emotional reactions, such as joy, frustration, and excitement. Controlling emotions is especially tricky for beginners, as they're unable to detach their emotions from the results.

To keep a steady balance, your strategy and mind must be able to control your emotions.

Why is this so important you might ask? Let's take a look at common emotional traps.

😱 PANIC

This is when the trader opens a Sell position knowing that the trend will reverse. However, the market persists longer than anticipated, and the trader begins to lose money. The trader is overcome with emotions. What's happening? Is it the wrong forecast? How much longer should I wait? Where can I get better information?

➡ RESULT

Panic sets in, and the trader makes an irrational decision instead of following the strategy.

🤑 GREED

The trader opens an order for a short period. They're making great profit, and everything is going well. The Take Profit value is fast approaching. He begins to question his philosophy and would rather ride the wave. After a few minutes, the price drops and reverts in the other direction.

➡ RESULT

The trader lost most of his profit.

😜 EUPHORIA

After the trader makes several consecutive successful orders, he may begin to feel overconfident and decide to start opening riskier orders with a larger volume.

➡ THE RESULT

The trader opens one order that starts going poorly, and now he's lost all of his profit.

How to control your emotions

The desire to make money or the fear of losing is a driving factor in our decision making, but it shouldn't control you. The numbers, market analysis, your strategy and research are far more reliable than your emotions.

Your goal should be to reduce risk and increase profits. Stick to it.

To help, keep a written diary of all of the challenging moments and tricky situations you've encountered. Record the details for each trade and attempt to analyse it objectively. The next time you read the diary, you'll have more resolve in overcoming your emotions.

The easiest way to regain your composure and clarity is to take a step back and breathe. Try it now! Take a deep breath for five or six seconds and then exhale slowly. Are you feeling more relaxed? Repeat it as much as needed.

If trading is an integral part of your life, then your perception of life is expressed through the quality of your trading.

It's time to put your knowledge into practice. After doing so, every day will be a small step towards sustained success. Stay calm and trade successfully!