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Psychology of Trading
Psychology of Trading
Trading psychology deals with the mental and emotional state of traders. This is the most important part in trading any assets. Success in trading is 80% dependent on psychology. Trading and psychology are inextricably linked. It is impossible to achieve good profit in trading without knowing about all the traps of the human brain. Nothing can ruin a trade faster than emotions.
Emotions affecting the trading the most:
Greed can make a trader stay in a position for too long to try to get every last cent out of it. Also, greed can motivate traders to take risky and speculative positions. Most often this happens close to the end of bull markets when speculation intensifies.
Fear is the reason why traders close positions earlier in order to reduce losses and to avoid additional risks. Fear is a common thing in the bear markets. This may cause some traders to leave the market irrationally. Never underestimate the power of Forex market psychology. Fear can turn into panic.
Understanding the Trading Psychology
The mind plays a big role in long-term success in trading, while behavior and way of thinking affect the style of trading. There is an emotion behind every trade, and it is very important to understand what the trader felt and thought at the moment of opening a position. This will help to see where he was acting irrationally. The loss of 1 USD or 50 USD, for sure, causes a negative, but the loss of a few thousands of dollars may trigger panic and unpredictable behavior.
How to Сontrol Emotions
Mastering the psychology of trading is an art. A trader should be able to adapt. Many are trying to get rid of emotions in trading but this is 100% impossible. Instead, it is better to define goals and remind yourself how trading can help you to achieve them. There are many ways to minimize the impact of emotions on trading, but often its efficiency depends on the individuality of each trader. However, there are general rules that should be followed:
Create your own trading rules and stick to them. Describe the scenario for the trading session for every currency pair you want to trade. That said, you need to open trades only when the price meets the conditions described in your rules. This can be compliance with certain technical models or indicators, or a combination of both.
Keep a trades diary and study statistics. The diary should contain not only information about time, lot size and price, but also a description of the emotions that you experienced while opening or closing a position.
Set precise limits on losses and profits for the day and, if these targets are achieved, stop trading and turn off the terminal.
Traders should understand the risks to minimize them. Thus, when opening a position, it is better to imagine that the deal is likely to be unprofitable and therefore it is better to immediately accept the loss, then the emotional stress is eased in advance and the impact on the psyche is minimized.
You can meditate before starting trading or do something that will bring you to a calm state. You should never trade if you are worried or something annoys you.
A trader should never break these rules. Even if there are losses, but the rules are complied, it will not have such a negative impact on the emotional state as the first goal in trading is to remove the emotional component. To hold a losing position for a long time and suffer is the worst thing that may happen, as well as regret the missed opportunity.
Violation of the rules forms incorrect habits and mental imprints, which are associated with closing positions too early or opening them with an insufficient number of confirming factors. By following these principles, a trader will be firmly convinced that losses will be minimal and profits stable.