A successful trader understands that the most important thing for trading is having the right mindset. Understanding how fundamentals work or the technical aspects of trade comes in handy when making difficult trading decisions. However, none of these skills will matter if you cannot execute them accordingly.
As traders, we have gone through various emotions, including hope, fear, regret, overconfidence, and doubt, at one point or other in our trading journey. These emotions played significant roles by influencing our traders towards either losses or gains. The emotions are often a result of past behaviors or copying patterns that might have worked in the past when facing difficult situations. In time the emotional responses become a pattern or habitual, causing great hindrance to our decision making.
One of the most powerful emotions to watch out for while trading is the fear of missing out, popularly referred to as FOMO. This usually occurs when a trader is enticed to buy after the trading move has peaked, leading to substantial emotional stress when the market moves in the opposite direction or reverses.
Since trading requires one to think fast and make quick decisions, traders in traditional and digital markets turn to trade psychology to help them clear their minds giving them a better mindset.
What is Trading Psychology?
Trading Psychology, also referred to as investor psychology, can be defined as the science that seeks to understand a trader’s emotional and mental states that influence their trading actions.
The way traders think differs for every trader since it is influenced mainly by their own emotions and experiences. Trading Psychology entails containing a trader’s emotions, helping them think quickly, and exercising discipline when trading. Thus, Trading Psychology helps traders operate at their optimal level. The science is aimed at helping traders solve some of the underlying barriers and challenges they face, both physical and mental, for best results.
This science helps traders break these patterns by becoming more mindful, consciously aware of the matter, and recognizing it as part of a larger life pattern. It entails stepping back and recognizing maladaptive behavior patterns associated with past coping and then making efforts to enter a zone in which we become able to access strengths.
The psychology of trading is a complex process and takes time to master. However, trading psychology can be done by either seeking help from professional psychologists who are experts in trading matters or at an individual level through developing various trading practices.
Often are times when traders experience the adverse effects of trading psychology more than the positive aspects. For instance, a trader can let their emotions cause them to close loss trades prematurely, as the fear of loss gets too much, or they can double down on losing positions when greed takes over.
Notably, traders who have the discipline to manage and benefit from both the positive and bad aspects of psychology are better placed to handle the volatility of the financial markets.
The Basics of Trading Psychology
Whether you are a new trader or an expert in the field, you need to develop particular trading psychologies and disciplines. Some of these include:
1. Getting into the demo environment
Before engaging in any market or platform, you first need to use the demo product to get acquainted with the environment. Using the demo services allows you to get a basic idea of what to expect from the platform. It also allows you an opportunity to learn that not all platforms are equal. You will also be able to note and understand some of the emotional challenges that come with that particular market.
2. Take time to learn your trading and personal habits
The key to developing a good Trading Psychology is ensuring you understand the emotions that drive the current habits or practices. Understanding what traits you have as a trader is the first step in ensuring you do not make the same mistakes. Notably, for this to be effective, you will need to be honest with yourself to outline both the good and the bad. In addition, knowing your traits helps outline the areas you tend towards because of the bias and how best to avoid such situations.
3. Create, write and follow a trading plan
It is easier to follow a plan jotted down on paper than a mental plan. Always practice writing down the homework, entry price, exit price, profit levels, and any relevant information you need for the trade. A trading plan acts as a blueprint for your trade. For example, the trading plan could state the number of hours you are willing to commit, one hour every morning and evening to trading. It can also outline the percentage you are willing to commit for a particular trade, let us say no more than 3% of the total value of your portfolio to any one trade.
Note, it is not enough to write down the plan. You are also required to stick to the plan. Scribbling the plans helps traders stay logical and keep their emotions out of the trade. A plan also allows you to trade with a capital that you can afford to lose.
4. Trade with logic, not emotions
As a trader, you should learn to manage your emotions. Always strive to avoid using your patterns, experiences, and influence from other people while trading. Following through with the set plan is key in ensuring you do not suffer unnecessary losses. In addition, you should -also exercise patience by trusting your analysis. It is essential to exercise patience by waiting for the best moment to enter a trade rather than simply rushing to trade.
5. Adapt to changes
While having a trading plan is essential, you need to learn to adapt as the changes come. Note, no trading day is similar to the next. However, each day brings its challenges, and you should adapt and make the necessary changes to your plan. For instance, if a particular day experiences more volatility than the previous, and the market is moving particularly unpredictably, you need to hold your trading activities until such a time the market is more predictable.
6. Take a break after losses
Lastly, not all trades lead to gains. Learn to accept the losses, choose your battle and learn to fight another day. The best trader learns to take their losses and use them as learning opportunities. Taking a break also allows you to see things in perspective, reevaluate the plan and recover from the losses incurred.