When it comes to trading the financial markets, controlling your emotions is half the battle. Unfortunately, many traders refuse to make this a top priority. In a highly volatile market, leading by emotion can be your ticket to immediate peril. Trading psychology is all about mastering fear and greed in the financial markets. These two basic human emotions have their place in life, but offer nothing of value in front of a trading screen. That’s why investors need to carefully evaluate their mental state and develop habits that remove emotion from the equation.
The good news is mastering trading psychology doesn’t have to be difficult. Below we show you five ways you can use to develop these skills which can help you trade more successfully.
- Manage your risks
There is no guarantee you’ll make money in the markets, but there are proactive steps you can take to minimize your exposure to risks. In trading, risk management is an essential but overlooked element of success because it teaches you how to minimize losses and protect profits. There is no one-size-fits-all approach to risk management. At its core is recognizing that the markets are always subject to risk, and that good traders actively manage their exposure to that reality.
One of the best ways to manage risks is to plan your trades carefully (more on that later) and master stop-loss and take-profit orders. A stop-loss allows you to set the price at which you are willing to sell an asset and take a loss on the trade. This occurs when you find yourself on the losing end of a position. A take-profit order is the price at which you sell a security for a profit. A take-profit order is beneficial when the trade is going in your favour, but upside in the market is limited due to various factors.
Stop-loss and take-profit orders are essential if you plan on being away from the trading screen for any length of time. The good news is that you can find brokers which offer these useful tools.
- Develop a strategy and stick to it
It’s easy to shrug off the notion that you need a plan to trade successfully. After all, who wants to spend days, weeks or even months putting together a trading strategy? Put it this way: being a successful trader is a highly deliberate action. It isn’t done on a whim. To optimize your performance, you need to develop a trading strategy and stick to it. This strategy can serve as your guide for navigating the market; any position or outcome that does not conform with your strategy you should consider leaving it aside.
The good news is, there is a myriad of successful trading strategies out there. Day trading, position trading, swing trading, scalping and even buy-and-hold have all been proven to work a lot of the times, if they are followed them carefully. Crafting a strategy also helps you manage your emotions by giving you a blueprint for entering and exiting a position. In other words, it forces you to remove speculation from the equation.
- Become a student of the market
One of the best ways to remove emotions from your trading approach is to learn as much as you can about the financial markets. As Benjamin Franklin once said, “An investment in knowledge pays the best interest.”
Knowledgeable traders are far less likely to get duped by herd behaviour, get-rich-quick schemes and unproven trading strategies. They are also more likely to become anticipation-based traders because they understand the forces impacting their trades. If you’re passionate about the markets, demonstrate it by learning everything you can about them.
After a while, you’ll begin to see patterns and develop techniques that remind you the market really isn’t all that scary if you come prepared.
- Realize that trading is not a hobby
Becoming a successful trader doesn’t require full-time effort, but it isn’t a hobby, either. Trading is a business, and should be taken seriously. Therefore, you must separate it from your personal life, much like you would any other kind of professional or entrepreneurial venture.
One of the best ways to improve your trading psychology is to have clearly defined goals. If trading isn’t just a hobby like video games or sports, what is it, exactly? What do you intend to achieve by opening a trading account? By clearly defining your goals, you will begin to approach trading as an investment opportunity, not a game. Remember: funding a live trading account with real money has real financial consequences. It deserves your full attention and should be motivated by clearly defined goals and strategies. Traders that treat the markets as a hobby are far less likely to execute well-planned decisions or follow a clear trading strategy.
- Develop a winning trading psychology
If you are new to the financial markets, rest assured there will be many up days and many down days. But this shouldn’t deter you from developing a positive attitude toward the market and your chances of success at it. Any worthwhile pursuit in life must begin with positive intentions and a positive outlook. Trading is not very different.
To develop a winning trading psychology, it is better to first understand how the general market reacts to fear and greed. In general, fear (selling) and greed (buying) are what tend to dominate investor behaviour. It’s also why herd mentality is so prevalent in the market. This means you can expect traders to usually buy a security when the market is already rising and sell when the market is already on the way down. It’s this inability to manage basic emotions that can lead to market crashes. Therefore, developing a winning psychology begins by separating yourself from the behaviour of the herd. It also comes with the realization that the market will be correct regardless of your opinion.
Trading psychology is one of the most important characteristics of a successful trader and should not be overlooked by those aspiring to become market participants. These five tipis will help you move in the right direction as you set out in your trading career.
Trading Pyschology By Deema Osman, Content Writer, easyMarkets
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