What is trading psychology?
Overreaction of bad news about a financial instrument or the forex market is human quality.
What psychology and discipline can do for you as trader?
There are many characteristics and skills needed by traders to succeed in the financial markets. The ability to understand the major economic processes and to determine trend direction are two key skill sets. Analyze and formulate a trading strategy as well. But none of them is as important as being capable of controlling emotions and maintaining discipline.
Lack of discipline and the pitfalls of human psychology and emotions are one of the most common causes of trading failures. In fact, as traders it is not that difficult to deal with them. It is important to know what to look out for and to be able to accept failures and learn from our mistakes.
Psychology for traders
The psychological aspect of trading is of considerable importance. Traders buy and sell currencies on the forex market, trade stocks or other financial instruments such as cryptocurrencies. They often have to make deals for very short periods and this requires quick decisions. To achieve these goals, they need some mental training. They also need discipline. In this way, they can stick to the already established strategies and know when to end their positions. In no way should emotions be involved in decision making.
When traders get bad news about a financial instrument or the forex market in general, it is normal to be scared. As a result, they may overreact, feel compelled to close their positions, and refrain from taking any further risks. If they do this, they can prevent certain losses, but at the same time they may miss their chances. Traders need to understand what fear is: an instinct that is activated when some kind of threat arises.
Determining the amount of fear could help. Traders need to think about what they are afraid of and why they are afraid of it.If they think about these issues and understand how they can instinctively react and perceive specific things, traders can try to identify and isolate these feelings. And then try to focus on eliminating emotional stress. Of course, this is not easy and may need to be practiced, but it is necessary for the good condition of each trader's portfolio.
Greed is the greatest enemy
On Wall Street, an old saying goes that "pigs slaughter them." It refers to greedy traders who hold profitable trades for too long, trying to suck the last drop. This can be disastrous for the position, as you never know when the market may change direction sharply. Greed is not easy to overcome. Often it is based on the instinct to achieve even better results, to take from the market a little more and a little more. The trader must learn to recognize this instinct and develop an appropriate trading plan leading to rational decisions.
Discipline for traders
In order to trade properly and not fall into psychological and emotional traps, traders must create certain trading rules. They must impose rules on when to enter and exit their positions based on their risk-return tolerance. In order not to depend on your emotions when making a decision, it would be a good idea to use the stop order and limit order functions.
Traders should also consider setting limits on the amount they are willing to win or lose in a day. If the goal is met, they close the position and collect the profit. If they lose and reach a predetermined stop, it would be prudent to exit the market, preventing further losses. Traders need to be educated in their area of interest as best they can. If possible, attend seminars and trainings on the topic. It is also logical to allow more time for research and analysis. This means studying graphs, reading news and macroeconomic analysis. Traders should be prepared as soon as the trading session begins. Knowledge can help overcome fear.
It is also important for traders to remain flexible and to consider experimenting with new things from time to time. For example, they may consider using risk mitigation options or placing a stop order in different locations or using trading algorithms (trading robots) to eliminate the impact of emotions.
The effectiveness should be evaluated periodically. In addition to reviewing returns and individual positions, traders need to review the way they prepare for a trading session. This periodic evaluation can help the trader correct his mistakes and thus support his overall return.
Although it is important for all traders to be able to read charts and their balance, there are also psychological components of trading that should not be overlooked. Exercising discipline and developing trading rules and plans are crucial to ultimate success.
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