Learn the basics of trading psychology
Understanding your mental state can help you take control of your emotions. That minimises the impact that successes and failures can have on your future trades. But how can you master trading psychology?
There is a saying amongst traders that the markets are driven by two emotions, fear and greed. Whether you are a novice or a professional everyone feels fear at some point but too much could make you act irrationally, either by influencing you to close a position prematurely or by preventing you from entering a trade at all. The key to controlling fear is understanding where it comes from and whether it’s imagined or real.
Fear would be reasonable during a market crash where all of your analysis tells you that there’s a crisis but in ordinary circumstances a fear of losing money or a fear of missing out on profit could be detrimental to your trading. If an asset is rising in price for example, it might be tempting to jump into a trade without proper analysis but this fear of missing out could put you at risk of losing capital.
Now let’s take a look at greed, the desire to acquire as much capital as possible. This get-rich-quick mentality dangerous because trading strategies require thought and patience. The internet boom is a good example. For much of the 1990s buying any .com stock was seen as a surefire way of making money, but investor greed caused the stocks to become overvalued. Finally, the bubble burst and the market participants lost money. Greed can cause blindness to the potential downsides of a trade so it’s important to consider the risks attached to the position and how much you stand to lose if the market goes against you. Remember knowing when to exit a trade is just as important as knowing when to enter one so stick to your trading plan and manage your risks with stops and limits.
When it comes to trading trading psychology is vital. In order for a retail trader to be consistently profitable, trading psychology is the most important thing.
It has been proven that the classic reasons why traders fail are the following:
- Lack of discipline
- Money management failure
- Poor strategy
- Over trade
In order for a trader to become professional someone would need a lot of practice. The only way to learn to play golf, learn to play tennis, learn to play a musical instrument is through practice, the same way as trading.
People looking for a trading strategy or a system believe that is the Holy Grail, hence they do not practice enough, especially new traders. Pure Market Broker also provides a Demo Account for that exact reason, to get familiar with trading and practice in order to prepare to trade the market with real money and much more confidence.
A mistake the beginners often make when going into their Demo Account and they practice is they think of the result to start with. And the result for a strategy is the least important thing at the start.
Trading can become hectic and extremely stressful, so it is important to go for a walk or work out consistently in order to relieve stress. Traders need to trade with a clear mind, in order to make better decisions.