Basic Psychology of Trading
Trading psychology is a broad term that encompasses all the emotions and feelings a typical trader will encounter while in the market. Some of these emotions are actually useful and may be for traders to embrace, but others such as fear, greed, nervousness and anxiety should be avoided. Trading psychology is complex and takes time to fully master.
In fact, many traders experience the negative effects of trading psychology more than the positive aspects. This statement can be seen in the premature closing of a losing trading position, for example, due to the emergence of fear of losing too big, or simply doubling down on a losing position when fear of realizing a loss turns into greed.
One of the most dangerous emotions that commonly occurs is the fear of missing out, also known as FOMO. The parabolic rise entices traders to buy once the move has peaked, which causes enormous emotional stress when the market reverses and moves in the opposite direction.
Traders who manage to benefit from the positive aspects of psychology, while managing the bad ones, are better placed to handle the volatility of financial markets and become better traders.
Trading Psychology Fundamentals
Managing emotions
Fear, greed, excitement, overconfidence and nervousness are typical emotions experienced by traders at some point or another. Managing trading emotions can be the difference between growing account equity or heading for bankruptcy.
Understanding FOMO
Traders need to identify and suppress FOMO as soon as it appears. Indeed, this is not easy, traders must remember that there will always be other trades and should only trade with capital that is ready to lose.
Avoid trading mistakes
Meanwhile, regardless of experience, all traders make mistakes. However, understanding the logic behind these errors can limit the snowball effect of trading bottlenecks. Some common trading mistakes include: trading in multiple markets, trading inconsistent lots, and using excessive leverage.
Overcoming greed
Greed is one of the most common emotions among traders, and it deserves special attention. When greed trumps logic, traders tend to double down on losing trades or use excessive leverage to recover from previous losses. This sounds easier said than done, but it is important for traders to understand how to control greed when trading.
The importance of consistent trading
New trading positions often seek opportunities wherever they arise and are lured into trading in many different markets, with little or no regard for the inherent differences in those markets. Without a well thought out strategy that focuses on multiple markets, traders can expect to see inconsistent results. Learn how to trade consistently.
Debunking Trading Myths
As humans we are often influenced by what we hear and trading is no different. There are many rumors surrounding trading such as: a trader must have a large account to be successful, or in order to be profitable, a trader must win most of the trades. This trading myth is often a mental block, preventing a person from trading. Find out the truths and lies of forex trading from our analysts.
Implement risk management
The importance of effective risk management cannot be overstated. The psychological benefits of risk management are endless. Being able to set targets and stop losses, up front, makes it very easy for traders to face the market because they understand how much they are prepared to take on risk in pursuing their targets. Another aspect of risk management involves the size of the position and its psychological benefits.
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