In addition to acquiring the skills of capital management, ways of trading, and formulation of trading strategies, you also need to develop other skills, such as trading psychology, to succeed in financial markets. At this point, however, a question arises: what is trading psychology, and how is it going to help us? This skill allows you to control your emotions in a trade and, instead of going after these feelings, follow the rules that lead to your success.
Have you ever thought about why you fail to achieve constant profits while you are knowledgeable in capital management? Or, why do you close a trade before meeting your targeted goal? All these situations are linked to a concept named ‘trading psychology’ that can guarantee your success if you master it. Therefore, we have decided to discuss trading psychology here, so you can manage your capital in the best way possible and make the right decisions.
What Is Trading Psychology?
A vital success factor for traders is their mentality during their trades. According to experts, prices in financial markets are influenced by the psychology of traders whose emotions can raise or lower the prices. For instance, let’s assume a trader who establishes profit and loss margins for his trades but gets carried away by a series of news and closes the trade prematurely before reaching his set goals. That is, he ignores and breaks all the rules he had set for himself.
Trading psychology encompasses a wide range of human emotions, some of which are beneficial, and some others, such as avarice, greed, fear, anxiety, and anger, are detrimental to trades and should be restrained. In fact, the impacts of negative feelings can be said to be deeper than positive ones. These impacts include closing profitable trades too early or holding losing trades too long. In other words, the trader is aware that this is a losing trade, but he refuses to close it.
Hence, it can be concluded that a characteristic of people who do well in financial markets is their control over their feelings. In such markets, a successful trader is one who sticks to his rules regardless of any emotions and follows through.
What Is the Significance of Trading Psychology?
Those who are familiar with trading psychology find the right time to enter and exit the market, and consequently, they can make big profits. When a stock disappoints people, they sell it at much lower prices. This is the time when many pro traders enter the market and buy the stock at the price floor. Moreover, a good opportunity arises to exit the market when people get greedy about purchasing a stock.
So, in addition to controlling his own feelings, a person who learns trading psychology can also detect the market’s emotions and make more informed decisions.
Note that trading psychology is tremendously difficult in action and requires practice and experience.
An Introduction to the Foundations of Trading Psychology
In financial markets, such as Forex market, stock exchange, or digital currency, you have no control over the market, so you should have control over yourself. This is indeed the secret of those who succeed in the capital market, and instead of attempting to change the market, they try and control themselves. It would be like riding on a wave and using it to your own advantage rather than controlling it.
The market always keeps on its course, and the only thing you can do is decide whether to get into a trade or not. After that, it is up to the market to change the prices as it pleases. Now, the question that arises at this point is how to control our emotions and behavior in financial markets.
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Losing: The Inevitable Part of Trades
Whether you like it or not, losing is a friend to all traders. A person who intends to trade a commodity should make friends with losing and accept it. While losing annoys you, through it, you gain a large amount of experience that heavily affects your success in the future. In fact, there is no experience better than losing money, which facilitates your faster growth.
Of course, you should consider all your trades the way that losing money does not particularly harm you. That is, you may suffer considerable damage if you take a risk on all your assets. If you incur a loss in a trade, check the causes meticulously and learn from it; It is the only way you can avoid making the same mistake again.
If a trader expects nothing but profits as he enters the market, he will lose his control when facing a loss, closing his trade without regard to anything else.
Our advice to you is to define a profit and loss margin for all your trades and act accordingly. In that case, emotions such as greed and fear do not affect you. Additionally, stop the losing trades immediately as you detect them to prevent further damage.
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Set a Goal for Yourself
The second subject in trading psychology is setting goals. You need to define your objectives before entering the financial market; to what end have you entered the market? What do you intend to achieve? Some choose the financial market as their second job, and for others, it serves as their main job. There are also people who turn to the capital market only to maintain their capital. Now, the big question is: What qualities should our goal have?
- A goal should be achievable: Is it possible to earn 10 million in profits over a month through a 20 million investment? The answer is that this profit is not beyond expectation. It is probable to gain such a profit once or twice by chance, but it is not feasible to sustain it in the long term. Therefore, the goal you set for yourself should be attainable. For example, it will be accomplishable if someone seeks to earn 2 to 3 million in profits per month through the same amount of capital.
- Choose a realistic goal: Under the influence of social media or a particular movie, we sometimes pick a goal that is out of the question in reality. If you currently have a capital of 20 million, you cannot expect to turn it into 2 or 3 billion by the end of the year.
- The goal should be measurable: It is not quantifiable to say, “I want to gain profit from the capital market.” Instead, you can say, “I want to gain 10% profit per month through the capital I have right now.”
Hence, it can be concluded that having a high-quality goal is crucial for those who aim to succeed in financial markets because it is not possible to chart the course without it. It would be like taking a trip somewhere without any information or a map of your destination.
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Maintain Flexibility in Your Trades
The next point in trading psychology is to be flexible. After reviewing tens of different stocks, you may come to the conclusion that Company X has better shares and can bring you a large profit, but as you get into the trade, the share begins to drop in price. It is hard to take for many people, and they cannot decide to exit. On such occasions, flexibility can stop your financial losses.
These are the times when you need to check what happened to you and what went wrong with your calculations. You can prevent such issues from happening.
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Control Fear and Greed
Fear and greed are two strong emotions that can do you great harm if they remain uncontrolled. When you profit in a trade, you would like to regain the same profit over and over again. Such greed for profit constantly escalates, and you lose concentration on your trades. Greed is exactly what is used in gambling to trick people.
The opposite of greed is fear which makes people exit the market before reaching their goal because they are worried about financial losses. Also, one may get into a trade that is known to him as a losing one only out of fear of missing the opportunity.
Therefore, consider a set of rules for your trades at all times and follow them. Order and discipline come up on top in financial markets. Once in a while, of course, we may break the rules for some reason, but it should not happen on every occasion.
Some Key Highlights on Trading Psychology
Financial markets are always accompanied by profit and loss, and you cannot expect to profit all the time. Never get into a trade for revenge if you failed in the first one because it is less likely that the second trade is profitable. You should remain dynamic and make learning and experience your priority to make progress in these markets.
What we discussed in the topic of “What Is Trading Psychology?” is only a partial glimpse of the whole concept, and we sought to present the essentials.