What is Trading Psychology?

Trading psychology is an important aspect of trading stocks, Forex, or virtually any other security. In fact, it is no less significant for conducting a successful trade than, say, trading skills and knowledge or current market conditions.
 
Trading psychology is associated with the traders’ mindset and how they are managing their emotions, thought processes, and trading decisions. According to the trading psychology definition, traders have better chances of getting large payouts, or at least not losing too many funds, when they stay rational at all times and not yield to greed or fears.
 
Even though psychological stimuli are subjective and different for individual traders, there are still some universal influences that determine how people conduct their trades. These stimuli include:
 

  • Fear
  • Anger
  • Impatience
  • Greed

 
When a trader is afraid, they may feel compelled to liquidate all their trading funds and not open new positions, which can make them miss the real opportunity. When they are angry after a loss, they tend to make rash decisions and open new trades when the market is clearly against their position.
 
As for impatience and greed, traders overcome by these passions usually want to get payouts immediately or/and at large amounts. They don’t want to wait and make tiny steps towards success; they want to achieve it at once, which can often lead to their demise.
 
In order to overcome fear and anger, and manage impatience and greed, traders need to practice their psychological responses to various situations, just as they practice their actual trading skills. This way, they will not be overwhelmed when the market behaves in/against their favor.

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Trader mindset/psychology of trading - why is it important?

When trading in a financial market, whether it’s Forex, stocks, commodities, or anything else, traders have to have a certain skill set that will enable them to minimize possible losses and increase upcoming payouts. In this sense, having extensive trading knowledge and experience, as well as regularly following the market developments, are pretty much essential.
 What is Forex trading psychology
However, the importance of trading psychology should not be underestimated. The way traders handle various market developments mentally can have no less significant effect on the success of their trading positions. Even if they know everything about trading terms, techniques, and strategies, and regularly get updated on market developments but don’t have enough mental experience not to make rash decisions, the chances of grave losses will still be high.
 
Therefore, having sound trading psychology can increase their chances of getting larger payouts or, at the very least, reduce the impact of losses. This is even more important as, on many occasions, traders need to make quick decisions about opening or closing a position or modifying it, and having a certain presence of mind can make their decisions more conscious.
 
Now, there are lots of psychological stimuli that affect the traders’ decisions. In fact, they are very subjective and individual traders experience different responses. However, trading psychologists still outline some of the more universal stimuli that tend to emerge all across the board. More specifically, we will review four of those stimuli:
 
  • Fear - when a sudden market development like the stock market crash occurs and all they think about is to liquidate funds and save the cash
  • Anger - when they lose during the trade and they’re so angry they cannot stop opening new positions
  • Impatience - when they engage in trading but the actual payouts are so minuscule that they cannot help but go big: make huge deposits and open much larger positions
  • Greed - when they receive a payout from the trade, which attracts them to the extent that they cannot stop opening new positions
Basics of trading psychology
All of these Forex trading psychology stimuli lead to the deterioration of traders’ perception of what is really happening in the market. Let’s take a look at each of them more closely and see how they manifest themselves in trading. We will categorize these responses in terms of their psychological characteristics: Fear and anger - as they’re more negative in a sense that the outside world is having a greater influence on a person, and impatience and greed - as they’re more positive in a sense that a person is trying to extend their influence on the outside world.


Fear and anger

One thing that is absolutely essential to understand is that both fear and anger are innate feelings that every single person experiences in their lives. It’s pretty much impossible to completely eradicate them. However, with some practice and mental work, we can learn to better react to them.
 
When a trader finds out that something drastic like a stock market crash has just occurred, their gut tells them that it is not the best idea to not only open new trades but even to hold tradable assets. Therefore, they start liquidating their holdings and turning them into cash, not to mention their reluctance to place new trading positions.
 
As for the anger, it’s also an incremental part of our emotional build. When the market goes against the trader and causes them to lose funds, anger tends to get hold of them in many cases. This, in turn, clouds their perception of market development and makes them open/close positions based on emotions, instead of calculations.
 The Psychology of Trading
Now, while these stimuli are certainly natural and unavoidable even, for developing successful trading psychology, traders need to be aware of what they’re afraid of, as well as what makes them angry beforehand - that is, before the accident has already happened. This is possible through mental exercise and the realization that while there will definitely be many difficulties along the way, traders can actually turn them into their advantage by thinking clearly and not yielding to emotions.
 

Impatience and greed

Next up, let’s talk about impatience and greed in trading. Unlike fear and anger, these psychological stimuli usually emerge when traders have a more positive experience during trading and want to have more of it.
 
One of the biggest misconceptions in trading is this idea that people can instantly get rich just by starting trading in Forex, stocks, or any other market. They believe that with a single position, they will get a huge payout.
 
However, in real life, this is rarely the case, unfortunately. In actual trading, notwithstanding the financial market, people tend to generate smaller portions of a payout per single trade. And the reason why most successful traders are actually successful is that they do things step by step, accumulating payouts every step of the way.
 
Not taking this important aspect into account, impatient traders tend to make rushed decisions and place too large positions per single trade. This way, they may be increasing the prospective payouts, but more importantly, they’re also increasing the size of losses. And more often than not, such decisions lead to losses than payouts.
 Forex trading psychology
 
As for greed, yet another important factor in the psychology of trading, it also is innate to our character. In trading, there is a common saying that “pigs get slaughtered,” meaning those who want more and more of the payout will get caught and start to actually lose funds.
 
Traders, who find a perfect spot where their position generates payouts, tend to maintain that position for a long time in an attempt to take every penny out of the market. Unfortunately, the market tends to make drastic swings after a long period of upward/downward trend. Therefore, it is better to stay careful at all times and not yield to whims and instincts.
 

Some tips on how you can improve your trading psychology

How you can improve your trading psychology

Having listed some of the most widespread psychological stimuli that influence the decision-making process in trading, it is also important to propose a method that can help people overcome them. As we noted earlier, the sound and present mind can be just as effective in trading as skills and knowledge. Therefore, here are some tips for developing successful trading psychology:
 
  1. Discover your personality - when deciding to trade on a financial market, it can be of massive help to find out your personality trait: whether you’re an impulsive person or someone who doesn’t fall for emotions that easily. If you find out that you’re an impulsive trader who can be overcome with fear or greed, knowing it beforehand will help you control the emotions more effectively. And if you’re more stable in that sense, you will know that you can trust yourself during the most critical times;
  2. Set up a trading plan - when you’re doing something, you first set out a plan and then follow it until the end. The same is true for trading. If you develop a plan, you will know exactly how much time you dedicate to trading, as well as how much money you put in it and what strategy you will stick to till the end. In short, the plan will guide you through every step of the way;
  3. Don’t expect fortune right away - as we noted earlier in the article, success doesn’t always come knocking on your door right after you’ve started trading. In fact, your individual positions will likely generate smaller payouts. But that shouldn’t upset you because that is how it usually happens in trading anyway. Successful traders stick to a plan and take things one step at a time, which ultimately results in a successful trading career - at least there are more chances of it;
  4. Don’t be greedy - this next tip may seem pretty straightforward but still many traders tend to choose this way. While it seems like a good idea to always stick to one strategy that generates payout, you need to be aware that the market always changes its direction and will never be in your favor all the time. Therefore, expanding your knowledge, reading some of the best trading psychology books, and employing new strategies will help you adapt to new situations and always be prepared.
 
These tips are by no means everything that a trader needs to know about trading psychology or how to improve emotional responses to the market developments. However, taking them into account can still have a significant effect on how they react to the payouts or losses and how they make trading decisions.
 

 

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Trading psychology basics - Key takeaways

People trading in various financial markets need to have various skills in order to lead successful trades. The first thing that jumps to mind is the actual knowledge and experience of the trading market, however, it is equally important to have a proper mindset and not yield to rash emotional responses.
 
Trading psychology is an important aspect of trading stocks, Forex, or virtually any other security. In fact, it is no less significant for conducting a successful trade than, say, trading skills and knowledge or current market conditions.
 
As the trading psychology definition goes, when traders stay reasonably cool headed and rational, they tend to have better chances of generating larger payouts. Besides, they can even minimize the amount of loss they take.
 
In this article, we talked about 4 of the most popular and universal psychological stimuli that affect traders mentally:
 
  • Fear of a loss during drastic market fluctuations
  • Anger from losing funds   
  • Impatience for getting large payouts right away
  • Greed for getting more and more of the payout
 
These emotional stimuli manage to cloud the judgment of a trader, leading them to make rash trading decisions and ultimately lose funds. Therefore, it can be a good idea to sort things out with your current emotional state, develop a certain plan, be patient, and adapt to new occurrences. This way, traders tend to yield less to emotions and more to reason.
 

FAQ on the basics of trading psychology

1.What is Forex trading psychology?

Forex trading psychology is one of the most important aspects of trading that can have a massive impact on how people conduct their trading positions. In fact, trading psychology is no less important than trading knowledge/experience or regularly following market developments.
 
Basically, trading psychology refers to the traders’ emotional responses to various market developments. There are lots of different biases and passions hidden deep in our character and certain events manage to wake them up. And while these responses are very subjective and individual, there are still some universal psychological responses found in trading:
 
  • Fear
  • Anger
  • Impatience
  • Greed
 
These stimuli emerge during different occurrences. For example, traders are afraid of losing funds during a serious market fall, which leads them to liquidate their holdings and stay away from opening new positions. By yielding to these emotions, their judgment becomes blurry and they fail to make more effective trading decisions.


2.How to master trading psychology and be more rational during trades?

As noted in the article, it is as important to have a proper mindset as it is to have proper trading education/experience. This way, you’ll be able to better cope with sudden changes in the market or other events that cause you to have emotional responses.
 
One of the best ways of restricting emotions is by finding out what type of personality you are. If you’re someone who easily yields to emotions, finding that out before you start trading can help you be prepared for what is coming. That is because even though we seem to know ourselves, our character doesn’t fail to impress us. And if you know that you have a tendency of making rash decisions during emergency situations, you won’t be surprised and overwhelmed by your actual decisions and will be able to come out of the situation more easily.
 
Another tip that can possibly improve the psychological response to various market development is to have a certain plan. In fact, a trading plan is important even if you’re not concerned about your mental condition - that is, you tend to remain cool headed and rational. It allows you to dedicate a certain amount of time, funds, and resources to the trading and have a strategy to follow. This ultimately helps your mind be less stressed over not knowing what to do next.


3.What are the best day trading psychology tips for Forex traders?

Traders can choose one of two methods of trading: they can either open a position and have it open for a long period of time (for days, weeks, or even months) or they can open and close their positions within a day. This latter strategy is called day trading and there are some day trading psychology tips you can use:
 
The first obvious tip that can be applied to any type of trading is to know your mental condition better. We already discussed this tip in the previous answer. A piece of more specific advice would be to take things very slow and not expect to suddenly get rich. As a day trader, you should realize that more often than not, your short-term positions won’t generate large amounts of the payout. Instead, you’ll have to take things one step at a time, open smaller and more rational positions, and slowly get to your own point of success.
 
Another piece of day trading advice is to be as adaptive as you can. During the short-term trades, it is possible to find a certain trend (uptrend or downtrend) and successfully stick to it for multiple trades. Now, while it may actually generate payouts, you have to know that in a short period of time, a trend that has been going on for a while can reverse pretty dramatically. This will instantly make your current strategy useless. Therefore, being adaptive and exploring new strategies will help you during such drastic changes.
 

4.How can trading emotions and psychology put your Forex positions in danger?

What is trading psychology? Why is it important to keep in mind? As psychologists and behavioral scientists suggest, our actions are based on our emotions quite substantially, therefore, we're bound to make mistakes when we are in an unhealthy mental state. And all this can manifest itself in a poor Forex psychology.

For example, when you experience a loss in your trading position, it's very easy to get angry and lose the ability to make clear decisions. And with such psychology of trading Forex, you can make rash decisions, go after the price movements that aren't beneficial for you, and ultimately, get into more losses. 

Similar cases can be made on other psychological impulses. Success can also cloud your clear thinking and let you believe that anything you do can bring more payouts in the market. In short, maintaining healthy trading psychology in Forex tends to me a more sustainable way towards success. 

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