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 traders learn is use of platforms, terminologies and conducting market analysis. The final step that is required to consistently make money in the market is learning how to manage emotions.
Trading psychology is an essential 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 wide spread 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
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 critical 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:
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.
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.
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.
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.