The Psychology of Trading

Overview
The usually overlooked factor relating to trading psychology is as essential in accumulating success in trading as learning fundamental and technical analyses for developing a holistic trading strategy. In this article, we will get to know how traders can and should intelligently handle the unpleasant emotions that often accompany trading.
outcome

How to rationally control emotional reactions when trading.

Reading time
5 minutes
Experience Level
  • beginner Beginner

What emotions do we need to contain?

 

As soon as a trader embarks on their trading journey, overwhelming emotions start to emerge. For this reason, traders must learn to understand, control, and maneuver such feelings, as they determine the probability of them making sound and risk-averse trading decisions. Here are some of the most common negative emotions that seem to take hold of traders of all types and levels:

 

Greed

Usually, a trader's primary goal is to earn as much money as possible, which is completely normal. What is not normal is to let greed blind and control your judgment where you begin to set high hopes of financial gain based on unrealistic projections. Greed usually results in misleading the trader into making irrational moves that usually result in heavy losses. For these reasons, anyone who is interested in getting into the trading business must learn to control their desires for making money and orchestrate them to their own advantage. To be a dedicated trader, you not only have to strategize your trades but to learn to commit to them and to double down on your risk-aversion skills.   

 

Fear

Are you the kind of trader who gets anxious when anticipating or hearing bad news in stock markets? If so, that is not unusual, yet it is important to acknowledge such fear and learn to recognize its effects on your trading decisions. Contrary to what is believed, this fear could play to your advantage by adopting it as a risk detector when placing deals. You can follow the suggestions below to get a better hold of your fear when faced with market volatility: 

Recognize your fear as a natural reaction to expecting a possible loss.

Dig deep into the source of fear and try to predict it in the future.

Make sure you trade with money that is not your primary source of income with accepting the possibility of losing.

You can always exercise risk aversion, choose your contract sizes carefully and place stop-loss orders whenever you need them. 

Calculate the risk/reward ratio that indicates the risk you will be taking for every dollar you invest. 

 

Revenge

Some traders get revengeful of the market when it goes against their predictions. You will see such traders return to the market a day after a big loss with even a bigger bet. It is a well-known fact that there are no guarantees in trading. But if we were to come up with any, it would be the strong possibility of losing your money in revenge trading.  


Every time you feel like you have a desire to take revenge on the market, ask yourself these two questions:

Are you ready to go through this experience again?

Are you prepared to undertake a new loss?

Accept and learn from loss and try again once you set up new strategies.

Do not deny yourself the well-deserved needed rest after a significant loss.

Do not over-trade to the point of addiction so as not to fall into the trap of emotional trading. 

 

Follow the tips we have mentioned above, and you will likely be able to deviate from plays of emotion in trading and learn how to protect yourself from loss.  

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