Traders need to be aware of their trading psychology because it can affect trading decisions and significantly impact the financial markets.
Trading psychology has a significant impact on trading. It impacts trading in two ways: trading psychology affects our trading decisions and the financial markets.
Emotions such as fear, doubt, and greed can affect trading decisions negatively. In contrast, emotions such as patience, confidence, and discipline can help us make better trades and become successful traders.
For example, if we are in a good mood and feeling optimistic about our trades, we will often take more risks than usual and may ignore potential losses as closely as we should.
On the other hand, if we feel depressed or frustrated about an ongoing trade or current market behavior. Then, over time, the trading results from our trades will likely lead us to make poor trading decisions, and you will lose money, such as cutting out too early when things get tough instead of pushing through to find success.
This article will discuss trading psychology from both perspectives of traders’ emotional state of mind and market participant-impact of traders’ emotional states on the broader market.
We’ll also cover some techniques that investors use to improve their trading performance by managing their psychological tendencies or taking advantage of other people’s mental vulnerabilities.
How trading psychology affects our trading decisions?
We are human, and we are not out of emotion. We use many tools, technical trading indicators, fundamental analysis, different financial parameters, and thousands of trading strategies to be successful traders.
However, all are useless unless you develop your trading psychology, control your emotions, develop your fast thinking, and implement discipline in your trade.
Four essential factors play a behind our trading psychology.
- Lack of proper investing knowledge
As human beings, we are not beyond mistakes and don’t have 100% control over our minds. But if we want to be professional traders, we must grow our confidence. We should not fear whatever the market conditions are. We also need to improve our investment knowledge and give up greed to develop our trading psychology day by day.
Confidence is one of the essential facts behind trading psychology. Sometimes traders have to make their decision quickly and watch the fundamental reports and technical charts. But some traders are not confident enough to take decisions rapidly and smartly.
There may have many reasons behind the lack of confidence. Like lack of proper trading plans or strategies, and we might not have adequate knowledge. Sometimes it also happens that if you lose some trades at a stance. It also destroys the trader’s confidence.
But if you are not confident enough, it will hamper your trading career. So, if you want to develop your trading psychology and make a consistent profit from the financial market, you should grow your confidence. To increase your confidence, make the right trading plans, build a profitable trading strategy, improve your knowledge and minimize your trading loss and risks.
Like, we are selling gold based on previous fundamental and technical analysis. Suddenly, if we get news, that will increase the demand for gold. In such a situation, we will be scared to get that news. Because we already understand that our gold’s sell trade will be closed in a loss.
If you did open our trade following risk management, we should be scared. But, when we get unexpected news that goes against us, we should not be afraid of that. Instead, we should make that surprising news as a profit-making chance but be careful to jump into the market just hearing the news.
Take your time to research and about the news and check the technical charts before you jump into the trade. In the speculative market, anything can happen at any time. So, don’t get scared and keep calm.
Lack of proper knowledge
We all know knowledge is power. As much as you will learn, the more trading psychology will grow and develop. Most of the traders don’t want to study, but they expect to earn money. If you don’t know how to invest, how fundamental analysis works, how technical charts will help you to make decisions, it is not possible that your trading psychology will grow, and you will win in the battle of trading.
So, never stop learning. The forex market is always changeable. Every time will see essential news and issues are happening and they are impacting the market. No single technical indicator is going to give you 100% trading success. So, you can’t depend on one thing.
Never stop learning. Make good trading plans and strategies based on your knowledge. Hopefully, after a certain period, you will be more professional, and proper trading knowledge will develop your trading psychology.
When it comes to trading, we all want to be rich shortly. We can’t hold our winning trade for a long time, but when the financial market goes against our business, we carry our losing trades day after day because of greed, though we know we already made mistakes.
It is the most challenging job to overcome greed. Especially newbies are often greedy and even experienced traders as well. However, greediness is human behavior, but it is possible to overcome with practice and patience.
Greed is a strong and often conflicting emotion, but it can be overcome with the right skillset. But, first, a trader should learn to recognize this instinctual desire for success in themselves and others. So, they don’t let their whims dictate what direction trading takes without considering all factors first-hand or, worse yet: letting someone else decide how best to trade.
How to Develop Our Trading Psychology?
Trading psychology is the mental state of the trader. It includes beliefs, emotions, trading rules, and discipline that are necessary for a successful trader. Trading psychology can be developed by following these ten tips:
1) Have a plan before you trade
Develop trading psychology by having a trading plan before entering the market.
Once you know your trading style and what triggers will make you trade, create an entry and exit strategy for your trades using different types of technical analysis tools like Support & Resistance or whatever you are good at.
In your trading strategy, you should also include a risk management strategy if things go wrong in the market and you lose money from trading. It is crucial to have the right trading strategy or system to make money with minimal damage to your account balance.
There are many technical trading tools and fundamental news that we use in our trading. Though fundamental analysis is a bit hard task, we should have minimal knowledge about fundamentals. At least in your trading strategy, you should include it. If you are not good enough at fundamental, better avoid trading while fundamental news releases.
But if it is possible to make your trading strategy or strategy combining technical tools with fundamental news, do it. It will provide the most accurate results in trading. But if you can’t make it, ok too. Then try to use big-time trade. Hopefully, your right trading strategy will help to develop your trading psychology.
2) Be disciplined in your trading plan
You can develop your trading psychology by following the trading discipline. Remember to keep emotions far from trading and always think clearly without falling into greed or fear when trading.
It’s a challenging world out there, and trading is no exception. The markets are constantly changing, new trading strategies are being created every day, and entire economies can rise or fall in the blink of an eye. It seems like nothing is stable anymore – but one thing remains true: you have to be disciplined if you want to make it as a trader.
After every trading session, remember to take some time for yourself away from the market so that you can re-energize your mind and body while doing something else like watching a movie or meditating.
This will help you get refreshed before trading another day at the stock market or trading in financial markets like forex trading.
What does discipline mean for traders?
For starters, it means that you need to know where your money is going before any trades happen. You should always set up clear rules for yourself about what kinds of trades are acceptable under your trading plan (and which ones aren’t). How much risk you’re willing to take on at any given time when you’ll cut losses short and let profits run. And how you’ll make sure that you are not doing emotional trading.
Trading discipline is much more than just following a set of rules – it’s about having the strength to follow those rules when times get tough. If you’ve never been tested before, if no one has ever really put you to the test in times of real turmoil, it can be tough to know how you’ll act when that next market crash comes.
3) Focus on winning trades instead of losing trades
It’s not uncommon for people to get into the stock market and end up losing money. The key is to focus on profitable trades instead of those trades being in loss. Focus on what you’re doing and try to avoid emotional decisions that will cost you in the long run. The forex market is a volatile place to invest your money. As an investor, you will have times when you are on the winning side of trades and other times on the losing side. As an investor, you must focus on what can make your portfolio grow instead of fixating on losses.
As the forex market is speculative, so anything can happen at any time. So you must create the right trading module, maintain trading discipline and follow money management before you trade. Instead of the following everything, your trade may go into loss. That’s is customary in the financial market when every economic and geopolitical news impacts the market.
So, it is expected that you can’t win 100% time in the forex market. But, if you focus on your losing trade and spend more time on it, think there is a chance you will make more mistakes. Thinking about losing business will create tension and keep you upset. It won’t deliver a good result. So, as you open your trade following money management, don’t about your losing trade. Instead, think about your winning trades that will give you more hope.
Just take a lesson from you lassoing trade, why that happened. If you find a good point that was your mistakes, then learn from them and implement them. You’re your next trader. And also, follow why you won at your last trade. If you find a good reason, add that reason to your trading module. Hopefully, this process will develop your trading psychology day by day.
4) Follow Proper Risk and Money Management
Proper money management is a crucial factor in any trading system. Many different money management strategies work for the individual trader. But it’s essential to find one that best suits you and your needs. A money management strategy will help keep losses small and profits large.
Usually, you shouldn’t take more than 2% risks on your every trade. If you lose 50 trades in a row, your account will blow up. It is tough if you have minimum trading knowledge that will make 50 losing trades in a row.
Taking 2% risks at your every trade is fine, but if you open too many trades at a time, this is also a violation of risk management. So you are following 2% risk on every transaction, which means you are tracking money management, but if you open too many trades, you are not following risk management.
So, you should understand the difference between money management and risk management. To obtain risk management should not open more than three trades at a time, That means you take an absolute more than 6% risk on your funds at a time.
I also want to include, like you are buying gold and silver together in the bull market. And it is taking 2% risks on each trade. That is also a violation of risks management. Because gold and silver always move in the same direction. If you lose in the gold trades, there are high chances that you will lose in silver as well. That means you are taking a 4% risk.
So, you should not do that. You should have a good idea about assets co-relation. Like buying EUR/USD in the bull market and selling USD/CHF in the bear market are identical most of the time. If EUR/USD rise, USD/CHF drops most of the time. Choosing related and co-related pairs are also part of risk management.
5) Wait for high probability setups and confirmations
Don’t rush; wait for the confirmations. Let the market close its candle. Investing market is not going washed away. When we get positive or bad news, we get a hurry to open a trade. When the market breaks any support or resistance or channels, we become hurry to open trade. We think, oh! We are missing trade opportunities.
That habit is risky because you don’t know whether the market will create a fake break out or not. May be market has reached its swing area. Maybe the news is artificial, or investors realize that the information won’t work. Even it also may happen that market makers are manipulating. So many things can be happening.
Remember, when the market moves in impulsive directions, there will be a correction too. It’s a sign of the excellent market and good opportunities to enter the market. Yeah! There should be nothing to say about 100% confirmation in the forex market.
But all uncertain facts have some high probability. So you only should open your trade when your long testing trading strategy says that there is a high probability of winning this trade. Then think about opening the trade and wait for the confirmation.
Like you trade based on only support and resistance. First of all, confirm that the market has closed its particular candle above or below support and resistance level. If you see the market has closed above resistance and gone far away from the opposition. Don’t open a trade instant and don’t make quick decisions. Let the market corrects the downside where the resistance level will work as a support. Then, try to buy from the support level. Analysis of the charts with price action.
Because you know, if you buy instant, you will cost more. So, it will be hard to proper risk and profit ratio management. Even, it might also happen, the market reached its swing area, and you just entered. That will cause the stop loss. So, always seek the high probability trading set tups and wait for the confirmations.
6) Don’t be overconfident
Overconfidence is a big problem for beginner traders. If you win some trades at a stance, you may feel overconfidence. You are trading psychology will divert you to over trade, taking some risks. You will become greedy. That’s really true.
When you are overconfident, you won’t care about risk management. Then, when one or two trades go in, loss psychology will push you open counter trades. Next, you will start to think about some miracles. But every time, luck will never favor you. And finally, you will lose your funds.
Sometimes I realize, never traders win all the trades. Traders would be mentally patient just by happiness and overconfidence. So, if you win some businesses at a stance, take a break, withdraw your profit, take some relaxation and have fun. Spend your profits and save some for the future.
7) Take a break after losing trades
Loss is part of trading. It is not possible to win every trade. If you open your trade with money management, it’s not a big deal for one to two stop losses. But if you’re trading without money management, that is the problem. But sometimes, it can happen.
Suppose you open trades and continuously lose, then you should take a break. Now analysis the past trades. Find out the reasons what was the mistake? Don’t repeat the same mistakes that you made before at your trading. Instead, study more, develop your trading plan and strategy. Don’t hurry to open a new trade. Take your time to think about the market situation.
While you will miss some trades at a stance and repeat, you will be aggressive to recover from your losses. But, that will cause more problems because our psychology of trading can’t work well under pressure. So, it’s better to take a break, think about your mistakes, and solve them. Till you get the suitable trading setup and confirmation, don’t rush for the new trade.
8) Keep patience
It is the hardest part of developing our psychology of trading. Patience is the key to success in trading. This doesn’t mean you should expect long periods without any progress, but rather that when things are going well, you need to keep your cool and be patient. Forex trading can be difficult for many people because it requires a lot of patience. It’s easy to get frustrated with trades that take longer than expected or don’t work out how you expected them. But this is where being patient comes in handy.
Good things come to those who wait. If you’re not patient, the market is going to end up beating you into submission until you give in and lose all your money. As a trader, you mustn’t let yourself get frustrated or angry with trades that take longer than expected. Every trade has its advantages and disadvantages which they can’t control. So it’s important to remember this and not let yourself get upset with the market when you come across a bad trade.
Patience is also essential for maintaining your discipline, which will lead to more success in trading. If you give up after losing money or giving into impulses due to frustration, then there’s no way you’ll be successful. So both are essential keep patience when you are in profit and carry that trade and keep patience while you are at a loss and cut your losses according to your trading strategy.
9) Have a great base of knowledge
Knowledge is power. The more you learn, the more experience you will gather. Without knowledge, you can’t build strong trading psychology.
Forex trading is a high-risk and high reward profession in the world. Therefore, its importance cannot be overstated. If you want to succeed, you must educate yourself on forex trading before investing any money into the market. Without proper education and knowledge about how the markets work, it’s impossible to make money in this field of investment without having good investment knowledge. If you need it, even you get help from the trading coach.
You will be scared; you will make many mistakes without having a great base of investment knowledge. You should know how fundamental analysis works in the forex market, how to read the economic calendar? How do financial reports drive the stock price? You also should have ideas on how technical analysis works? Which technological tools you should use and many more things. And, of course, you should have excellent knowledge of risk and money management.
10) Practice! Practice! And Practice
Practice, practice, and practice. The more you learn, the better trader you will be, only if you practice correctly. A trader without exercise will never get good at it. It’s important to remember that the Forex market is constantly changing. Many things can influence our decisions, such as the news, economic factors, or even other traders’ reactions to certain events in different parts of the world.
The best way for a beginner investor/trader would be to learn from sources like videos, online tutorials, read books about trading FX markets, etc. Then, go through those lessons again until their technical analysis works appropriately.
To become a successful trader, you have to understand the ten golden principles of trading psychology. It’s not an easy task, but these strategies will make your trading life more manageable with time. But when it comes down to deciding how much or what type of trade should happen next in any given situation that may present itself.