Trading isn’t for the weak at heart, it’s a lot more emotional than you may think, and before you can master trading you have to learn to master your emotions.
Trading psychology is about understanding the way we react mentally to the stresses and pressures of trading
Controlling your emotions is essential to successful trading, without a clear mind you won’t be able to make rational trading decisions.
When trading there are two emotions that are more common, and more dangerous, than all the rest; fear and greed.
Fear and greed can ruin even the best trading strategies
One moment of fear or greed can lead to a moment of madness and months of hard won profits going down the drain
Uncontrolled emotions should not be an excuse for losses and losses should not be an excuse for uncontrolled emotions
Remember!! Trading affects psychology as much as psychology affects trading
“You can’t feed on greed”
Greed is trying to make money too quickly
There are lots of ways to be greedy in trading;
Fear in trading has two faces;
The fear of loss compels traders to close profitable trades prematurely, meaning they miss out on potential profit
The fear of missing out compels traders to abandon their trading strategy so they do not miss a major price move
Fear is NOT good as it leads to overtrading and miss-timed entry and exit points
DON’T BE SCARED!!
Risk management involves calculating how much risk you are prepared to tolerate in order to make a profit
For a more detailed look at Risk and Risk Management tools please refer back to the "Risk" Module
When trading it is important that traders realise the importance of Risk Management; it teaches you to pace yourself, to think clearly, and most of all, it helps keep your emotions under control.
Here are a few things you should think about when trading
When you take a hot bath, you don’t just jump in straight away; you test the water temperature with your toes first. Trading is no different. Never jump into the market with your entire position. Test the market first with a smaller trade before taking your full position
Aim for at least a 3-1 or at worst a 2-1 Profit/Loss ratio
Planning your risk/reward ratio means that you can prepare yourself mentally for the loss that you might face and prevent emotional trades.
One wrong emotional trade can produce a large enough loss to wipe out the profit of many profitable trades
Once you reach this target you should stop trading so as to avoid giving profits back to the market
P/L targets help to avoid fear and greed compelling you to overtrade and/or increase your trade size
Some times of day are more volatile than others:
Afternoon in London, which corresponds to morning in New York, is the most volatile time of day for most markets, with the largest price swings and profit potential and losses.
During periods of extreme volatility it is usually best to stand aside if you are not an experienced trader.
Here are some more trading tips that you may find useful
Use stop losses and limits – these take the emotion out of closing a trade and reduce the risk of unnecessary losses as a result of attachment to a position.
Traders allow losses to grow as their emotional attachment makes them hope the price will reverse
Trust your original judgment!
You wouldn’t invest $10,000 in a business enterprise on impulse – so don’t do it when trading!
Make sure to make time for researching the markets when you are not trading
An informed trade is always a better option than an impulsive trade
Patience is a virtue in trading; it is different to not trade through fear
Standing aside is a valid trading decision
Learn to anticipate price moves, not just follow them
Learn to love your losses
This is a term heard often in the trading world, and if you don’t learn to embrace your losses, your trading career will probably be short lived.
So, what exactly does “learn to love your losses” mean?
It means you should understand why you made a losing trade;
Some losing trades are not your fault; for example, an unpredictable event such as a terrorist attack could move the market, but…
The majority of losing trades are because the trader made an impulsive decision
Trade based on what the market is doing rather than what you think it should be doing. Trends and market conditions can change; make sure your strategy changes with it.
Cut your losers and run your winners
Don’t try to make your fortune in a single trade – you will never be satisfied if you have unrealistic expectations
To summarise, don’t underestimate the power of your emotions…
TAKE CONTROL OF YOUR TRADING, DON'T LET TRADING TAKE CONTROL OF YOU
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