Trading in the financial market is a highly technical activity. To be successful in trading, you must understand how the financial markets work. However, apart from technical skills, it is also essential to sharpen one key attribute which is trading psychology.
Role of trading psychology in profitability
Trading psychology is the right mindset you need to remain disciplined and keep your emotions under control when the market goes against your predictions. Consider this: you are monitoring the markets while waiting for the right moment to enter a trade. Now, it is understandable if you are acting cautiously due to the fear of losing money.
Usually, you will wait for a better support line before entering a trade. However, you may miss the entry and the market may trade-off without you. There is no need to worry much. You can wait before catching the next wave. Now, if you are afraid of taking risks, you may end up missing the next opportunities as well.
Meanwhile, it is normal for you to interact with other traders through online forums. While they are making great profits, you are stuck without entering a single trade. This is when you will start feeling like you are missing out on profits, which will lead to anxiety and frustration even when you have not lost money.
So, at this point, it is not surprising if you throw all caution out of the window and make reckless decisions. However, here is the thing. Trading can never be successful if you are driven by emotions like this. Markets can change directions at any time and you may end up losing all your money.
This is why trading psychology is important. You must control your emotions to make the right decisions. Along with having the right mindset, you also need the discipline to stick to your trading plans and strategies, regardless of the market conditions.
Impact of emotional trading
If you let your emotions control you while trading, then it can affect your trades in many ways. These are some of the trading issues caused by emotional trading –
Not taking loss
Usually, the reason behind this is the fear of failure that a trader faces because it puts their ego at stake. However, you must realize that you cannot avoid losses completely. It is also a part of trading, and not taking any risk at all will only result in missed opportunities.
Hoping and wishing
When traders make trading decisions and execute their trades based on their wishes or hopes instead of following the market situation, it is most likely to take downhill. Always keep in mind that predictions must be made based on logic, not on emotions.
Second guessing signals
These are frequently caused by the fear of being wrong and the fear of failure. If traders have a hard time accepting that loss is a natural part of trading, they second guess their signals.
When traders get addicted to trading, the addiction can be as dangerous as that of gambling. Being compulsive can lead to not being cautious when a trader is executing a trade. This is when you have the highest risk of losing your money.
Being scared to enter positions
This is also caused by fear of failure. Other reasons this can happen are risk awareness, fear of being ridiculed, need for control, or lack of a trading system. However, if you cannot even enter positions because of your fear, then there is no place for you in the financial markets.
Exiting trades too early
This happens due to a trader’s need for instant gratification. While trading, if you are anxious and fearful that the position may reverse, you may take the rash decision of closing the position for relieving your anxiety. However, this decision taken on impulse can prove to be wrong.
Some traders are driven by greed and the need of conquering the market. Sometimes, it can also be caused by anger, when the trader is making an attempt of making up for previous losses.
It refers to a situation where the trader does not admit that the trade is wrong. They keep hoping that the trade will come back and continue to add to the losing position. This also happens because of the trader’s ego and the result is never great.
Some traders start to feel they are invincible and in control of the markets after winning a series of trades. This can lead to risky trades.
Trading a large position size
The main reason behind this is the disillusionment that the trader can turn any trade into a profitable one. It can also be caused by poor risk management.
Tips to improve trading psychology and keeping away from emotional trading
Novice traders often think that they are being rational while trading by making decisions solely based on data and facts, but that is not the case most of the time. Emotions are bound to cloud your judgment if you are a human. So, you need to improve your trading psychology. These tips may help you to do that.
Have a plan
If you want to earn money through online trading, you must treat it like business and always have a solid trading plan. Before entering the trade, make sure to determine entry point, risk-reward tolerance, and your exit as well. Not only having a plan increases the chances of making money but sticking to your plan also prevents emotions from taking control over the whole process.
You can improve your trading psychology by increasing your knowledge constantly. By knowing more about the market and its behavior, you can become better at decision making instead of reacting to a situation with panic.
Be prepared to lose
As mentioned before, you need to keep in mind that you are going to lose some trades, no matter how much analysis you do. By being prepared to lose some trades, you can refrain yourself from panicking and taking rash decisions.
Trading online implies a lot of stress and high psychological strain that you will need to withstand. However, anxiousness is triggered by uncertainty, which you should know how to deal with.
Although you will not eliminate it completely, constant learning will definitely improve your market prediction skills and deepen your understanding of the situation. Most importantly, keep practicing as much as you can to gather more confidence.