To succeed in trading there are two fundamental factors that depend directly on you: The first factor is the knowledge and experience that is achieved with dedication and a lot of practice. The second factor, on which we will focus on this article, is in your mind with your attitude and with the proper control of your emotions.
The path to success in trading is no different in many other facets of your life, for example if you practice a sport, in addition to many hours of practice, a good psychological and mental preparation is essential to face the opportunities, sacrifices, obstacles , victories, failures,…
Trading psychology is vital for any beginner trader, who must develop their own investment strategy while learning to deal with these emotional factors. But it is also for professional traders who must remain psychologically strong and not lose discipline in order to be consistent and profitable for years.
What are the main emotions we face when we trade?
THE FEAR will make you do not want to take any risk in your trade.
It acts in two ways:
- You may see an opportunity to trade but fear does not let you dare to open any position and therefore you will lose good opportunities.
- You may have an open position and fear makes you close it prematurely: If the position is at a loss, fear will push you to close it so as not to lose more money when if you keep it the market could turn around and generate profits. If the position is producing benefits, fear will also push you to close it so as not to lose your earnings in the event that the market turns around when, if you keep it open, these benefits could be quite superior.
You will also be a victim of fear and impatience if you trade by risking money that you cannot afford to lose.
THE GREED is a very common emotion. Virtually everyone wants to earn more and more, with the least possible effort and if it is the sooner the better.
Greed will cause you to trade in excess and take too many risks so, instead of helping you make a profit, it will end your trading account. It pushes you to enter the market, to open positions without control, to not be patient waiting for the right opportunities. Greed also leads us to hold open positions in benefits longer than necessary with the idea of earning even more.
You are not controlling your greed if you see yourself identified in some of these cases:
- If you push yourself to open positions every day or if you can’t find good opportunities them you feel pissed off, frustrated or uncomfortable.
- If you feel furious to realize that you have missed a good trading opportunity.
- If you are taking a high risk to get greater benefits.
- If your goals are to double or triple your account in the shortest possible time instead of moving slowly but surely.
What are the keys to success in trading according to trading psychology?
Properly manage the losing trades
When most traders fall into a losing streak of losing trades they tend to blame themselves and try to change the trading strategy. They believe that these losses occur because there is something they have done wrong or that their system is not good.
If you are constantly changing the system it is impossible to know what works and what does not. It is not about never changing anything but doing it with discretion. Losing is part of the trading. It is completely normal and even the most experienced traders with winning strategies lose a significant percentage of their transactions.
You must develop your tolerance for error, avoid fear and accept losses as part of learning and on the path to becoming a profitable trader.
Properly manage the winning trades
A few winning positions can get on your head and convince you that your trading system is infallible, that you are a trading crack, that you have a gift for this or that you are immune to losses.
Nobody likes to lose, but when you start you can even become positive so that you realize that trading involves risks and that it is very easy to lose. Overconfidence can be your worst enemy. You will put more money into play and take more risks than appropriate. You will believe that the market will meet your forecasts and you will be unable to react to the mistakes you make. That is why trading psychology is so important to control these impulses.
Positive thinking works. When you think positive and follow your trading strategy you will get more successful trades.
On the other hand, if your thoughts are negative, they will drag you to make many more mistakes. You will be prey to fear or anger and you can hardly learn, analyze or act objectively in that state.
Think of any sport: Do you think that a famous basketball player will get something positive from thinking for himself that he will not be able to score, that he will fail every play and that he is really a bad player who has no future in sports. This is the best recipe to fail, so in any sport a positive inner language is very important to generate self-confidence. The same happens in trading.
Be aware of what you can and cannot control
No matter how hard you try, you cannot control how the market will react and whether a trade will be a winner or a loser. The market is made up of millions of people and automatic systems that make decisions and execute their trades without you being able to influence them.
What you can control is yourself and your way of acting: how you look for investment opportunities, what you rely on to make your trading decisions, how you limit the risks per trade, how you set your profit objectives, how you open positions when you close them…|
Focus on these aspects that you can control and do not become obsessed with the results. You cannot control the results. The valuable thing in trading is not the individual results of each trade but having a profitable and consistent trading system. You should always try to relativize the result and focus on your system. Neither the losses mean that your system is bad and that it is better that you dedicate yourself to something else or the benefits make you a master of the markets possessing an infallible system.
Have emotions under control
Feelings like fear and greed will always be there and you cannot eliminate them altogether. What you can do is control them, keep them at bay and try to attack the factors that generate those feelings.
Fear usually appears when you don’t have adequate market knowledge yet. You have no experience and you lack confidence in yourself and in your trading system.
The main solution is practice. Open a demo account to not risk your real money until you are ready, test, develop and optimize your trading system until it is profitable, be patient and maintain a positive attitude focused on learning. The first months are the most complicated: do not be discouraged or give up before losing trades or become confident in winning trades.
Another frequent cause of fear in many traders is that they trade with the aim of getting the solution to a complicated economic situation. If this is your case and you open a real account, risking money that you cannot afford to lose you will be easy prey to impatience and fear. I advise you not to resort to trading for this, try to find another source of income and trade again when you can act calmly and without pressure.
Consider how a trading robot operates: automatic trading systems act according to a predefined strategy when the necessary variables are given. If the variables are given, then it enters the market, but it does not wait as long as necessary. You should do the same avoiding self-convincing yourself of good opportunities that are not or thinking if you have many or few open positions and what has been the result of the previous ones.