A Beginner's Guide To Trading Psychology

Education / 5 Min Read
02 Feb 2021

Having the right strategy would mean little if a trader does not pair it with sound trading psychology. It is imperative to have control over one's own emotions and is deemed to be one of the most important traits for a successful trader. A trader will need to approach trading as a business, and becoming emotionally involved can be detrimental to the business’ success. This is why understanding and subsequently adopting the right trading psyche is crucial for any trader.

What is trading psychology?

Trading psychology describes how a trader handles generating gains and handling losses. It represents their ability to deal with risks and to not deviate from their trading plan. The emotional aspects of investing will attempt to dictate your every transaction, and your ability to handle your emotions is part of your trading psychology.

Some pros and cons of having a good trading psyche are:

Pros

  • Create a good trading plan
  • Avoid letting emotions getting the best of a trader
  • Handle the fear of missing out
  • Allows a trader to overcome mistakes

Cons

  • Limits dependence on gut feel
  • It takes time to develop

The basics of trading psychology

Fear and greed are powerful emotions that will dominate the trader's thought process throughout your trading career. The goal is to learn how to harness these emotions and develop a winning mindset.

A trader can use several techniques to create your trading psychology. Besides reading books by trading psychologists and expert investors, you can also create a trading plan. Developing a trading plan will help you stick to a solid routine and avoid concentration gaps and loss aversion. Check out this article that details how a trader can start mapping out their own trading plan! 

When beginning to trade, emotions can definitely run amok. If an exchange rate moves quickly, a trader might start to fear that they are missing out. This is especially so for beginner traders and is a constant emotion that will frequently appear. Other emotions to manage are greed, fear of losing money, and the mental fortitude to overcome mistakes that have been made. Last but not least, one of the more critical aspects of developing a trading psyche is learning how to manage risks.

The importance of developing a trading psychology

One of the biggest hurdles for every forex trader is the fear of loss and making mistakes. Unfortunately, when trading, it is inevitable for one to take risks that might result in losses. The emotion of fear from losing out is otherwise known as loss aversion. To overcome this, a trader needs to approach their trading activities similarly to how a business is run.

A good method is to focus on the statistics and referencing data, while preventing emotions from driving any trading decisions. Beginner traders should especially consider building this habit as part of their trading psyche before their first transactions.

Another method to develop a healthy trader mindset is through the creation of a routine. This routine can include a premeditated way of starting the day. For example, a trader might consider initially catching up on data that was released while asleep. This could be followed by checking your positions and reevaluating your risk management.

The take to trading performance is more on how you learn rather than what you learn. Therefore, this reinforces the need for a routine as it is key to learning and understanding the proper way to trade. 

Trading psychology mistakes and how they may negatively impact a trader

One of the most common mistakes made by beginner traders is entering positions based on gut feel, or intuition, without having a specific strategy. This arises from lack of proper information and data, which results in a fear of potentially missing out on a golden opportunity. This subsequently leads to the fear of losing money and holding positions, which allows losses to build up. Thus, to avoid falling into this vicious cycle, besides having a trading plan, a trader must remain disciplined.

Ensure that each trade undertaken adheres to the rules or goals that has been outlined. Trading based on gut feel without a sound risk trading plan is a mistake. To avoid these mistakes, you want to develop risk management system, which determines:

  1. Stop loss level
  2. When to take profit
  3. Any potential trailing stop loss
  4. Indicators that help confirm stop loss levels and take profit levels

Getting into a successful forex trading mindset

Being able to adopt a successful trading mindset is not something that can be done from the get go. To develop a robust trading mindset, it takes time and a certain level of patience to learn from successes and mistakes. A good method to aid that is practice trading with a demo account. It will both help in honing a good trading psyche, while allowing a trader to polish their trading skills and techniques. Most importantly, it comes with no risk!

By spending a certain amount of time trading on a demo account, it will help a new trader gauge the ups and downs of price action, and the rollercoaster of emotions that entails when trading, which ultimately helps to build confidence. 

As with most successful traders, do not let the fear of missing out be the impetuses be the distraction from a trading strategy. Staying disciplined is a critical psychological practice that will helps traders gain success.

Finding your trading psychology

Being able to develop and hone one's trading psyche is closely aligned with success as it helps a trader to keep calm in hectic market environments. By obtaining a deeper understanding of the fallacies that might arise, sounder judgement will prevail. 

However, to do so is not easy as traders can make inferences that are highly subjective. It is always more beneficial to look at data and PsyQuation is a tool that can help measure a trader's performance and help with this process to optimise performance. 

Other than that, it is also recommended for beginner traders to check out Axi's educational hub as there is a plethora of articles that helps new traders understand how trading works! 

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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