Most trader and investor guides are filled with information about fundamental events, indicators, and patterns. However, it’s not always easy to make decisions based only on facts and technical analysis. Trading psychology is an extremely important but underestimated aspect of this activity. Let’s break down what it is and why it’s important to know how to control your emotions while trading.
What Is the Psychology of Trading?
The field of trading psychology emphasises the importance of controlling your emotions to achieve better results. We are frequently advised to make decisions with a calm mindset, avoid acting based on intense emotions, and refrain from making regrettable choices. These principles also hold true in the context of trading.
On any exchange and information resource, you will find a footnote stating that the authors of the posts and the platform owners are not responsible for your ups and downs — you should control everything and be prudent. That is why it is important not to let your emotions control you.
Introduction to Trading Psychology
Learning how the forex or stock market works is really important, but equally important is understanding what motivates us to make choices and act in a certain way. When you trade, your level of self-discipline must be extremely high. This is essential to achieve the best results.
The two main emotions that influence a trader’s decision-making are fear and greed. Greed — the desire to earn as much as possible — makes you keep the trade open longer than necessary. It also makes you take overly risky decisions.
Fear could cause you to make decisions to avoid risk that leave you with little profit. Fear of losing a trade makes you exit a trade earlier or maybe not open it at all. This can lead a person to follow their emotions rather than logic and reason.
One more primary emotion associated with fear is FOMO — Fear Of Missing Out. Similar to greed, FOMO causes you to take risky actions. FOMO is especially common when an asset has changed significantly in value in a short period of time.
Trading Psychology Training
To help you navigate this issue, we at FXOpen have compiled a list of top trading psychology techniques.
Make a Trading Plan
Trading in any market, including stock and forex, has its own rules, forming a complex and orderly system. To trade successfully, you need to study the market, analyse trends, and make a plan. Traders usually include the following:
- how much they will invest in each asset
- how many trades they plan to make
- how risky the asset is
- how much profit they could make
- how much they could lose
- what percentage of their overall capital will be allocated to an investment
Experienced traders follow a plan and do not give in to temptation so that trading remains systematic. A well-designed trading plan involves giving up random profits in favour of long-term prospects.
Take Regular Breaks
No matter whether you are learning how to trade or are already an experienced trader, it is important to take regular breaks. Taking the time to rest and relax can go a long way in alleviating emotional stress.
This practice becomes especially necessary after a stressful trading session or a series of losses. If you feel that your emotions are taking over, step away from trading for a while and do other things.
Open an FXOpen account and start trading today.
Don’t Quit Your Job
If you are just starting out in trading, follow this advice. Professionals on Wall Street didn’t get rich on their first day of trading. It takes a long time to learn. Do not expect to make a fortune immediately.
Trying to be as successful in trading as possible will add to your stress and pressure, which causes mistakes and risky trades. If you have a day job and a steady income, trading will be easier and more enjoyable because you will be able to pay your bills regardless of your success in the market.
Accept the Fact That You Will Lose
Accept that you will lose money on some trades, so take it easy! It may be every second trade when you start out or every hundredth trade when you get better, but you will lose money.
If your last trade was a loss, try to learn a lesson from it. What went wrong? What assumptions were inaccurate? What will you do differently? A loss is an opportunity to learn, not a final failure. The theory states that your goal should be consistent over multiple trades.
Use Take Profit and Stop Loss
Fix how much you are willing to make or lose with a stop loss and take profit. These tools allow platform users to set price levels to automatically exit the market. A stop loss allows you to minimise losses, while take profit is used to set a target profit level. This will make trading much easier, as these orders simplify risk management.
Trading psychology techniques seem simple. However, not many traders succeed in them. The hardest thing is to accept that you will lose and stop competing with the market. Remember that you will never beat the market, so if you see you lose, just learn the lesson and proceed with other trades.
Remember to practise. On our TickTrader platform, you can use various trading instruments easily. We offer fast and error-free order execution, as well as the most modern and innovative trading solutions. Our intuitive user interface makes trading simple. Open your first trade today.
This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.