What is actually meant by “trading psychology”?

What is actually meant by “trading psychology”?

Trading psychology is the emotional mind-set that is embraced by the trader whilst executing a trade and the trader’s mental reaction to ensuing market consequences.

If you were to ask many experienced traders, the vast majority of them will tell you that if your state of mind isn’t in the right place, you will have a far greater chance of messing up your trades, either by missing out on a profit or taking a loss unnecessarily.

How do you get your head in the right frame of mind though?

Basically, there are three intellectual abilities that traders need to master:

Self-Assurance
Self-Discipline
Feelings

Self-Assurance

What separates the people that have made it to the top of their field of chosen occupation or sport and those that have not, is confidence. It’s similar in trading, self-assurance is essential but it is important not to be over confident because if you imagine for one second that you have it mastered, it will turn around and bite you.

It takes a long time to acquire the understanding, expertise and proficiency that will lead to the necessary confidence, and to build that self-assurance and mentality, you will have to focus on procedures methodically and practice, practice, practice. All top sports stars, musicians, actors, doctors, military personnel etc, single mindedly rehearse their particular procedures over and again. When focussed on those procedures, other emotional urges and instincts are pushed to the side and eventually removed from mental process.

Self-Discipline

Understanding what you have do, or mustn’t, and when you have to do it may seem a relatively simple exercise. However, in trading, you can’t be left wanting. You will have to be prepared for anything that may come your way, and react accordingly, and that means having a trading plan. Your plan will specify precisely what your trading system is, how well your system will perform over the long term and just about everything about your trading.

The difficult part is the discipline required to carry out your plan consistently and systematically for months on end. There are so many outside influences that can put you off track. If you get side-tracked from your plan due to other factors, then your self-assurance will be dented and it may mean you diverting from your trading plan leading to bad trading practices.

With a plan, traders are able to manage their money and the risk strategy. They can observe their performance and therefore assess their development. They will be able to trade confidently without undue anxiety. Without a plan, trading will become tense with massive highs and lows leading to a predictable trading loss.

Markets can play havoc with your mental processes because they pull on two of your very strong human emotions, fear and greed. When money is at risk, traders can make foolish judgements. A trading plan will alleviate those emotions and unnecessary decisions.

Feelings

After you have developed an understanding, ability and proficiency and you can decisively carry out a detailed, well established trading plan, then you should be relaxed and tension free with your trading. This will take quite a while to achieve however and early on in your career, you may feel that your mind is finding it hard to cope from the fear and anxiety. We can’t hide the fact that we are emotional humans.

Feelings in forex trading can work for and against you. There will be trading opportunities for you as others let their emotions take control of themselves. On the other hand, if you let your feelings take hold of you, there will be many other traders waiting to pounce on your shortcomings.

Some traders get caught up with greed and fear at certain times. They dread that they will miss out on a big opportunity because prices are rising steeply and that everyone around is cashing it in. The greed takes hold of them because they want to grab themselves a part of the easy money. Conversely, smart traders can appreciate the real situation that is happening. They know that prices are much too high and unmaintainable so they short trades knowing that prices will drop.

Even some of those that short the market end up losing money because prices keep on going up and fear makes them sell their short positions. Not long after there is a crash and those that held on to their short trades make a massive profit, those that sold up are left kicking themselves.

When you first open up an online trading account start trading, when you get winning trades, you feel great exhilaration and joy. When you pick up losing trades, you feel frustration and hurt. These are normal emotions. After a certain amount of time, the joy of winning and the pain of losing grow less and less. This is because you will discover that the next trade will be different and the next different again. It doesn’t matter if you won or lost the previous trades because there is another trade that will come along soon. What matters is winning more than you lose over time and that the key is trading well on a consistent basis, with assurance and discipline, as per your trade plan.

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