Affordable Indicators, Inc.
Trading psychology refers to the mental state that helps dictate success or failure in trading. This represents a wide range of aspects of an individual’s behavior and character that influences their actions. If you have ever traded before, you understand just how much your emotions impact your trading. Getting to know these emotions and learning how to minimize their effects is vital in finding success.
One common emotion experienced while trading is greed. Greed pushes us to want more, in fact, so much more that it can cloud our rationality and judgment. Greed drives us to make decisions that can be too risky or dangerous to our account. This emotion is most apparent in the final phases of a bull market when caution is thrown out the window. Overcoming greed can be a difficult task, but isn’t impossible to beat. It is important to set specific trading parameters on when to take or not take a trade. This, along with a risk-reward ratio should be written in your trading plan.
Another common emotion most traders encounter is fear. Fear causes us to avoid risk and therefore, produce lower returns. This can also cause traders to exit positions too early in fear of taking a loss. When we see a trade going in the opposite direction, we tend to get scared and sometimes overreact by closing our position. Quantifying the fear is one way we can help minimize it. We should go into a trade thinking through the possible events and negative effects that may occur. This way if things do not go in our favor we have already thought out what could happen. It is also important to think through why you had entered the trade in the first place. If you believe it was a good trade to take, do not let fear drive you out of it.