A Guide to Trading Psychology
TRADING PSYCHOLOGY: BEYOND THE BASICS
The psychology of trading is often overlooked but forms a crucial part of a professional trader‘s skillset. DailyFX is the perfect place to learn how to manage your emotions and hone your trading psychology; our analysts have already experienced the ups and downs, so you don’t have to.
Keep reading to discover their top tips, and to learn more about:
What is trading psychology
How to get in the mindset of a successful trader
The basics of trading psychology
Trading psychology tools and techniques
Learn more about the realities of trading in our ‘Day in the Life of a Trader’ videos.
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WHAT IS TRADING PSYCHOLOGY？
Trading psychology is a broad term that includes all the emotions and feelings that a typical trader will encounter when trading. Some of these emotions are helpful and should be embraced while others like fear, greed, nervousness and anxiety should be contained. The psychology of trading is complex and takes time to fully master.
In reality, many traders experience the negative effects of trading psychology more than the positive aspects. Instances of this can appear in the form of closing losing trades prematurely, as the fear of loss gets too much, or simply doubling down on losing positions when the fear of realizing a loss turns to greed.
One of the most treacherous emotions prevalent in financial markets is the fear of missing out, or FOMO as it is known. Parabolic rises entice traders to buy after the move has peaked, leading to huge emotional stress when the market reverses and moves in the opposite direction.
Traders that manage to benefit from the positive aspects of psychology, while managing the bad aspects, are better placed to handle the volatility of the financial markets and become a better trader.
THE BASICS OF TRADING PSYCHOLOGY
Managing emotions
Fear, greed, excitement, overconfidence and nervousness are all typical emotions experienced by traders at some point or another. Managing the emotions of trading can prove to be the difference between growing the account equity or going bust.
Understanding FOMO
Traders need to identify and suppress FOMO as soon as it arises. While this isnt easy, traders should remember there will always be another trade and should only trade with capital they can afford to lose.
Avoiding trading mistakes
While all traders make mistakes regardless of experience, understanding the logic behind these mistakes may limit the snowball effect of trading impediments. Some of the common trading mistakes include: trading on numerous markets, inconsistent trading sizes and overleveraging.
Overcoming greed
Greed is one of the most common emotions among traders and therefore, deserves special attention. When greed overpowers logic, traders tend to double down on losing trades or use excessive leverage in order recover previous losses. While it is easier said than done, it is crucial for traders to understand how to control greed when trading.