Trading Psychology: How to Beat Your Emotions

Trading Psychology: How to Beat Your Emotions

10 February 2019, 09:59
Nguyen Thanh Trung
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From the day that you decide make the move from a demo account to a live account, things change in ways that you could never really be fully prepared for.

What is trading psychology?

Trading psychology is the perception change that you go through once you are actively in the markets trading your own money.

When trading on a demo account, it seems like it would be easy to make money and there seems to be no reason why you wouldn’t be able to start making money with a live account. Then, you make that first live trade and you start to feel indecisive about when to take profit, or cut your losses. You have just discovered the effects of trading psychology.

How does trading psychology affect your trading?

Trading psychology can affect your judgment while you are trading.

There are two emotions in particular have been the source of ruin for forex traders over the years. Those two emotions are fear and greed.

Fear will cause you to either not make a trade when the opportunity arises, or to close a trade prematurely without giving it a chance to be profitable.

Greed will cause you to make trades that are too large or too risky, while trying to make massive gains.

Greed can also cause you to try to wait for the “last pip” of a move instead of being satisfied with a “good run”.

How to beat your emotions

The best way to combat trouble with trading psychology is by making a trading plan and sticking to it. Use well thought out risk management and don’t get in over your head.

Remember that mastering your emotions will allow you to seize the real profit from the markets while emotions are high for others.

If you can master your emotions and follow good risk management practices, you can be a successful forex trader. 

Fear and Greed

Besides all of the fundamental and technical factors a trader must keep track of in order to be successful, there is another area which is often overlooked – themselves. 

No matter how good your strategy is, the other factor which will always influence your outcomes are your own emotions. After all, it is emotions that move the markets.

Emotions are what most of our indicators are designed to give us a measurement of. And in order to be able to profit on market movements created by the emotions of others, you must first learn how to read the mood behind the move, and also how recognize and control your own

Greed

As prices rise, they naturally attract more attention.

As more and more people jump on board the rally, its climb accelerates. But in all the excitement, there is a tendency to confuse account balance (the amount actually on your account) with account equity (the total value including the sum of your open positions).

People begin to treat their potential profits as if they were already realized. This expectation can sometimes cause basic reversal signals to be overlooked. 

Additionally, those who missed out on the opportunity early on, when the trend was still young, are becoming hypnotized by the length and size of the rally. Jumping on board late is a risky game, however, as those who got in early will eventually need to take their profits.

There is also a bit of the “greater fool” factor, as anyone who is still buying is now buying at a higher price, and from a seller who has reason to believe the move may soon be over.

The idea then is that hopefully someone will keep on buying after you, at an even higher price, when you eventually decide to become a seller yourself.

Fear

When prices start falling, they awaken fear and panic.

Fear is one of our most primal emotions, which explains why prices often fall faster than they rise.

People holding longs run for the door trying to sell as quickly as possible, and short sellers motivated by the falling prices add their own orders to the mix as well. When those short orders are eventually covered in order to realize profit, there are temporary rallies which can give false hopes. 

This crowd mentality frequently creates moments of market imbalance which can be capitalized upon, once one can learn to recognize the signs and interpret them correctly. Above all else, the key to developing this skill is practice.


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