Being a trader entails more than just developing better strategies and doing detailed analysis; it also includes adopting the right mindset.
Most newbies assume that all they need to do is find a great trading strategy. After that, all they have to do is come to the trading market every day, plug in their great trading plan, and voila, the market will start pouring money into their account right away.
Unfortunately, as anyone who has ever traded knows, it is not that easy. Trading effectively in the financial markets requires a wide range of abilities. They provide the ability to assess the fundamentals of a market and predict the course of a pattern.
However, none of these technical skills is as critical as a trader’s mentality. Controlling one’s emotions, thinking rapidly, and practicing discipline is the essence of trading psychology.
Importance of trading psychology
The term trading psychology refers to the mental state that a trader is in when trading. If you trade without the proper trading mindset, the odds are stacked against you.
When trading, you must not only have comprehensive technical analysis and strong fundamental analysis, but you must also have the right attitude to increase your chances of success.
Having the right trading mindset will keep you safe and develop you throughout your trading career. The first thing you can do before learning a trading strategy is to focus on creating a positive mindset.
But this isn’t sound easy. If you want to curb your emotions and develop the right mindset, you need to take care of two psychological components; fear and greed.
Let’s explain each one of them and how you can overcome them to develop the right trading mindset.
Fear is a normal human reaction to something that appears to be a danger. When traders receive bad news about a specific currency pair, a stock, or the economy in general, they naturally become concerned.
They overreact and find it necessary to liquidate their holdings and sit on the cash, avoiding further risk. They may prevent some losses, but they may also lose out on certain profits if they do so.
You see, fear of losing money causes you to be overly careful, and as a result, you skip all of your entries.
Although caution is an important trait, being too careful to the point of missing all of your entries becomes a disadvantage since you will not make any money in the market unless you enter trades.
Traders must consider fear as a normal reaction to a perceived danger. It is a challenge to their profit potential in this situation.
The first step in overcoming fear as a trader is to recognize that losing is a normal part of the trading process.
It is difficult to exchange and not lose money. Also, the most efficient traders suffer setbacks from time to time.
When you realize that losing is a normal part of trading, your mindset shifts from fear of failure to trying to control your losses.
A trading strategy is one of the best ways to manage uncertainty by handling failure. You are more likely to be swayed by your feelings if you trade without a plan.
On the other hand, a strategy holds you grounded even though the markets seem to be against you.
For example, if your plan wins 80% of the time, you can expect a few losses here and there.
As a result, making one or two losing trades will not overwhelm you with anxiety because you will be at ease with such losses.
Another method for overcoming your fear is to gradually increase your trading experience. Instead of diving headfirst into the market in the hopes of making a fortune, start with a small trading size.
If you continue trading, you will gain a better understanding of the markets and what to expect, making you less afraid as you decide to take bigger and bigger risks.
“Bulls make money, bears make money, and pigs get slaughtered” is an old Wall Street old phrase that alerts investors against being too greedy.
This refers to greedy investors’ habit of holding on to a winning position for too long in order to squeeze every uptick. Eventually, the trend reverses, and the greedy are trapped.
Greed is always motivated by a fear of missing out (FOMO). This usually occurs in one of two forms. The first is when you see other people make massive gains in the market while you haven’t made any.
To avoid missing out on the profits made by others, you abandon your trading plan and join trades at the wrong time.
FOMO can also play a role when the market outperforms your expectations.
Overcoming greed as a trader can be difficult because it is often based on a desire to do a little better or make significantly larger profits.
There are, however, two main ways to overcoming greed.
The first is to stop worrying about what your friends and other traders are doing or how much money they are earning.
As a trader, your primary focus should be on your own trades and outcomes.
The second is to be disciplined enough to stick to your plan.
There are no feelings involved in developing a trading strategy. Instead, most traders develop a trading strategy based on a thorough and realistic study of the market.
While it is tempting to abandon the plan when things seem to be going well for you, sticking to the plan is your best bet if you want to become a good trader. Learn as much as you can from the experience of leaving money on the table, and then apply the new understanding while developing a strategy for your next trade.
Remember that every trade is a battle, and winning a battle requires the right mindset. Since uncertainty is the only thing that’s certain about the markets, you should learn to identify the possible scenarios and how you can keep your emotions in check. Concentrate on being a good trader, and the money will follow.