In this article, you can learn what the psychology of trading is, how you can improve your trade management, including what is fundamental analysis, how to manage risk when trading, and how to conduct market analysis, as well as find useful tips on how to control your emotions.
In this lesson you will learn:
- The psychology of trading
- How to improve trade management
- Tips on how to control your emotions
The Psychology of Trading
Trading psychology, or having the right mindset for trading, can be just as important as knowledge, experience, skills and strategy when it comes to reaching your trading goals. After all, being able to stick to your trading plan and make the most of your knowledge and skills depends entirely on your ability to control your emotions and act rationally no matter what.
The two main aspects of trading psychology are discipline and risk taking, as they are the ones that determine whether or not a trader is able to actually implement their trading plan. The two main emotions associated with trading psychology are fear and greed, as they can both cause traders to forsake their plans without much thought. This is why managing your emotions is a critical aspect of successful trading.
How to Improve Trade Management
Having the right mindset is half the work, while having a solid trading plan in place is the other half. For this, it’s important to be proficient in both technical and fundamental analysis, and have clearly defined risk management principles even before you start trading.
How to Manage Risk
Managing risk when trading largely depends on three crucial elements: having your personal trading strategy, being able to control your emotions, and good money management.
Developing your own trading system means you have a plan in place that works for you, your trading style and goals. The idea of coming up with your own trading strategy might seem daunting at first, but it actually entails nothing more than consistent application of the rules that you set for yourself, such as specific entry and exit points, trading in the direction of the prevailing trend, using moving averages, or using a stochastic indicator to help determine whether or not it’s safe to enter a trade after a moving crossover. Whatever it is, it should be unique to you and your needs.
Most traders notice a difference in their results when they switch from a demo to a real account. The main reason for this is that when real funds are involved, psychology, or your ability to control your emotions, plays a crucial role. Emotions such as fear and greed, as well as excitement, can stop traders from sticking to their plans. This is why being able to control your emotions is key to actually being able to implement your carefully thought-out trading strategy.
The third element of risk management is money management. This is the part of your strategy that specifies the size of the position, the amount of leverage used and any Stop Losses and Take Profit levels. It’s what can help traders to maximise any profits while minimising any losses.
Tips on How to Control Your Emotions
In this last section of the lesson on how to control your emotions, we’ll take a look at the two most common emotions associated with traders, and what you can do to keep them under control.
Fear or Nervousness
Most often, fear occurs in situations where the trader is trading too big. When you’re under the stress of risking larger losses than normal, it can cause you to make mistakes you normally wouldn’t make. Another common cause of fear is the fear of being in the ‘wrong trade’. Both of these problems can be solved by having a solid trading plan and sticking to it no matter what happens during the trade.
Greed or Overconfidence
These emotions most commonly occur when a trade is doing exceptionally well and the trader decides to deviate from their stops and targets, and keep pushing. Greed often leads to a strong run ending in a loss. Again, this can be prevented by simply being aware of the downfalls of becoming greedy and overly confident, and sticking to your initial trading plan.
If you want to continue learning, make sure to visit our Trading Academy, where you can find beginner, intermediate, and premium courses that can help you improve your trading skills.
To find out more about managing your trading mindset, visit How to Prepare for Success Course and How to Cope with Pressure Course.
This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.
