Psychology in Trading


by Amanda Harvey

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Introduction

The importance of psychology in trading cannot be overstated. Most people readily acknowledge the necessity of understanding the markets, learning to use technical analysis, and implementing solid trading strategies, however, many overlook the impact of psychology in trading. Learning to exercise mind over matter is of extreme significance in an arena that can often seem like a rollercoaster ride, and gives rise to some very intense emotions.

The Elements of Successful Psychology in Trading

• A disciplined approach to trading provides the best possibility of long-term, continued success. While it is possible to become swept up in the excitement, and the thrill of the chase of profits, and to still experience some successes, with this outlook, there are also likely to be enough spectacular spills to negate the gains made. Of course, even the best-planned and most methodical trading perspective will still incur losses; however, these losses can be minimized and offset with risk management, and outweighed by the frequent, steady profits that an understanding of psychology in trading can help to attain.

• Patience is another key to successful trading psychology. This need for patience is evident in various aspects of the trading experience. One such aspect is in taking the time to thoroughly research a potential trade and to select the appropriate moment to enter it, rather than being swept up in market noise and diving in at the wrong moment, or entering a trade that is less than ideal because of an unwillingness to sit back and wait for the right opportunity. Patience is also required when waiting for the right moment to exit a trade, and failing to apply this patience can result in exiting a trade too early and missing out on the full return that could have been attained.

• Confidence is also vital to the psychology of successful trading. Decisions must be taken firmly and often quickly, and a reasonable amount of risk must be tolerated, in order to trade effectively. Hesitation, doubt, and a tendency to look to others for confirmation are not the hallmarks of a successful trader. A belief in oneself and one’s knowledge and ability to make smart choices is vital.

• Realism is essential to a winning trading psychology. A successful trader knows that not every trade will be a winner, and that losses are part of the trading experience. Rather than being discouraged by these losses, they accept them and move on, always looking at the bigger picture. This trader also understands that huge overnight profits fall mostly into the realm of idealism, and they are happy to continue making moderate and steady gains.


Pitfalls in Trading Psychology

As well as the opposite of the positive attributes listed above, there are emotions often experienced in trading that can be highly detrimental, and must be managed if a trader is to succeed.

• Greed is one of the biggest traps that can ruin a trader’s success. This emotional pitfall most often manifests in the trader staying too long in a trade, wanting to squeeze more profit out of the position, and seeing the price plummet along with all their profit.

• Fear is an equally damaging component to the psychology of trading. This emotion results in a trader missing out on promising opportunities, pulling out of a position too soon and failing to see the true potential of the investment realized, and even taking a loss that could have been recouped with a more intrepid approach to waiting.


A Final Word about Psychology in Trading

By understanding and cultivating the qualities that contribute to a winning trading mindset, and learning to manage the emotions that can be detrimental to a successful trading psychology, a trader gives themselves a vast advantage over those that focus simply on the technical aspects of trading.


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