Avoid emotional trading
Trading psychology describes how a trader handles generating gains and handling losses. It represents their ability to deal with risks and not deviate from their trading plan. The emotional aspects of investing will attempt to dictate your every transaction, and your ability to handle your emotions is part of your trading psychology.
It is impossible to eliminate emotions in trading, but this should not be the goal in the first place. Instead, traders should understand how certain biases or emotions can affect their trading and use this information to their advantage. Every trader is different, and there is no simple rulebook that everyone should follow.
Identify your personality traits
Develop and follow a trading plan
Have patience
Be adaptive
Take a break after a loss
Accept your winnings
Keep a trading log
Identify your personality traits
One of the keys to developing successful trading psychology is identifying your personality traits early on. You will need to be honest with yourself and say if you have impulsive tendencies or if you are prone to acting out of anger or frustration.
If this is the case, it is important to keep these traits in check while you are actively trading because they can lead you to make rash and ill-advised decisions that have little analytical backing. However, it is also important to play to your personal strengths. For instance, if you are naturally calm and calculated, you can take advantage of these personality traits during your time on the markets.
Equally as important as identifying and being aware of your personality traits and emotions is recognising your biases, as listed above. Biases are an innate aspect of human nature, but you should be aware of what your individual biases are before opening or closing any trades.
Develop and follow a trading plan
Having a trading plan is paramount to ensuring that you achieve your goals. A trading plan acts as the blueprint to your trading, and it should highlight your time commitments, your available trading funds, your risk-reward ratio and a trading strategy that you feel comfortable with.
For instance, a trading plan could say that you were going to commit one hour every morning and evening to trading, and that you will never commit more than 2% of the total value of your portfolio to any one trade. This can help minimise losses and limit the effect of emotions on your trading as the rules for opening or closing a position are already highlighted for you.
Trading plans should also take into account individual factors that could affect your trading discipline such as your emotions, biases and personality traits. If you make clear what your biases are before you start trading, you might be less inclined to act on them.
Have patience
Patience is integral to discipline and it is crucial that you have patience with your positions. Acting on emotions like fear can lead you to miss out on a profit by closing a position too early. Trust your analysis and remain patient and disciplined. Equally, when looking to enter a trade, it is important to be patient and wait for the opportune moment rather than just jumping into a trade right then and there.
For instance, if you were wanting to speculate on some GBP currency pairs like EUR/GBP or GBP/USD, you may want to wait until just before a Bank of England (BoE) announcement as there tends to be increased volatility at this time.
Be adaptive
While it is important to have a trading plan, remember that no two days on the markets are the same, and winning streaks don’t exist in trading. With this in mind, you should become comfortable in assessing how the markets are different from day to day and adapt accordingly.
If there is more volatility on one day compared to the day before and the markets are moving particularly unpredictably, you may decide to put your trading activity on hold until you’re sure you understand what is happening. Being adaptive can help to limit your emotions and rule out representative and status quo biases, enabling you to assess each situation on its own merits – ensuring that you are pragmatic during your time on the markets.
Take a break after a loss
Sometimes after a loss, the best thing you can do is walk away from your trading account for a short while to gather your thoughts and compose yourself – rather than rushing into another trade in an attempt to regain some of your losses.
The best traders are those that take their losses and use them as learning opportunities. They will typically take a few minutes to themselves before going back to their platform, using this time to assess what went wrong for that particular trade in the hope that they might avoid making the same mistake in the future.
In doing so, they keep emotions like pride or fear in check by letting themselves cool off before approaching the next trade with a clear head and sound judgment.
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