Introduction to Trading Psychology
- 23 May 2022
One must consider a myriad of factors to become a successful trader, and one of the most important factors is trading psychology. Trading psychology refers to the mindset of the trader while taking trades in the market and it includes biases and emotions. Biases are irrational assumptions or inclinations that result in the trader making decisions that are not based in fact (i.e., fundamental and technical analysis). Additionally, there are many emotions that can hamper the trader’s ability to make the right decisions in the market such as greed, fear, pride, impatience and anger. It is vital for a trader to be able to identify and reflect on their biases, traits and emotions to come up with a solid strategy that addresses those factors and reduces their effects while trading.
As a new trader, I paid a great deal of attention to fundamental and technical analysis while overlooking the importance of trading psychology. I scoffed at the idea of trading psychology thinking that as long as I pay attention to the flow of the market and employ fundamental and technical analysis, all will be good. I swiftly realized during my first week that was not the case. Throughout the week, I was taking good trades and steadily increasing my profits without giving much thought to trading psychology. But at the end of the week, I took two trades that quickly went south which led to the fear and pride kicking in. I was fearful of booking a loss and wanted to continue my good streak so I rapidly took three more trades in hope that I could cover my loss. Those trades resulted in further losses and woke me up to the fact that I need to reflect on my trading psychology. I examined my traits along with my emotions and realized that my perfectionist tendencies gave a chance for my fear, pride and impatience to affect my trading. Furthermore, I learned that once I book a loss, I need to accept it and take a short break from trading. Therefore, I formed a strategy to deal with my emotions and not rush into new trades to make up for any losses. After all, booking a loss is inevitable and is an opportunity to learn for both new and seasoned traders.
- Leena Othman