The Psychology of Trading

Many advertisers tend to glorify trading and push people into signing up on a trading account. Even though it is entirely possible to be profitable as a trader, it is also at the same time inevitable that you will be in a losing position in your trading journey. Being at a loss is just a part of the trading game. And to many, a large trading loss can be devastating financially and emotionally.

A big part of avoiding a huge loss as a trader comes from mastering your emotions and your thoughts. Many people fall for very common psychological mistakes when trading, and this often leads to their demise.

F-O-M-O Trading

FOMO is an acronym for (fear of missing out). To paint a better picture, FOMO trader psychology means that you are more optimistic than necessary. They look at every trade as it almost guarantees a profit. This type of trading psychology can be detrimental because it infers that you take every trade that shows even the slightest signs of an uptrend.

This psychological strategy causes you to increase your position size on a particular trade, and swing for the fence in hopes to make a hefty profit. This often puts individuals in a risky position, where they have tons of their revenue depending on a single trade.  

This psychological error can be brutal for the average retail investor since it carries the potential risk of a huge loss. Traders at the beginner level are often victim to this trading mentally, and much of manifests due to the bombardment of outside influence, and discussions.

Thus, the best way to keep away from this is to stay away from the vast interchangeable news that is surrounding the media. Influencing other traders can be beneficial, but having an overload of information can be equally harmful as well.  

Reacting to a Loss

How you react to being in a losing position is much more important than the loss itself. Inexperienced traders that face a huge loss will usually have their emotions hijack their minds and emotions. Some often resort to revenge trading, which leads even more turmoil in the longer run.

What this means is that the frustration of a loss can have them entering into a trade aggressively, without any critical reasoning behind it, often in strive to make up for their previous loss. Others may also withdraw from the market at a loss and never trade again.

None of these reactions are constructive. Instead, they are incredibly destructive. You can only trade successfully if you treat losses as an opportunity to learn and improve your trading techniques.

Know-How to Lose

Knowing how to lose, can promise you a lasting and prosperous trading portfolio. 

Make sure that you do not lose more than your average wins. For example, if you average about a 50 dollars profit on a good day, then always enter a trade with a stop/loss that is less than that amount.

This helps you minimize your risks. If you think about it, there are only four major outcomes of entering a trade, a big win, a small win, a big loss, or a small loss. As long as you are avoiding a big loss on all your trades, you can live comfortably if you land on the other three outcomes.

Impulse Control

Controlling your impulses and emotions is a huge part of being a successful trader. Markets are often very volatile and unpredictable, and while looking at the candlestick graph forming an uptrend, along with all the hype surrounding it, will make you want to jump on that trade, it is often ill-advised to do so if you already have a strategy in place.  

Know that there will always be profitable trades in the market, and so, abandoning your initial trading strategy just because there is a consensus of profitability surrounding it is a huge trading fallacy.

To avoid it, you must learn the values of patience, and impulse control as key psychological aspects when trading. Throwing your trading discipline out of the window and blindly following the herd is a trap that many new traders fall for, and it causes them to suffer.

Conclusion

Human psychology is what drives the market, and is often unpredictable. Hence, the traders that rely on much more technical indicators, and have good impulse control, often end up begin profitable when most people suffer major losses. Trying your best to move against the herd is, therefore, the superior trading psychology.

 

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