Trader Insights

Why Trading Psychology Matters

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There are a multitude of elements that make up a successful trader: Dedication, focus, intelligence, motivation and risk management, just to name a few.

However, whilst these and many more attributes make up a percentage of what makes for a good trader, there is another thing: Mindset, and the trading psychology.

To become a truly successful trader, a trader must possess the right trading mindset and that comes from having a true understanding of Trading Psychology.

In this blog, we’ll take a look at why trading psychology is so important for new, and even experienced traders.

If you’re a hobbying trader looking to take your trading professional, read on here to find out just how to do that.

What is Trading Psychology?

Simply defined, when we talk about Trading Psychology we’re referring to a trader’s mindset when they are trading the markets. The right mindset can determine how successful they will be in securing a profit, or it can even explain why a trader might have incurred substantial losses.

You’ll often hear us – and many other trading firms – talk about how good trades should be borne from logical decisions based on your trade plan, not emotional ones. This is because emotion plays a huge part in trading psychology, and some emotions in particular can have negative consequences on a traders profits and losses.

Part of becoming a successful trader is to not act on emotion, and in particular not make trades that are based in any of the following:

  • Anger
  • Excitement
  • Fear
  • Greed
  • Happiness
  • Impatience
  • Pride

In particular, the emotions of fear and greed are the two that can have the most significant impact on the success of trades.

Fear & Greed: Overcoming both

Fear and greed are at the root of most decisions borne from emotion that traders make. 

For example, a trader who receives information about a trade rising sharply – but fails to do the necessary research required to ensure it is safe – makes the trade out of excitement. That excitement however comes from greed at the possibility of receiving a larger slice of profit. 

On the other hand, a trader who overhears news that could affect a stocks prices may be compelled to make a snap decision out of either anger or worry. Both of these emotions stem from the fear of incurring substantial losses, which is ironically what can occur anyway by making a rash decision.

To overcome both of these main emotions, there are two tactics that traders can use.

Learning to Let Go of Fear:

Fear is perhaps the hardest emotion to conquer because we all naturally get scared. If there is a world event, like Brexit for example, that looks like it could have longstanding consequences on stock and share prices we all become worried for our trades and profits. 

This is where trading psychology can come into play to prevent traders making either rash decisions, or decisions clouded by fear that are ultimately the wrong move.

Traders can use trading psychology to ground themselves, pause and understand what fear is, and what is driving their anxiety. Commonly, this is a threat to their potential profits. 

Once they know why they are fearful, and what the worst case scenario is, traders can begin to think from a place of logic and move past the emotional response to formulate a tactical one. Naturally, this is not easy – but with practice, traders can learn to face their fear, let go of the worry, and then return to logical decision making.

Learning to Silence Greed:

Greed is one of the seven deadly sins and in trading, this is never more true. Traders can often make decisions that are based entirely on the money symbols that appear in their eyes, and that aren’t based on logic or analysis. 

Alternatively, traders can come greedy by withholding a winning position for too long to try and capitalise on every uptick in price. The tide can quickly turn if a trader is doing this however, and they will get caught out – often by incurring a heavy loss as the trend reverses.

Just like fear, greed is not an easy emotion to overcome but the root of greed: The want to have more and do better, can be understood and applied in order to make a trader better.

All trading firms – including us at Alphachain – want traders who have the passion to continue to learn and improve themselves, and understanding and controlling our cognitive biases (psychology) when trading is an important element of that. This is why we have our own experienced trading psychologist and performance coach who helps develop our traders to be the best version of themselves they can be. Trading psychology is one of the most important aspects of becoming a consistently profitable trader.  

Instead of traders making hasty decisions borne from dreams of flash cars and expensive clothes, traders can channel their greed – their want to be the best – into making a trade that is correctly and carefully plotted so that the trader will receive profit and will not incur loss. A trader can better themselves by applying this trading psychology mentality, and by channelling that want into improving areas of their trading like their risk management.

Have you read our Complete Guide to Becoming a Proprietary Market Trader yet? 


5 Ways to Incorporate Trading Psychology

As we’ve seen, trading psychology can help prevent a trader from making instantaneous decisions that could lead to losses or negative outcomes.

Mastering the art of psychology may sound complex, but there are simple, actionable steps that traders can take to begin to switch their mentality from a place of emotional response to one of logic and rationale.

5 beginning ways to incorporate trading psychology are:

  1. Identify personality traits

If a trader possesses personality traits such as impulsiveness or frustration, they may be more susceptible to making decisions borne from places of emotion.

Accepting these traits and being aware of their impact in every trading decision is one way to minimise the effect that they will have on a traders day to day work. 

On the other hand, a trader who is calm and calculated can use these traits to their advantage by pausing to analyse a potential trade before committing to a decision.

Knowing personality traits, whether positive or negative, can give a trader the ability to manage risk by making the correct trade.

  1. Stick to a  pre-defined trading plan 

A trading plan acts as a blueprint for a trader. It ensures the trader stays focused and achieves their trading goals through analysis of good and bad trades, risk management, and trialled, tested and newly developed trading strategies.

A trading plan can also act as a scheduling and rules-based tool for a trader. For example, say a trader has identified the best time to trade their markets is in the morning, and they have set a boundary of never trading more than 2% of their portfolio. By following their plan, they can firstly begin to set a routine that ensures they only trade in the morning – preventing them from making impulsive trades at night on other markets – and secondly ensure that they never exceed their 2% boundary, negating the risk of heavy losses.

Following a trading plan leaves less room for emotions like fear and greed to sway a trader by providing a focused structure. 

Our tips are applicable no matter which type of trader you are.

  1. Create a trading log

A trading log is almost like a trader’s trading diary. In it, traders can detail their wins and losses, as well as note down why they made the trade, or what influencing factors there were in their decision.

Having this record to assess whether a trader made the correct decision helps them to not only understand their trades better, but also their decision making. A trader is therefore less likely to repeat mistakes, and could instead begin to identify behaviour that could result in another incorrect move.

  1. Accept profits and losses

Experiencing losses is one of the primary ways to let fear overthrow a trading strategy. Traders will become panicked and look to instantly recoup their losses, but the best way to do this is to walk away from the markets and regain composure. A moment to accept the loss, write it down, understand and analyse it will improve a trader. 

Likewise, experiencing lump profits can incite greed which can also lead to rational decision making in order to continue experiencing the rush. But just like when a trader experiences a loss, it is actually an advisable decision to step away from the markets, write down and analyse the trade. Once again this resets a traders mentality, preventing them from chasing an emotion.

  1. Learn patience

Patience is a core part of trading. Becoming a successful trader doesn’t happen overnight, and some trades can require days or weeks of holding before a trader could even get a result. That’s why it is imperative that traders practice their patience.

Practicing this integrity is also vital when opening and closing trades because it also negates the probability of a trader making a rash decision based on emotion. By enacting patience and analysing and plotting a potential trade will present the trader with an opportune moment, instead of a misleading opening.

In summary:

Trading psychology ultimately boils down to the act of switching a traders mindset from emotional to logical. The ability to switch can prove vital for making profits, or experiencing losses but it can also bleed into other aspects of a trader’s career, such as how they manage risk and handle profits and losses.

At Alphachain Academy, we place a lot of emphasis on a traders development. We want all our proprietary traders to want to strive to be the most successful trader they can be. That’s why we provide expert mentoring, live web classes, and unlimited access to experienced traders in all of our funded trading courses. Interested? Then check out what your potential journey as a global trader, an algo trader, or a crypto trader looks like today.

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