Psychology Of Trading

Sep 1, 2018 | Abundant Insight, Blog

Besides knowledge about general economy, financial markets and technical analysis, trading involves many different aspects of human psychology. We’ll teach you what they are and how important it is to be a master of yourself when you’re trading in order to be safe & succesful with your endeavors.

Why Trading?

The first thing you should ask yourself before you get out there and start trading is why do you want to trade at the first place? Here are a few common answers most people who are interested in trading would give:

  • I need money
  • I want to earn money from home
  • I want to be my own boss

If you find yourself in a difficult financial situation and hope that trading will solve that, please think again. Not only it takes substantial funds to start trading comfortably, any form of investment contains a part of risk and the last thing you want when you’re in a bad place financially is gamble. Investing and gambling are two very different things. One is the result of knowledge and control of outcome, the other relies purely on hopes of outcome. Instead of thinking about the gains you would get, think about what would happen if you would lost it all. Investing and trading is not what solves financial troubles, it is a way to accumulate wealth over time. Therefore, the best way to start trading is when you’ve saved some money that you don’t necessarily need and have built a proper action plan, strategy and budget. You’ve practiced on a demo account for a while and are familiar with the markets you want to trade in. If you’re well prepared, then yes you can earn money from home and be your own boss. However, once gain there are no guarantees in trading and investing. So make sure that you don’t quit your job hoping that day trading will make you rich over night because it probably won’t. If you play it safe & rational, you may get you some extra cash and help you grow your net worth over time. Over time, if you’ve got some really great results and significant earnings, you might think about making a carreer out of it but this is something that needs to be backed up by clear data of your performances.

Emotions & Trading

During each trading sessions, a trader will experience many different emotions. Depending if he’s the green or the red, a trader is likely to experience some form of greed or fear. These are considered to be the two strongest human emotions and are especially felt when dealing with money. A successful trader knows that these emotions will arise in a specific situation and is prepared for it. He has a plan to get in and out of the market, won’t push his luck too far if he’s in profit and will cut his losses without panicking if he’s made the wrong call. Most beginners are unaware of the emotions involved during trading and often make unnecessary mistakes due to a lack of experience. The typical example would be to panic sell when the market is getting really volatile while the price might have gone up 25% in the next two days. This can definitely happen in a market like cryptocurrency. Therefore, it is crucial to understand the market you’re in and be prepare for this type of movement. The best tip we can give you here is to work on controlling your emotions and be zen! Whatever works for you: meditation, yoga, hypnosis… These are all practices that help you be in control of your mind and not let your emotions take over during your trading sessions and in your life in general.

Responses To Trades

One of the key factor of long-term successful traders is their response to their performance. Whether it is positive or negative, successful traders always analyse what they’ve achieved. They take the time to look at the data objectively and see how they can improve themselves, their strategy, their psychology and their behavior for their future trades. Studies on this matter have suggested that when inexperienced traders start to lose money, they get frustrated and either quit with a loss or start taking more risks to make up for the mistakes they’ve made. In both cases, their response to their trades is too intense and their emotions are taking over. Same thing can happen on the flip side. If you’ve made a few good trades, you feel like a hot shot and therefore might think that there is no way stopping you now. That one trade that you made feeling greedy and overly confident might turn against you and those losses might even obliterate all the great trades you’ve made before that. We believe that it is crucial to take psychological & emotional distances with your trades. Analyse your results rationally like you would for somebody else. If you really intend to be a good trader, take the time to work your skills and on self development. Once again, don’t expect to become a millionaire over night and set realistic goals for yourself.