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The Basics of Trading Psychology

trading psychology

Trading psychology is an often-overlooked aspect of trading, yet it can have significant impact on a trader’s performance. The term “psychology “refers to the mental and emotional state of a trader. This encompasses everything from a trader’s mindset, beliefs, biases, behaviours, and to how a trader would react to the market under various circumstances.  

What is Trading Psychology? 

During trading, psychological roadblocks such as fear, greed, overconfidence, impulsiveness, and confirmation bias occur often. These challenges can lead to irrational decision making, trading errors, and ultimately, losses in capital.  

Developing an awareness towards such short-term psychological pitfalls allow traders to develop trading strategies that help mitigate trading risks in the long run.  

The Enemies of Good Trading Psychology 

The two most common emotions traders experience are fear and greed [1], which are two important components of trading psychology. 

Fear:  

Ever felt the fear of a trade not going as planned? Or when uncertainty in the market grows exponentially? Traders constantly interact with fear in many trading situations which often leads to declining confidence, causing them to make irrational decisions such as closing a positioning early.  

Greed

The excessive desire for quick and easy financial gain can often be as dangerous as fear. Greed can lead traders to abandon risk management, causing them to engage in impulsive decision making. Greed-motivated traders also hold on to losing positions for an extended period of time, hoping that markets will reverse.  

How to Improve Trading Psychology?  

Being able to effectively manage fear and greed is critical for success in trading. The ability to balance emotions with firm decision making allows traders to achieve long term financial goals.  

Hence, improving trading psychology is an on-going process that requires self-awareness, discipline, and commitment to continuous learning.  

Vantage shares 5 tips that can help traders improve their overall trading psychology: 

#1 Develop a trading plan: A well-defined trading plan equipped with clear objectives, risk management strategies, and a set of rules to follow can provide the scaffolding needed for traders to remain disciplined and avoid impulsive behaviour.  

#2 Find the Right Tools: Depending on the type of trader you are, indicators, stop losses, and pip calculators are examples of tools traders keep in their arsenal to tackle the markets.    

#3 Do Your Homework: Doing in-depth research on financial instruments and markets can also help traders build confidence in trading. Vantage offers free weekly webinars and written market analysis, conducted and written by industrial professionals, to assist traders in their individual journey. From market updates to live trading, there is always something for traders of any expertise to learn.  

#4 Learn from past mistakes: Instead of being disheartened by losses, traders should view it as a learning opportunity and avoid getting emotionally invested in their positions. Analysing mistakes and adapting strategies can help prevent traders from making the same mistake again. Using a trading journal to monitor past trades can be an effective way to mitigate future losses and enhance trading psychology.  

#5 Manage risk effectively: Effective risk management is key to protecting a trader’s capital in the long run. Traders should consider their individual risk tolerance and limit the amount of capital exposure to the markets.  

Traders can also further consider brokers that offer negative balance protection. Here at Vantage, your account will be covered in rare occurrence where its balance falls into negative territory, hence you cannot lose more than your initial capital amount*.  

*Terms and conditions apply 

Negative balance resulting from trading abuse (such as excessive leverage or position size during periods of high volatility) will be evaluated on a case-by-case basis and may not be eligible for protection.  

Conclusion 

Trading psychology is a crucial aspect of trading that should not be overlooked. It is just as important to master trading psychology, as it is to understand technical or fundamental analysis. Through the development of a strong trading mindset, traders are better prepared to overcome emotional biases and improve their chances of success.  

Want to make Vantage an important partner in your trading journey? Sign up for a demo account or a live account here.  


References 

  1. Cattlin, R. (2023). Trading psychology: the biases and emotions in trading. https://www.cityindex.com/en-uk/news-and-analysis/trading-psychology/ . Accessed on 26 April 2023

Disclaimer
Vantage does not represent or warrant that the material provided here is accurate, current, or complete, and therefore should not be relied upon as such. The information provided here, whether from a third party or not, is not to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any financial instruments; or to participate in any specific trading strategy. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. We advise any readers of this content to seek their own advice. Past performance is not an indication of future results whereas reference to examples and/or charts is solely made for illustration and/or educational purposes. Without the approval of Vantage, reproduction or redistribution of this information is not permitted.

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