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A Guide to Trading Psychology

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Given the role that understanding and determinism plays in trading, it’s clear that psychology and the mindset of an investor has a direct impact on their chances of achieving success in a particular market.

For example, a sense of determinism makes it possible to model features and predict potential outcomes, identifying opportunities to either minimise losses or leverage volatility to your advantage (in markets such as forex). 

Regardless, determinism should play a pivotal role in your trading psychology, especially if you want to succeed over an extended period of time. But what are the basics of this psychology, and how can you develop the mindset of a successful trader?

An Introduction to Psychology in Trading

Ultimately, there are multiple feelings and emotions that a trader will experience in the market, including fear, greed and a generalised sense of anxiety.

These emotions are generally considered to be negative from a trader’s perspective, as they can unduly influence decision making and should ideally be contained by investors.

Typically, traders experience the negative of these emotions and trading psychology more than the positive aspects. For example, fear can encourage traders to close potentially lucrative trades prematurely, while greed may force you to over-leverage your position and incur inflated and disproportionate losses.

In this respect, managing such emotions is the foundation of your trading psychology, with determinism playing a key role in this respect. By recognising the underlying laws that govern change, for example, you can reason emotion out of your decision making and optimise your chances of long-term success.

A practical example of this is suppressing and regulating ‘FOMO’ (the fear of missing out) as soon as it arises, by focusing on your underlying market knowledge and a predetermined strategy rather than being distracted by seemingly attractive but ill-informed opportunities.

Another key element of positive trading psychology is overcoming greed. As we’ve already touched on, this is one of the most common emotions experienced by traders, as the potential of increased gains can easily overpower logic and reason if you allow it.

You can help negate this with a consistent trading approach and strategy. This way, you’ll only target a carefully selected range of markets and trading opportunities, based on your knowledge, understanding of a particular market, risk appetite and your expectations in terms of bottom line profits.

Make no mistake; consistency is central to a successful trading career (either part or full-time), so this should provide a solid psychological foundation before you get started!

How to Create a Successful Trading Mindset

Of course, there are several nuances and factors that contribute to trading success, but there are also a few common approaches and psychological factors that you should keep in mind at all times. Here’s a more detailed breakdown of this psychological mindset:

#1. Positivity and Discipline

It may sound like a cliche, but in order to achieve success as a trader, you’ll need to display a positive outlook and attitude at the start of every single day.

This can be challenging, of course, as attempting to remain positive while speculating in volatile markets such as forex is continually tested by price fluctuations.

A positive mindset is also a disciplined one, as it remains focused on objectives and successfully overcoming challenges rather than succumbing to negative thoughts and an ineffective, risk-averse approach.

#2. Put Aside Your Ego

In addition to positivity and discipline, you’ll also need to display humility as a financial market and forex trader.

This will help you to accept that you get trades wrong and make continual mistakes, while embracing losses and attempting to learn from such instances. Remember, around 70% of forex traders alone lose money over time, so this remains a significant risk for every single investor on the planet.

With an acceptance of this and a clearly defined risk management strategy, however, you can strive to minimise losses proactively and look to optimise gains when placing successful trades.

#3. Don’t Trade for the Sake of It

As a general rule, you can only really take what the market gives you, and the prevailing conditions and macroeconomic climate will have a direct impact on your activity.

This will also depend on your strategy, of course, creating a scenario where you place multiple trades on one day and none during the next 24-hour period. Your activity will also be governed by selected trade and forex signals, along with the data provided by technical indicators and analytical tools.

This should create a deterministic and assured mindset in successful traders, who can adopt an informed approach that makes the most of an existing bankroll and relevant opportunities as they arise.