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Understanding The Basics Of Trading Psychology

If you’re interested in getting involved in trading, there are quite a few things to think about. You’ll need to find a good broker, find a strategy, think about risk management, and more. However, one thing that seems to go unconsidered by many beginners is psychology. The truth is that psychology plays a big role in your ability to profit in the market. Today, we’ll talk about the basics of trader psychology and why this is definitely something that you want to think about if you’re ready to start trading.

 

 · Human Beings Are Emotional Creatures

 

The truth is that we are all human beings, and as human beings, we are all emotional creatures. Love, fear, greed, and more are the primary forces that seem to drive our everyday lives. However, these same emotions can lead to big losses in the market if you’re not careful. At the end of the day, before getting started in the market, it’s important to understand basic emotions that the average person may not think about.

 

 · There Are 2 Driving Emotions In The Market

 

At the end of the day, there are only two emotions that will generally drive movement in the market. Those emotions include…
 

  • Fear – First and foremost, one of the emotions that tends to lead to big losses or lost opportunities for big gains is fear. Ultimately, we live in a world that is driven by money. When trading, you are putting that money at risk. So, it is natural to have a fear of losing that money. However, letting this emotion dictate your trading habits is a bad move. We’ll talk about how to avoid letting fear get involved later.
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  • Greed – While greed doesn’t generally lead to missed opportunities in the market, it can definitely lead to big losses. As mentioned above, in a world led by money, our quest to get our hands on as much as possible can end up hurting us.

 

 · How To Avoid Letting Emotions Lead To Losses In The Market

 

For me, there has been quite a bit of success in a simple three step process. That process includes…

Step #1: Follow A Strict Trading Plan

In the world of trading planning is key. At the end of the day, by writing your trading plan down and following it to the T, you are keeping emotions completely out of the process. Your plan dictates when you enter and exit trades, not your emotions. So, before you get started in the market, make sure that you have a strong trading plan drawn up.

Step #2: Check Your Emotions At The Door

Never walk into the trading process in an emotional state. If something is going on in your life that’s leading to heavy emotions, it’s best to deal with what’s causing the volatility in your emotions before trading. After all, if you are already overwhelmingly happy, sad, or otherwise, these overwhelming emotions can cause you to stray from the path to profits as you trade.

Step #3: Know When To Walk Away

If you start trading and you notice that your emotions are getting the best of you, it’s probably time to walk away. Start by getting up and going for a walk around the block and trying again. If that doesn’t work, give yourself the day off. It’s better to not gain than it is to lose!

 

 · Final Thoughts

 

While we don’t often think of emotions, if we do sit back and think of them, we tend to find that they dictate some of the most important decisions we make in our lives. While emotions do have their place, they don’t have a place in trading. So, before you get started, make sure you’ve got your emotions in check!





One response to “Understanding The Basics Of Trading Psychology”

  1. Another strategy, albeit costly: have someone else execute your plan for you.

    Nick de Peyster
    http://undervaluedstocks.info/

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