Why trading psychology is important: Top 5 Reasons You Should Know

Table of Contents

• 1. Trading psychology manages emotions
  • Fear and greed :-
• 2. Trading psychology helps in managing risk
• 3. Brings discipline in the trading  business
• 4. Trading psychology helps manage uncertainty
• 5. Reduces fear of missing out (FOMO)
  • Jumping the gun –
  • Random Trading –
  • Big Position size –
• Conclusion 

Why is trading psychology important?

If this question keeps your mind occupied, congratulations, you are already on the right track to great trading success. Because if you are looking for answers to profitable trading and have already explored the technical aspects of trading, here is where the missing piece of successful trading lies – trading psychology.

When I first started out as a trader, one thing that struck me was why, despite using the same strategy, trading performance varied so much from one trader to the next.

That prompted me to experiment and learn about how successful traders think, and I continue to believe that the edge I have in my trading is largely due to a paradigm shift in the way my trading mindset has evolved.

[Suggested Reading :-Trading Chart Patterns]

In this blog, I will discuss the top five reasons why trading psychology can have such an unprecedented impact on your trading and how trading psychology can help you become a better trader.

So, without further ado, let us quickly go over the top five reasons why you should focus on trading psychology-

1. Trading psychology manages emotions

When you first start trading, you may feel that despite having a strong understanding of markets and price action, as well as any type of technical or fundamental analysis, you are unable to turn your knowledge into profits.

This occurs because two human emotions dominate your decision-making process:

Fear and greed :-

When the market moves against open positions and the trader stands to lose money, the natural reaction of the human mind is fear. Fear causes traders to exit positions too soon, even when a reasonable technical or fundamental picture appears. Fear can work against traders in a variety of ways, such as preventing them from capitalizing on a price move because they are afraid of making a mistake.

This is especially true if the previous position was booked as a loss.  

Similarly, greed is another emotion that gets in the way of successful trading. Greed causes you to hold a position in the hope of earning more profit, only to see your open profits vanish before your eyes. Nothing is more painful than watching your profits turn into losses.

There is a better way to book profit in a systematic manner, but traders are often blinded by greed and fail to see any other option.

Pro Tip:- Always keep fear and greed in check, and use a trading journal to highlight trading errors caused by fear and greed.

A good trading psychology does not remove these emotions, but rather teaches us how to accept them as a part of human nature and keep them from interfering with our ability to make rational decisions based on our analysis.

The importance of trading psychology in managing these emotions has a greater impact on traders’ equity curves because, once identified, these emotions can be used to their advantage rather than becoming a victim of them.

2. Trading psychology helps in managing risk

Trading is also a risk management business, and without proper trading psychology, managing risk is nearly impossible. Better planning your trades in advance is considered a good trading practice, but champion traders plan ahead of time how much risk they will take for each position. “If you can’t measure it, you can’t manage it,” a great trader once said.

Having a clear mindset of measuring and taking calculated risk is a factor that can make a huge difference in your trading, and risk management becomes simple if you can develop a good trading mindset.

3. Brings discipline in the trading business

Trading, like any other business in the world, needs a consistent and systematic approach. Without the proper set of rules and planning, it is impossible to be disciplined enough to achieve trading goals.

Why is trading psychology so important?

Because it brings you focus and discipline in your trading, it makes you a better trader and a better person who knows when to risk and how much to risk, which is what makes the real difference 90% of the time.

A trading journal is essential for practicing discipline and developing the right attitude in trading. It helps you revisit your mistakes and become a proactive learner.

It is similar to any other business ledger in that it accounts for everything, and reviewing it will reveal your strengths and weaknesses.

4. Trading psychology helps manage uncertainty

Great traders train their minds to accept absolute uncertainty, which is the fundamental principle of trading. “Anything can happen” is the thought process that successful traders live by; proper trading psychology deals with uncertainty in a positive way.

No one, no matter how good an analyst, can predict how much the market will move and in which direction with absolute certainty. This is why having the right mindset and trading psychology is important in managing uncertainty.

Right trading psychology does not fear uncertainty because it tells us to live in the moment to flow with market psychology and think about information that is made available by the market at this movement rather than thinking about the future, thus relieving the mind of uncertainty.

[Suggested Reading – Trading For Beginners : Top 5 things to know before you start]

5. Reduces fear of missing out (FOMO)

There are three types of trading entries: trading plan entries, conviction entries, and fear of missing out entries. In my experience, the third type of entry has the most devastating long-term consequences.

Fear of missing out causes any or all of the following trading mistakes:

Jumping the gun –

Taking a position without confirmation of a trading signal

Random Trading –

Trading without any plan just in anticipation of a big move in the direction of the trade.

Big Position size –

Taking a higher than normal position size and violating risk management rules.

To avoid FOMO (fear of missing out), every trader should take positions in accordance with a trading plan.

Proper trading psychology is essential for reducing FOMO and assisting traders in maintaining focus over time.

Conclusion

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