Trading psychology is a combination of a trader’s reactions to events taking place in the market. This is what reflects the nature of our trading decision-making process. Traders can react differently to the same event. For example, with a sharp drop in the value of shares, some begin to panic and urgently sell off assets. Others, on the contrary, prefer to buy stocks at a low price, resting assured that the stock value will bounce back and their purchase will be justified.

The attitude to market news and events clearly shows the difference in trading psychology. Based on behavioral patterns, the following psychological profiles of traders can be distinguished:

• Impulsive. Such traders are not inclined to be patient or think about their trading strategy for a long time. They open deals on the spur of the moment, without thinking much about the consequences. Any change in the market is a signal for them to act immediately. Such traders are most affected by emotions and often make rash trades.
• Cautious. This is the exact opposite of the previous type. A cautious trader weighs his every trading decision by conducting a complete and comprehensive analysis, studying the opinions of other traders and financial experts. While such traders are hesitating, the moment for a successful deal may be missed. Cautious people are better off being long-term investors than traders.
• Practical. Such traders successfully combine the qualities of the previous two types. They have sound risk management and don’t hesitate when making a trading decision — this approach is the best for working on an exchange.

As you may guess, the last type is the rarest — sticking to the golden middle is hard. However, in the next sections, we will describe ways to overcome greed, fear and hesitation.

How to improve your trading psychology

Assessing your own strengths and weaknesses is the key to mastering strategies that suit you personally. Many traders are affected by their emotions, biases and personality traits. When you acknowledge them, you will be able to elaborate a trading strategy enhanced by your positive sides. At the same time, you can find ways to tame your fear and greed.

For example, if you are a confident person, you can make rash and risky decisions. For example, you can decide not to set stop-losses because you’re sure that the asset’s price will turn in the expected direction. To avoid such mistakes, traders recommend setting stops and take-profits: this way, you will make conscious decisions that are less affected by your emotions.

What affects trading?

There are several emotional killers of traders’ efficiency.

Fear

Fear is the main enemy of a profitable trader. It can force people to close a promising trade ahead of time or get rid of potentially profitable assets when they temporarily drop in value. For example, when the market goes against a trader’s predictions, he can put a stop loss closer, comforting himself with the thought that this will increase the stability of the trade. This is not true.

In any case, if we try to stay away from the high risk that we originally planned, we are acting against our trading strategy; our behavior is emotional. Make sure to close a position when a certain goal is reached. Emotional trading always leads to losing trades, and thus loss of capital in the long run.

Fear Of Missing Out FOMO is another widespread phenomenon in trading psychology. It is often observed during major market uptrends when people start regretting not buying certain assets some time ago, as it happened with Bitcoin. However, opportunities pop up every day — traders should learn to distinguish them.

If an investor is guided by someone else’s opinion, he cannot rely on his own critical thinking. Meanwhile, the latter is the main skill of a successful trader — to understand the market, always have your own opinion and take full responsibility for your decision-making process.

Do not copy profitable traders and do not collect the same investment portfolio as any famous trading guru. Remember: everyone has their own thoroughly developed strategy, clear goals and perspectives. Not everyone is equally willing to take the risk of losing money. Therefore, it is not always worth imitating successful traders, but you can listen to their opinion.

Greed

Greed is another emotion that can hinder profits. Spontaneous trades made for big profits very often turn into equally big losses. The desire to get everything at once (while paying no attention to high risks) pushes many traders to rash transactions.

For example, greed can force you to set a very high take-profit for no reason. In such a case, you risk missing a breakdown of an important resistance or support level. This mistake is most often observed among experienced traders: they become victims of overconfidence and stay assured that the market will move in the expected direction. That makes them risk higher volumes.

If you are ready to put a large volume at stake, but this does not correspond to your trading journey plan, you can try creating another account or opening separate deals to test your theories.

Bias

Biased trading takes place when you’re inclined to open positions in favor of certain assets. As a result, you can start making less efficient investment decisions and base your choice on personal preferences instead of technical or fundamental analysis.

As a rule, traders have a biased attitude towards the asset they had past success on — they will keep picking it again. On the contrary, stocks that brought losses are avoided. It is crucial to be aware of your biases and stay guided by rational thinking and market research.

Bias can also manifest itself in the following situations:

• Negative thinking when the trader pays too much attention to risks and tends and sees danger everywhere. This can lead to the closing of a profitable trade, even if it develops according to the expected scenario.
• Ignorance of market conditions when the trader tends to continue using tested strategies or markets without taking into account new information. This may work for a while but will hinder the trader’s success when the market is changing.
• Confirmation bias happens when a trader seeks or exaggerates the value of arguments that confirm his pre-formulated ideas. At the same time, he will turn a blind eye to the facts that refute his beliefs.
• Biased assumptions are related to the asset cost. For example, when the price has already risen, a trader thinks that it will continue to rise. The opposite opinion — “if the price has grown, then it must fall soon” — has no ground until proven by technical indicators. Such reasoning often underlies failing trades.

Snap decisions

No matter how experienced or successful traders are, their decisions should be based on a thorough market analysis. Assessing the trend on a given timeframe is a must for a profitable trading journey! You can destroy your long-term financial result by ignoring the rules of risk management. Before opening any trade, make sure that you stick to a well-balanced risk-reward ratio.

Denying one’s mistakes

After a losing trade, many investors are unwilling to admit that their actions led to failure — they start blaming the market instead. As a result, they keep repeating the same mistakes over and over again.

Inability to admit losses

Traders refuse to take losses so as not to hurt themselves. Psychologists assume that loss aversion is connected to the instinct of self-protection. But in the financial market, it is vital not only to endure the pain of losses, but also to accept them neutrally, since failures are inevitable.

Trading always comes with risk and a high probability of loss. You need to be prepared for this and have a backup plan in case something goes wrong. Make sure to set a stop loss for every deal you open! Otherwise, you may witness the asset price going in an unexpected direction and hesitate to close it because you don’t want to lose money. This is not a professional approach.

7 tips to avoid emotional trading

Even if you are a highly emotional person, you can master certain trading strategies and manage your deals successfully. Here are some recommendations that will help you develop sound trading psychology.

Take a personality test

Determine your strengths and weaknesses. The sooner you do it, the better. You need to honestly answer the questions and figure out how to increase the advantages and control the disadvantages of your mindset. This is a crucial factor for mastering the psychology of the stock market and Forex trading. It’s important to realize and admit any impulsive tendencies if you have any. For example, some traders act out of frustration, fear, or greed.

In this case, you should keep these personal traits under control, especially if you are an active investor. Otherwise, you risk making rash decisions that lack an analytical background. At the same time, you should know how to exploit your personal strengths. For instance, if you are a patient individual, you can open long-term positions and wait for the perfect timing.

Develop a trading plan and follow it

Your trading plan should contain detailed instructions for any situations that may arise during trading: when to enter a position, when to exit, what is your budget, how to control risks, and which strategies to exercise.

For example, you can decide to trade for a couple of hours in the morning and never stake more than 2% of your budget in a single deal. This way, you can minimize your losses and restrict the impact of emotions on your trading decision. You will see clear conditions and rules for opening and closing positions.

Your trading plan should also be based on the specifics of your trading psychology. Mind your biases, emotions and personality traits when crafting a comfortable strategy. This way, your efficiency will be affected by emotional factors to a lower extent.

Finally, it is important to keep improving your strategy — your trading psychology will evolve as well.

Be disciplined

Have enough patience to stay out of the way when emotions push you to enter a position. Stay determined to act when emotions tell you to wait, and close a position when the market conditions are averse.

Also, don’t forget that devoting a certain amount of time to trading means getting experience. The more you practice trading, the higher your chances of closing deals successfully.

Handle wins and losses appropriately

A series of losses and profits is an integral part of a trading career. The secret of a sustainable trading psychology boils down to adequate reactions and your attitude.

If you have been losing

After a series of losing trades, do not rush to recover. Take a break: you should try to gather your thoughts and get yourself together. Regard your failing deals as lessons and learning opportunities. Take the time to think over your losses, analyze your strategy and find out how to avoid mistakes in the future.

If you have been winning

It is equally important not to fall prey to the illusion of being a “trading god” after a series of successful deals. You may be blinded by euphoria and miss the moment when the market trend reverses.

It is common for traders to have many successful trades in a row. Some of them continue trading because they assume that the market will keep moving the same way under its own inertia. When you notice yourself thinking this very way, stop from diversifying your portfolio too quickly and analyze the market once again.

You should be perfectly aware of what drives your trading decisions: your own beliefs or facts and technical analysis. So while you’re studying charts, try to be cold-headed and think of what might be impairing your trading psychology. Let such emotions as fear and pride cool off before opening the next trade.

Exercise patience

No matter what market you prefer — cryptocurrencies, Forex market, or precious metals — it’s important to stay patient to fulfill your plan. Acting on emotions can lead you to miss out on profit by closing a profitable position too early. If your decision is based on thorough analysis and the market evolves as expected, don’t bide your time — let your predictions actualize.

At the same time, it’s crucial to stay patient when the market is moving sideways and you cannot find a lucky moment to jump into a trade. Remember that 70-80% of the time, asset prices are moving within a narrow price tunnel, but even non-volatile stocks are caught up in a trend sooner or later.

In order to define the best time for trading, choose particular financial markets and keep monitoring news. As a rule, price trends are triggered by geopolitical events, news and financial announcements.

Don’t hurry to diversify your portfolio

Although diversifying a portfolio can act as a hedge if the value of an asset drops, it is not recommended to open too many positions in a short time. While the potential gains may be greater, owning a diversified portfolio requires a lot more work.

Indeed, you should stay informed about news and events that could affect the markets. But this extra work may not be worth it, especially if you don’t have a lot of time or are just starting out. For beginners, this emotional and intellectual load may be too huge to process.

On the other hand, a diversified portfolio increases your exposure to potential positive market movements, which means you could benefit from trends in a large number of markets rather than waiting for a single market to move in your favor. So keep adding assets one by one — increase your trading complexity gradually.

Understand what leverage is

Increasing your profits by x5, x10 or even x20 sounds very alluring. However, leverage is not for the faint of heart. Here’s why.

Leverage is basically a loan made by a broker to open a position. Investors deposit funds, called a hedge, and gain market exposure equal to the full value of the position. However, while leverage can increase gains, it can also magnify losses.

It is important to fully understand the consequences before opening a position. Investors with limited knowledge of leverage can decimate the entire value of their trading account due to excessive losses. To avoid this mistake, you should educate yourself on trading with leverage on CFDs, Forex markets, futures, etc. because this is a very tricky thing.

Use a Demo Account

A demo account is an essential tool for both experienced and beginner traders. This way novice investors can avoid the increased risk of live trading while seasoned speculators can try out a new trading strategy or system. In addition, demo account trading can help to instill trading discipline by forcing investors to stick to their trading strategies. By trading in a simulated environment, they can learn to control their emotions and make logical decisions without the pressure of real trades.

Keep a trading log

In your trading journal, you can write down your wins and losses, as well as your emotions and doubts experienced during the process of trading. This information can help you analyze your trading psychology and reveal weak spots and errors that should be avoided.

Taking a retrospective glance at your actions is important: you can see which decisions were right and which were wrong. Plus, you can track the evolution of your emotional control and find out whether your feelings cloud your judgment or not.

As an alternative to writing, you can try recording videos to watch yourself later. If you have experienced traders among your friends, ask them to assess your progress and give some recommendations for improving your trading psychology — their opinion will be unbiased.

Be adaptive

Any financial market is ever-changing, and you cannot expect it to evolve by one and the same scenario over and over again. A hundred-percent winning strategy simply does not exist — remember that. You should always keep tabs on the market to adapt your strategy correspondingly.

If the market is too volatile, you had better postpone your trading activity and try to figure out what’s happening. Being adaptive means taming your emotions and being able to assess the situation regardless of your feelings. Stay pragmatic no matter what’s going on around you.

Conclusion

There is a common stereotype that trading on the stock exchange is very difficult, and financial intelligence is the major determinant of your success. However, trading psychology and the ability to control your emotions are no less important.

Fear, greed and inability to accept losses can sabotage your efforts — once you learn to control these emotions, your trading psychology will be greatly improved.