The Basics and Importance on Understanding Trading Psychology

What is Trading Psychology?Trading psychology is the change in mindset, emotion and perception, and thus behavior, when pursuing active, “live” trades, as opposed to demos. Trading one’s own money, or managing other people’s investments adds a psychological element and added barrier to success that cannot be duplicated in the classroom. Emotions, such as indecision, fear and greed, which normally do not come into play during the training process, crop up when one begins to trade with actual money. These emotions result from not only the use of real money, but the highly stressful and competitive environment of the day trading floor. Learning how to identify and manage these psychological elements will allow you to retain a clearer head and make better trading decisions.Why is it Important?When in training, taking the risk of putting one’s money on a company or fund is pretty easy. It is a bit like playing Monopoly, you make decisions with fake money that are much harder to make when real money is at stake. Easy decisions in training can easily start to feel like rocket science to the new trader. Indecision or rash decision making can result from being flustered as a result of the stress and reality of the trading floor. These poor decisions can lead one to losing out on a good trading opportunity or going “all in” before you have had enough time to really think it through.

Besides indecision, fear and greed are the biggest psychological barriers to good trading. These emotions can quickly and negatively impact your ability to make quality, well thought trading decisions. Fear can cause an inability to make a move or maintain patience until a trade gets to its most profitable level. Greed can cause one to make risky trading decisions to get that “big hit” and cause you to lose a lot of money, fast.What Can I Do to Maintain Positive Trading Psychology?It is important to reduce your stress levels and manage your emotions while trading. This can be really difficult in the heat of the pressure of rapidly changing trading situations that you must quickly react to. One of the best things you can do to maintain your cool is to create a trading plan that has different contingencies for various possible market changes and stick to your plan. By creating a plan of action while in a cool mindset, you can avoid the negative ramifications of making a rash decision that you do not have time to properly think through. Focus on educating yourself and keeping up to date with the most effective trading strategies. You need to develop the ability to be more flexible in your planning, while keeping an eye towards responsible risk management. Having this solid plan that accounts for various different possibilities gives you the ability to make on the floor decisions without allowing your emotions to control your choices.

While it might not seem like psychological concepts would come into play when talking about trading, psychology is us, and it is everywhere. Having an understanding of the psychology of trading, and how best to manage your emotions and psychological pitfalls that can negatively impact your ability to make good trades, will improve the quality of your trading decisions. Learning how to manage the psychology of trading is part and parcel to the successful trader as you can be your own biggest asset, as well as your own worst enemy.