Home >> Psychology of Trading
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Psychology of Trading

Trading is a complicated profession and anyone who claims that everyone can quickly learn how to trade and make lots of money in the markets is misleading to say the least. Almost all the professional traders we listened to, report that it took them several years before they were able to be successful.

There are three main elements required for trading:

1. a good trading system.

2. having sufficient trading resources such as sufficient capital for trading, computer equipment and software.

3. mastering the psychology of trading.

Many trading experts claim that the third element, mastering trader's psychology, is by far the hardest part of trading. Learning to recognize and control the effects of one's own emotions on trading such as fear, greed, anxiety, over-confidence, so that these emotions would not harm ones trading is extremely challenging.

Traders who expect that they can start trading and in a matter of few months become consistently profitable and make a living doing so probably have unrealistic expectorations. Not only that, but they set themselves up for failure as the added pressure of needing to make money in trading right away to pay their bills tends to make traders make more mistakes and lose their money even faster. For example, traders may become fearful of losing and may start taking profits right away. Traders can also become fearful of closing trades and taking a loss, and end up stay in losing trades longer, occurring bigger loses than they plan initially, as they hope the market will turn around and they would avoid the loss.

Another common mistake for traders is to try to "make up" their losses, by increasing the risk of the trade after losing a trade. Traders are often anxious and disappointment after losing a trade, and may implosively enter poor trades that are inconsistent with their own trading plan, just in order to get out of the emotional state of feeling bad about the loss. That coupled with increasing the risk of the trade, can quickly snow-ball into a bad losing streak. Another common mistake for traders at such situation is to stop adhering to their own money management plan, mounting losses even quicker. The result is that many traders end up 'blowing-up' their accounts (that means losing most or all their money in their account), within less than a year of starting to trade.

How one may overcome some challenges and pitfalls related to psychology of trading?

1. Setup reasonable expectations from trading: realize that almost all professional traders repot it took them at least several years to become good at trading. Almost all traders make costly mistakes in the first couple of years of trading.

2. Keep in mind that the great majority of traders end up losing in trading. Only a small percentage of traders win large amounts of money in trading. Pursing a dream of becoming a professional trader is exciting, but it is important to keep in mind that most people are unsuccessful in doing so. It is thus very important to consider the risks involved, and consider alternative careers.

3. We strongly recommend that traders have a job that they can financially rely on while they learn how to trade and practice their trading. Only when a traders feels confident that they have several years of trading, and have proven track record of profitable trading (we recommend for at least a year) it is time to consider relying on trading for a living more heavily. Not doing so, as we explained above, only adds tremendous pressure, and tends to make traders lose their money quicker.

4. We strongly recommend to only consider professional trading as an option for income generating profession after having at least a few years of trading experience and a proven track record of being profitable for at least a year.

5. Have a solid trading system. However, don't assume that just because you paid money for your trading system, that it actually is a good one, or that it works. Try to speak to other traders who have used your trading system to find out if they have been successful at it.

6. Trade on demo accounts until you have mastered the trading system, and convinced yourself that it is a good one. But remember that trading on a live account is nothing like trading on a demo account, because then one has to deal with one's emotions and the psychology of trading. Usually that does not play much of a roll when trading on a demo account, but it does play a huge roll when trading on a life account. But at least you can test your strategies first on a demo account.

7. Have a clear trading plan of setups to enter and how you would manage trades at different scenarios.

8. Stick to your plan! This sounds trivial, but is actually the hardest think for many traders to do! Most traders find it very difficult to stick to their own trading plan. But think what would happen if a constructor would not keep to the architect plan when constructing a large building? or an engineer not keep to their plan when building a computer? obviously that may lead to a disaster, so why should it be any different in trading?

9. keep to string money management rules. It is very important to keep a keep budget and a maximum amount the trader is willing to lose on every day, every week, and every month. Once that amount is reached, stick to your rules! and never trade with money that you can not afford to lose!

10. Work on avoiding entering trades impulsively.

11. Never try to "make up" a loss. If you lose in a trade, take a break. Only after you are calm and not angry or upset at losing a trade, then look to enter into a another trade.

12. Never trade when you are angry, upset, depressed or overconfident. Trading under such conditions can lean to entering into bad trades impulsively with poor plan and poor management of the trade.

We hope that you find this information helpful. Please write to us, and let us know your thoughts at support@smartest-trading.com

Smartest Trading Team.


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