What is psychology in trading?
Trading is the analysis of the market and making decisions based on the analysis made: buy, sell or stay away.
And since analysis and decision-making come from the brain, the emotions and experiences that also occur inside the head can directly affect the trading process. It’s about euphoria, impatience, anger, fear, and pride. Their influence can be so strong that:
- the trader suffers a loss in the transaction, despite the correct analysis;
- the trader does not enter the position (or does not exit the position) when the corresponding signal arrives;
- the trader trades too much or too little volume;
- the trader overemphasizes some factors and ignores others.
Emotions do not always lead to losses. Sometimes they help to increase profits, but then this is usually associated with unjustified risks, which is not a sign of professionalism.
Fear and greed are the most dangerous emotions in trading
Although there is nothing reprehensible in having a lot of money (if it is earned honestly), the passionate desire to get rich quickly and easily in forex or stocks is more likely to backfire.
Greed can dull rational thinking and lead to suboptimal behaviors, such as buying an inexplicably large amount of a financial asset simply because the price is rising rapidly.
One of the useful trading tips from professionals is to study the indicator of trading volumes. By understanding the psychology of the market and having the skill of reading volume, you will be able to develop the skill of understanding genuine sentiment so that you can then act rationally.
Bias and errors of judgment
Bias in trading is the inability to conduct an independent analysis and make an objective decision. To fight prejudice, use two simple things – a trader’s diary and a trading plan. Create and maintain them with discipline.
The way to solve problems will be unique because each person has his own personality, unique experience, set of knowledge, and skills. There is no ready-made formula, you will need to work hard on yourself. However, you can use the trading advices of experienced traders. It is important not to blame the market as if it is acting to spite you! Everything that happens in your life, including trading, depends primarily on you.