Trading Psychology and Discipline
Know your psychological traits before your trade
Success in trading is not only about the knowledge and understanding of the fundamentals or technical analysis but the trading psychology plays a vital role in the success or failure of our trading.
When we say trading psychology, it means our individual psychological traits as well as an understanding of mass psychology. This lesson is all about the important psychological factor of a trader which can lead to big successes or bigger failures.
Trading is an art in itself. Even with a great knowledge and understanding of the market, you may find yourself continuously losing in your trades. The psychological factors play one of the most important parts in trading. They can literally make or break you. And these all stem out of the BIG two – The Fear and The Greed.
Let’s take a hypothetical case – and mind you, in practical life you will see it happening quite often.
You take a long position for EUR/USD and instead of moving up the price goes down and hit your stop-loss. Your trade ends in a loss and you are sad.
However you are still pretty sure that this might be a temporary correction and the prices should move up. However, now you are scared of taking another position and you wait and think.
The price suddenly reverses and jumps up too high, exactly as you had analyzed. You are now frustrated because of missing the second opportunity to make up your initial loss. Now you are frustrated and angry… and yes, desperate.
Fueled with that anger and frustration you enter the market with a much larger long position to make up for the previous loss and the missed opportunity. To make it worse, you put your stop-loss order too far in case the market again behaves as it did the first time.
The prices had already moved up quite a bit and as soon as you entered the long position, the market goes for a free fall. And Oops!!! The position was much larger and the stop-loss order too far. What it left was a very big hole in the pocket and a VERY, VERY angry, frustrated and also scared you.
Let’s check what all can go against you in your trading career and what all you need to keep in check:
- Greed – Nobody becomes rich over night as you have already seen in “Forex Profits – Take the Blinkers Off”. Don’t trade all the time even when you are not too sure of the price direction and do not take too much and too many risks.
- Fear – A couple of losses and we come too cautions to even miss opportunities for which otherwise we are pretty confident.
- Emotional attachment with your positions – A trade can always go against you if you are emotionally attached to your trade you may decide to hang on to it. Come out of any trade which is really going against you as soon as possible.
- Ego – The feeling of “I know everything and my decision was right.” Even if the trade is going against you.
- Too much optimism or pessimism – A trader has to take risks and the success depends on the ability to take risks, but "how much" is something which can decide whether your account booms or you get doomed. A perfect balance of optimism and caution is required.
- Rebellious nature: These kind of personalities always try to go against the trend. They are rebellion, right? Remember the famous saying that the trend can be your friend. Accept that. A trend will always reverse but taking position along the trend will always have less risk.
The above was just an example of how the right analysis, knowledge and intellect become completely useless because of psychological factors and lack of trading discipline. .
Whatever are our psychological traits we all, at times, make some common mistakes. A strict control to avoid these to repeat is what the trading discipline is all about. Bringing discipline in our trading career is the most important aspect and the foundation stone for the success. Let us check what are the factors which need the attention for improving the trading disciplin:
Proper risk management all the time
Risk management comes into the picture for the position-size, leverage and always putting optimum stop-loss orders.
Trade only when you see a strong opportunity
Don't trade for the sake of trading. You do not have to be in the market all the time. Trade only when you are pretty confident about the position and have evaluated the risk and reward ratios.
Don't mess up with all the currency pairs
Trade only few selected currency pairs as every currency pair has its own character and with the time you start getting a feel of it. It is better to be a known devil than an unknown one.
Don't change to frequently
Whether it is the trading system, trading approach, the position size or the risk reward ratio - be consistent. Frequent experiments and changes only increase uncertainty and uncertainty is the number one enemy of a trader.
To summarize, a strict discipline is must for successful trading and for that understanding our psychological and personal traits is the first step.
- Trading Psychology and Discipline