Trading psychology is the emotional, mental state that influences the decision and actions of a trader. It is an area of study that orders the human mindset to define success or failure in trading. It is also the area that dictates the aspects of a trader’s emotion and mental reaction to trading circumstances.
Emotions such as fear, greed, anger and regret are the core aspect of an undisciplined trader’s mental state that leads to failure. These emotions will be carefully explained in the subsequent paragraphs.
Greed is referred to as the selfish desire to accumulate more than what is needed. Although, this attribute could be an important necessity in the aspect of trading and at the same time destructive depending on how it is being utilized by the trader under different circumstances, its excessiveness clouds rational judgments.
For instance, a consistent trader who is always on the game and as a result of the trader’s consistency became wealthy but on a particular day, there was a decline in the stock market. Unfortunately, he lost it all.
Fear on the other hand causes more havoc than greed. Greed utilized under positive circumstances can yield more profit while fear generates little or no return. Fear is the appalling emotion caused as a result of perceived danger. This emotion tends to make traders pull away from making certain trading decisions to avoid risks; it causes one to lose more than what has been invested. It is the most destructive emotion any trader can have.
Anger is a stinging feeling, a pain that stems from losing in a trade that could have yielded more return. This emotion births regret and eats away at a trader’s progress and alters the effect of decision making.
Regret, as mentioned in the previous paragraph, stems from anger. And from anger, it develops into phobia or fear. One major aspect of regret is also its ability to make a trader extremely greedy. If there are no careful and disciplined actions, a trader will be forced to make trading decisions that will generate more loss than imagined.
The underlying factors of trading psychology are discipline, consciousness, and accuracy. These factors are what aids traders in the bid to overcoming the negative effects of emotions on their trade. As a matter of fact, to overcome a problem, one must first understand the problem, acknowledge its presence, effect and set rules to instill discipline.
The most important aspect of being a successful trader can be attributed to exercising restraint, adhering strictly to trading rules and trends of the stock market and the awareness of the impacts of anger, fear, greed and regrets.