Trading Psychology And Discipline

Traders require various characteristics and skills in order to be successful with their trades. The ability to determine the direction of the trend is one of the key traits, but it is not as important as the ability to contain emotions and maintain discipline.

The psychological aspect of trading is extremely important to understand, and the reason for that is fairly simple: a trader is often darting in and out of stocks on short notice and is required to make quick decisions. Emotions simply can't get in the way.

Emotions could be a trader's worst enemy; they often lead to misjudgment and loss of a trade. 

There's an old saying on Wall Street that "pigs get slaughtered." This greed in traders causes them to chase on the winning positions for too long, trying to get every last tick. This attribute is damaging to your trade plans as you are always running the risk of getting blown out of a position. Greed is not easy to beat because we always want to do better and try to achieve a little more. A trader should recognize this instinct and create trade plans based on rational decisions.

When your trades are in red, or bad news comes out about a certain stock or the general market, it's not unusual for fear to take the reign.

Sometimes we hold on to trades that we know are no good in fear of closing them and making the loss real. It's okay to have a loss and walk away. Sitting on bad trades just makes your losses larger and offsets any successful trading that you might be doing otherwise. If the trade isn't working out as expected, close it and move on.

Paralyse by Analyse
"Paralyse by Analyse" is an interesting phenomenon in which traders get so caught up in analysing everything about a potential trade, they never actually pull the trigger on the trade. In this case, what often happens is that the trader will constantly question all  the minor details found in the analysis in an attempt to perfectly analyse a situation. This is a truly unachievable task, which can prevent a trader from both making monetary gains and achieving experiential gains by getting into the trade.

We are only human and, as such, perfection may not exist in trading. However, profitable trading can be achieved when emotional management is learned.

To get your head in the right place before you feel the emotional or psychological crunch, you can look at creating trading rules ahead of time. You can establish limits where you lay out guidelines based on your ROI ratio and when you will exit a trade - regardless of emotions.

After a major loss, it's important that you take some time off. Avoid the need to immediately jump back in to get your profits back, it will surely come once a distinctive working method is employed. It is better to come back after you feel well rested, calm, and clear- headed. Beating your emotions is the most difficult thing to do. If you are smart and recognize that you are being emotional, you can avoid compounding your mistake.

Deciding when to enter and exit trades is one of the most basic functions of a day trader, and it is important that these decisions are made as efficiently as possible. Being decisive is vital to successful day trading, otherwise you will only sit and watch trades that you should have actually taken. Being decisive does not mean being rash and taking trades that you are not sure about, but it does mean acting promptly when a trade does come along. A common pitfall that many beginning day traders come across is seeing a trade occurring, but hesitating and waiting for the trade to start moving into profit before entering. This always results in an entry price that is not as optimal as it would have been with a prompt entry, and can turn a winning trade into a losing trade.

Remaining calm during trading is one of the most important personality traits for a day trader, but it is also one of the most difficult to obtain and practice. As humans, the natural reactions to a winning trade are excitement and joy, and the natural reactions to a losing trade are panic and sadness; but day traders need to control these emotions; otherwise, they will adversely affect their trading decisions. For example, the panic that occurs after a losing trade might make you take a new trade almost immediately in an attempt to make the money back, even though there was no trade according to your trading system.

Trading anxiety can be a problem for traders that have suffered from serious losses. Anxiety can cause a loss of confidence, fear of mistakes, and reduce your ability to be objective.

If you find yourself feeling sick and upset over your trading account, it's likely that your risk management is not tight enough. To overcome this, you have to make a plan. Sit down and outline what you think you did that put you in the position that you are in. Once you have identified the mistake, make a trading plan to correct the mistake and make a note of how you will avoid this happening again in the future. No one is perfect, everyone makes mistakes. The most important thing is that you learn from them. There are no perfect traders out there. Even professional traders take a heavy loss from time to time.

 Whilst very beneficial in many aspects of our lives, being overly optimistic can, however, be very dangerous in the trading environment. Excessive optimism and guessing occur for two main reasons: the illusion of control and the self-attribution bias.

What prevails among new traders is initial trading success without proper planning, which eventually leads to more trading of a similar fashion, thus, creating overconfidence in trading. The problem is common, especially when traders attribute random outcomes to skill, an issue known as "random reinforcement." It is important not to confuse randomness with positive expectancy and recognize that working with technical indicators, combined with the market sentiment and fundamentals, will give you the complete package to success. It is important to acknowledge that successful trading requires attention and a work plan. A few winning trades are not the same as long-term statistical validation. 

Revenge trading is when you get into an emotional tussle with the market and become overly aggressive with trading. You've suffered some losses and you are understandably upset about it, so you set out to get revenge on the market or the source that lost your money.

As hard as it can be to fight the emotional response, traders must refrain from revenge trading. Emotions are a trader's enemy. The typical revenge trade will be double or triple the size of the previous losing trade. The trader will reason that "I can make back what I lost and quickly add a gain to it." The only problem with this approach is the fact that if the trader's hasty decision turns out to be wrong, it will add a double-sized loss to what was already lost. This turns revenge trading into a never ending pit of larger and larger trades until a margin call occurs.

Although being defeated might not be a preferred choice, it makes more sense to accept defeat for the moment and admit your mistake. The long term rewards will be much more profitable. 

You should try to learn about your area of interest as much as possible. For example, if you are interested in currencies, it makes sense for you to become knowledgeable about currencies. Start by formulating a plan to educate yourself.

This means following our educational suite, studying and understanding charts, speaking with your account managers, reading the news and viewing the videos we publish or doing other background work.

You should periodically review and assess your performance. This means that you should review your returns and individual positions, but also how you prepared for a trading session and how abreast you are of recent market updates.