The path to success in trading is not different in many other facets of your life, for example if you practice a sport, in addition to many hours of practice is necessary a good psychological and mental preparation to deal with opportunities, sacrifices, obstacles , Victories, failures, ...
The psychology of trading is vital for any beginner, who must develop his own investment strategy while learning to deal with these emotional factors. But it is also for professional traders who must remain psychologically strong and not lose the discipline to be consistent and profitable for years.
What are the main emotions we face when doing trading?
The fear will make you not want to take any risk in your operation. It acts in two senses:
- You may see an opportunity to negotiate but fear does not let you dare to open any position and therefore you will lose.
- You may have an open position and fear makes you close it prematurely: If the position is in losses the fear will push you to close it to not lose more money when you keep it could turn around and generate benefits. If the position is in profits the fear will also push you to close it already so as not to lose your profits in the event that it turns around when, if you keep it open, these benefits could be much higher.
You will also be a victim of fear and impatience if you trade by risking money that you can not afford to lose.
Greed is a very common emotion. Virtually everyone wants to win more and more, with the minimum possible effort and if it is sooner rather than better.
Greed will cause you to trade excessively and take too many risks so that, instead of helping you make a profit, you will end up with your trading account. It pushes you to enter the market, to open positions without control, not to be patient waiting for the right opportunities. Also keep open positions in profits longer than necessary with the idea of winning even more.
You are not controlling your greed if you are identified in some of these cases:
- If you push yourself to open positions every day or if when you do not find them you feel pissed, frustrated or uncomfortable.
- If you feel furious to realize that you have missed a good trading opportunity.
- If you are taking a high risk to get more profits.
- If your goals are to double or triple your account in the shortest time possible instead of moving slowly but surely.
- If you try to change your system or try new strategies often because you think you are not opening enough positions every day and this limits your benefits.
What are the keys to success?
1. To adequately deal with losing operations
When most traders fall into a streak of losing trades they tend to blame themselves and try to change strategy. They believe that these losses occur because there is something they have done wrong or that their system is not good.
If you are constantly changing systems it is impossible to know what works and what does not. It is not a matter of never changing anything but of doing it with discretion. Losing is part of trading. It is totally normal and even the most experienced traders with winning strategies lose a significant percentage of their trades.
You must develop your tolerance for error, avoid fear and accept losses as part of learning and the road to becoming a profitable trader.
2. Suitably face the winning operations
A few winning positions can come to your head and self-convince that your trading system is infallible, that you are a crack at trading, that you have a knack for this or that you are immune to losses.
No one likes to lose, but when you start you can even become positive so you realize that trading involves risks and that it is very easy to lose. Overconfidence can be your worst enemy. You will put more money into play and take more risks than the convenient ones. You will believe that the market will meet your forecasts and you will be unable to react to the mistakes you make.
3. Think positively
Positive thinking works. When you think positive and follow your trading strategy you will get more successful trades.
But if your thoughts are negative they will drag you to make many more mistakes. You will fall prey to fear or anger and can hardly learn, analyze or act objectively in that state.
Think of any sport: You think that a basketball player will bring something positive to be thinking to himself that he will not be able to score, in a footballer who enter doubts when he is going to throw a penalty, a cyclist on the rise He does not trust that his strength will come to him, an athlete who is not convinced that he will be able to improve his marks, This is the best recipe to fail for that reason in any sport it is very important a positive interior language to generate self-confidence. The same thing happens in trading.
4. Be aware of the ones you can and can not control
No matter how hard you try, you can not control how the market will react and whether an operation will be a winner or a loser. The market is made up of millions of people and automatic systems that make decisions and execute their operations without you being able to influence them.
What you can control is yourself and your way of acting: how you look for investment opportunities, what you rely on to make your trading decisions, how you limit the risks per operation, how you set your profit targets, how you open positions , When you close them
Focus on these aspects that you can control and do not obsess about the results. You can not control the results. What is valuable in trading is not the individual results of each operation but the having a cost-effective and consistent system. You should always try to relativize the result and focus on your system. Neither the losses mean that your system is bad and that it is better that you dedicate yourself to something else nor the benefits make you a master of the markets possessing an infallible system.
5. Controlling emotions
Feelings like fear and avarice will always be there and you can not eliminate them altogether. What you can do is control them, keep them at bay and try to attack the factors that generate those feelings.
Fear often comes when you do not yet have adequate knowledge of the market. You have no experience and you lack confidence in yourself and your trading system.
The main solution is practice. beginners Open a demo account so you do not risk your real money until you are not prepared, test, develop and optimize your trading system until you become profitable, have patience and maintain a positive attitude focused on learning. The first few months are the most complicated: do not get discouraged or give up on losing trades or become confident in winning trades.
Another frequent cause of fear in many traders is that they operate with the aim of getting the solution to a complicated economic situation. If this is your case and you open a real account, risking a money that you can not afford to lose you will be easy prey to impatience and fear. I advise you not to resort to trading for this, try to look for another source of income and go back to trading when you can act calmly and without pressure.
Consider how a trading robot operates: Automatic trading systems act according to a predefined strategy when the necessary variables are given. If the variables are given then enters the market but is waiting for as long as necessary. You should do the same to avoid self-congratulating yourself on good opportunities that are not or thinking if you have many or few open positions and what has been the result of the previous ones.