Trading psychology probably isn’t something that novice traders take seriously enough when they first start, but it will be a critical factor in achieving success. It helps if a trader understands the basic principles behind the mental side of things, so he knows what he needs to work on from day one.
Here are three reasons why understanding these concepts will help any new trader:
- The mind provides the physical energy needed to complete the trading tasks. Anything that gets in the way of a trader completing their work (such as negative emotions or physical conditions) will take away energy from what’s important, which is executing trades to make money.
- Trading is hard, and it takes persistence and dedication to become successful. It’s like any other sport; you’ve got to work at it if you want success. And when things get tough, how can losing traders stay motivated? How do winners maintain their discipline when they’re down on their luck? The answer lies in trading psychology. That old saying about toughness being more mental than physical applies here.
- An honest appraisal of one’s strengths and weaknesses is necessary for anyone who wants to improve. This includes traders. A deep understanding of what’s going on in your mind and body will be vital for you as you try to improve.
Minimise your loss aversion
The first thing that a trader should learn about is the concept of loss aversion – that losses have a far more significant impact on people’s decision making than gains. In other words, losing money has a more pronounced psychological effect than profiting from an investment.
Experiments with gambling reveal this in spades. Even though somebody may win slightly more often than they lose over time, they will walk away from the table feeling terrible if they try for hours and make absolutely nothing. In contrast, if they had walked away after hours of winning some small amount, they would feel pretty good. This is part of why people will keep trying to make money back with their trades and lose it again.
This can lead to poor decision making, such as chasing losses by doubling up in a trade that is going bad or holding out hope for an investment that has gone sour. A trader should instead face the truth and accept that they made a mistake. This is particularly important after a string of bad trades – no one ever made their way to riches by losing all of their money! Once you have re-evaluated your goals and decided your strategy in the future, stick to it.
Control your emotions
The markets are all about controlling your emotions and your ego because they can both lead you to lose money. Remember that trading is not a competition – there’s no prize for second place and if you see other traders succeeding, try to learn from them instead of feeling resentful or worrying about how you’re going to catch up.
The market is full of clever people who know more than you do. Bettering yourself through learning from others will make sure that the gap between you widens at a manageable pace. In short, accept that everyone makes mistakes and focus on what lessons those mistakes hold for you.
And even if you do everything right, keep in mind that the market is not always logical. Technical analysis won’t always work, and some trades may be better explained numerologically than psychologically.
Discipline is vital for success in any field or area of life, but that fact becomes especially apparent during the early stages of a career as a day trader. Every lousy habit that exists for a rookie can impede his progress towards becoming profitable. Most newbies fail because they lack the patience to withstand the tough times in an inherently volatile and unpredictable industry. We recommend you use reputable online brokers Saxo Bank and start your demo account today, read more here.