To trade successfully you not only need the trading know how but to understand your own strengths and weaknesses when it comes to trading psychology. Acting rationally and containing your emotions is key to allow you to think quickly and clearly to make profitable trades. Trading psychology is different for each trader and based on personal reactions to risk and rewards and tendencies to be emotional.
Take some time to identify your personality traits. It is important to recognise your strengths and weaknesses early on so that you can tailor your trading style appropriately. What are your tendencies to react calmly and logically in a stressful or high stakes situation? Do you tend to get angry or frustrated when things go wrong and you let your emotions take over?
Take emotion out of the decision and be patient when deciding to open or close a position so you don’t miss out on profit. You must think logically, using your knowledge and trust your analysis when is the most opportune moment to act.
Depending on trading style you will need to think fast and make snap decisions to enter and exit positions to keep your trades profitable. You need the discipline to keep to your trading plans and be prepared to log losses as well as profits to track your progress. You must not be disheartened if you lose, after all, everyone makes mistakes and it is just part of the learning curve to become a successful trader.
Fear is a natural reaction to a threat, in this case, losing money, When stocks start to fall or there is a likely economic downturn you must keep your cool. The internal alarm bells that ring and prompt you to close your positions and to take no more risks might seem like the best thing to do. When in reality, liquidating holdings too quickly could cause you to miss out in the long run. It is good to prepare for these events and plan the best strategy to mitigate loss. Trading is risky, but the bigger the risk, the higher the reward.
When a position is rising it is tempting to keep holding on to just get a little more profit. But you have to be aware that acting rationally will reap far more success than acting on instincts or emotions. A rising trend may look good, but there is always the risk that the trend reverses and stocks crash and for the sake of waiting for a few extra ticks, it is better to pull out.
Setting yourself rules
By setting out clear guidelines based on your risk-reward tolerance you can take emotion out of the equation when deciding when to enter and exit a position. You can set limits on profits and losses each day or week to ensure you don’t get carried away and can start again another day. It is best to constantly review your rules depending on your trading results so you can finesse your personal strategy.
Setting a trading plan to suit your strengths and weaknesses will keep you on the road to success. You can also tailor your trading style to your personality traits to ensure trading is exciting, fun and profitable for you. There are many different strategies for trading which are characterised by trading styles. Trading styles depend on the period the position is held and suit different personality traits. The four main categories are:
- Position trading: where positions are held medium term – upto a year
- Swing trading: where positions are held from days to weeks
- Day trading: positions are open and shut within the same day.
- Scalp trading: positions are only held temporarily – from seconds to minutes
The amount of capital, time and experience that a trader is able to invest will determine the best trading style for them. It can be difficult to choose the trading style that suits you best, it really depends on your personality!
- Position trading is best suited to people who can hold their own no matter if there is turbulence because of the time position trades are held, you must hold your ground through turbulent and fluctuating periods.
- Swing traders are patient people who can keep calm when a trade isn’t performing as there are much greater stop losses than for day trading.
- Day traders are often people who cannot sleep knowing a task isn’t done. If you are someone who struggles to clear their mind when the sun goes down then day trading may be the best for you.
- Scalping is best suited to active traders that are good at making quick decisions, this is to optimize profit and prevent losses as remember those trades can change rapidly. You need to be focused to be successful at this trading style.
So now you understand the basics of trading psychology and how you can suit trading to you! If you want to learn more we offer an online course hosted by London’s top trading educator that goes into more depth so that you can really understand your own trading psychology, here.