DISCUSSING THE IMPORTANCE OF TRADING PSYCHOLOGY AND DISCIPLINE

Being a trader requires many characteristics and skills to be successful in the markets. The ability to understand a company’s fundamentals and the ability to determine the direction of a stock’s trend are just two of the much needed skills. However, what’s more important than those is the ability to exercise discipline, along with the strength to control your emotions. Let’s talk about why trading psychology and discipline are important.

Trading Psychology

It’s natural for a trader to feel quite anxious when he or she receives some bad about the asset he or she is trading or about the broader market. As a result, they may overreact or feel compelled to liquidate their holdings and cash in and avoid taking any more risks. Doing that really helps them avoid further losses, but they also may miss out on certain gains.

Fear is a natural reaction to threat. Traders must understand that. Instead of clamming up completely, it’s better for traders to quantify their fears, considering what exactly they are afraid of and the reasons behind such emotion.

When they contemplate about this issue ahead of its occurrence, traders can plan how to react to these things. They may even change the way they perceive such threats. As a result, they can hope to isolate and spot these feelings during when they occur in a trading session and the can focus of foregoing the emotional stage of the response. Now that’s not to say that this will be easy. It may even take a long time to practice. But it’s necessary for the health of your trading portfolio.

Your Greatest Enemy: Greed

It is common knowledge on Wall Street that pigs get slaughtered, meaning greediness can lead to terrible losses. One habit that manifests too much greed is hanging on to winning positions too long, trying to get every last tick. Greed can be very disastrous since you would always take on the risk of getting whipsawed out of a position.

You can overcome greed easily. That pretty much is true. It’s usually based on an instinct to try to do better; to aim to get just a little more of what you have already won. You must learn to recognize this instinct and create a trading plan based on rational business decisions and not on emotional spikes or potentially harmful instincts.

You need Trading Rules and Plans

The importance of having trading rules and plans lies on the fact that you can get your head in the right place before you feel the emotional strain of a psychological crunch. You should lay out guidelines based on your risk-reward tolerance for when you will enter or exit a position (through either a profit target or stop loss). This will definitely help you take emotion out of the equation.

For instance, you might want to think about how certain news will make you do something, such as a positive or negative earnings report or macroeconomic event.

You would also be doing yourself a favor if you set limits on the amount you want to gain and lock in and the amount you are willing to lose. Basically, if you have reached your profit target, call it a day and lock in your profits. If you have reached a stop loss level, pack up and move on to another more promising trade.