In these difficult times, maintaining control over your mental faculties can be tough for even the simplest of tasks, and trading is anything but a simple task. There are a number of psychological pitfalls you could inadvertently fall for, which in the world of trading could cost you a lot of money. Here are some common emotional responses that could affect your trading, and some psychology tips to help you effectively handle your emotions and avoid making poor decisions.
Emotions that hold you back
These emotions can be useful to stop you from making impulsive calls in your trading, but being too cautious about every trade can prevent you from making the most of your trading experience. Here are some things you can to to prepare yourself mentally for trading, and make the process a little less daunting: – Practice using a demo account first, to identify your strengths and weaknesses. – Use the demo account to help develop a trading strategy, which you can use as a general structure to your trading activity. – Use organisational tools such as spreadsheets to keep track of your financial movements. – Start small with your trading, to help build your confidence. – Use risk management tools, such as stop-losses.
Emotions that entice you to trade
While some emotions could hold you back from trading, others could encourage you to be impulsive with your money and make you act when you shouldn’t. Trading can be an exciting career, but it’s important to look before you leap to prevent making decisions you will regret later. Here are some things you can do to manage your impulse control, organise your psychology and learn healthy trading habits: – Keep a trading diary to track of your thought processes – Use risk management tools and money management techniques to rein in your trading impulses – Use spreadsheets as a means of organising your financial decisions and calculating potential consequences – Make sure you understand all the factors that go into a trade – Develop and maintain a trading strategy, so you can observe any decisions you make that stray from that strategy – If you can feel yourself becoming stressed or angry, take a break from trading to help gather your thoughts. A trade made impulsively can often be worse than not making a trade at all.
Emotions that cloud your judgement
Some emotions can affect your ability to reason, and could significantly impact any trading decisions you make. These include:
- Anger– losing out on a trade can obviously make you angry, be it at yourself for making a mistake or at the market itself for not working out for you. But making trades in retaliation, or “hair-trigger trades,” can often bring more harm than good in the long run.
- Regret– everyone misses opportunities at some point, but sometimes missing a valuable trade can cause you to jump more readily for other trades in pursuit of another big win. Ironically, trying to avoid making a mistake could result in you making more mistakes if you “over-trade” to compensate for a missed opportunity.
- Sentimentality– humans are sentimental beings, and our brains are designed to look for patterns in everything we do. This helped our ancestors stay alive in the wild, but those same instincts could be detrimental to your trading efforts, causing you to form superstitions and attach value to certain trading styles or financial instruments regardless of their actual profitability. For instance, if you make some healthy profits on gold trading, you may subconsciously end up thinking that “gold is your friend,” which could influence you to continue investing in gold despite changes in the financial world.
- Stress– trading can be exciting, but sometimes that excitement can translate into anxiety and stress, especially if things take a poor turn for you. Events in the outside world can also add to your stress, and it’s important to consider your current personal situation, as well as the current socio-economic situation, before you start trading. These emotions are all normal parts of everyday life, but in the world of trading small decisions made impulsively can translate to big losses if you’re not careful. If you find yourself falling into these patterns, be sure to take a break and gather your thoughts before going back into your trades. Keeping a trading diary can be a useful way of managing these impulses- by documenting your psychology, emotions and rationales on a trade as you make it, you can look back on these notes after the trade to identify what emotions influenced you to make a particular trade. Organising your thoughts in this way can help you notice any trends in your trading decisions, and could help you avoid any particular psychological weaknesses on your part for trades going forward.