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Trading Psychology - Manage your emotional capital

Written by James Watts on April 29th 2020

The trading industry has grown rapidly over the past few years whether that be for the likes of forex, stocks & shares, bonds or commodities like gold or crude oil. It doesn’t matter which market you trade-in, there is always the potential for money to be made, however, despite the lure of money, too many people don’t have the required skillset or mindset to be able to successfully navigate the financial markets. They lack the mindset that is needed to be successful in this business. Professional trading is not something that everyone can do, as it is reserved for those who have the education and the right trading psychology, which counts for more than you think. You need a specific skill-set if you want to become a trader, and it is a very important one which will be mentioned in this article below.

Forget the lure of money and fancy cars for a second and focus on one of the most important aspects of becoming a successful trader, and that is trading psychology. This should occupy a large portion of your trading plan because it counts for an extremely large part that determines whether a trader is going to be successful or not in the future. Some people would go as far as to say that trading psychology is the most important part of any successful trading strategy. It may not seem obvious but a perfect example of why having sound trading psychology is when you place a trade, which then starts to move in the wrong direction. However because you have strict rules and good trading psychology, you have set your stop loss in a pre-calculated position beforehand so you can simply initiate the trade and happily walk away, knowing full well that you are protected. On the other hand, you have someone who lets their emotions control them and when the trade starts going against them, they will have a preconceived notion that the trade will head in the right direction. Not only will they let their emotions cloud the judgement but they will often move the stop-loss order, and they negotiate with themselves that the trade needs to ‘breathe’. Instead of sticking with their initial stop-loss order where they could have lost a relatively small amount of capital, they have actually caused themselves to lose a much larger portion of their capital, all because they couldn’t face the loss.

The best traders are those who leave emotion at the door and act like robots whilst they trade, because when it comes to trading there is absolutely no place for any emotion of any kind. One of the best ways to develop strong trading psychology is to use a trading journal to record and annotate your trades, as this will give the chance to review them and see where you went wrong and where you can improve. By making detailed notes of the trades you have taken, you can analyse your progress and see if and where any emotion has crept in so you know for the next trade.

Another aspect of good trading psychology is learning to accept that not every trade is going to be a winner, and the sooner you learn to accept that the sooner you will become a successful trader. Professional traders in all the might don’t win every single trade and hedge funds do sometimes report losses. The most important thing is to accept the loss, note it down in your journal and review it so you can become better prepared. If you cannot accept losing certain trades then trading simply isn’t for you, and you will never learn to develop that trading psychology that is necessary to be a successful trader. Being able to accept that a trade that isn’t going your way and the best course of action is to cut your losses, will transform your mindset as well as transform your money-making ability. Emotions seldom help traders so as mentioned earlier on in this piece, you need to leave emotion at the door and become a trading machine that only runs of probability and figures.

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