Every trader has a need to know about the trading psychology. The trading psychology helps the investor or trader to have a great trading experience with a calm mind which is free from all trading emotions. Most of the people assume that it is a psychological thing and is not understood easily by every one. Understanding trading psychology means understanding a trader’s mind set when the trader is doing trading. This is because, there are a lot of factors that effect the mindset of a trader, such as emotions, fear, greed, and anxiety. Trading psychology was brought to common acceptance by Dr Van Tharp. Van Tharp, a clinical psychologist and trader decided to combine trading and psychology and came up with a whole new way of looking at and improving trader’s performance.
Trading psychology largely deals with the emotions, fear, and greed. The major factors that effect the trader’s performance are fear and greed. Fear is the emotion that prevents the trader from initiating a trade in the first place. This makes the trader close the losing positions before they hit their predetermined stop positions. It makes the trader to close out the winning positions before they reach maximum position level, because fear changes the mindset of trader on both conditions.
The other emotion is greed, it makes the trader to have too high expectations. When trader is on to a winning position, the greed develops and makes the trader to hold many positions. It is not bad thing, but when a trader is getting in to a losing position the greed does not give good results. So how does trader ensure that their trading psychology is good?.
There are two major methods for trader to manage trading psychology. Those are developing trading plans and setting trading goals.
Developing trading plans: It is necessary for any trader to have a proper trading plan. A trading plan includes where to invest your money, which trading best suits you, and when to buy and when to sell. This will help you keep emotions out of your trading. Emotions are the biggest enemies in trading, such as fear and greed.
Setting goals: Setting trading goals is not simply a matter of determining an expected profit target. It easy to say that “ I want to make $ 1 billion trading in the next month”, but there are other areas that may require to have particular goals. The trader may set goals in regard to time spent to educate themselves about trading. The best way to set up goals is to use the SMART goals framework. SMART goals means
- Specific: The goal which you have set should be specific.
- Measurable: It should be measurable, that means it has a certain limit.
- Achievable: It should be achievable for you, means you should set your goal within your capabilities.
- Realistic: It should be realistic.
- Timely: It should be reachable within a time period, some of the people set goals that takes long time to accomplish. Do not set your goals such way.
By following above two methods, one can manage the trading psychology in a better way.