Trading Psychology - Managing Emotions and Trades

What is it that drives us to make bad decisions in trading? There are two answers - lack of information and uncontrolled emotions. 

When discussing the psychology of trading and developing a winning attitude, it is important to note that the market offers the best training. The lessons it provides through its past behavior help us create realistic expectations for the future. 

Over the past decade, we have witnessed numerous market crashes that teach us how to manage our emotions in similar situations in the future properly. 

In this article, we will discuss various aspects of trading psychology, focusing on the discipline and control of emotions that are essential to achieving success. 

Let's get started! 

Psychological challenges in trading

Mark Douglas, author of "Trading in the Zone" and "The Disciplined Trader," relates many of the challenges of trading to the inner psychology and emotions of the individual trader. The main psychological challenges are: 

• Accepting responsibility - the first and foremost lesson is to understand that the market is always right. All mistakes and losses are the trader’s responsibility, not anyone else; 
• The market is emotionless – the market doesn’t care about the trader’s state of mind or his emotions – it moves based on its own logic and algorithms, not emotions; 
• Risk Management - understanding and managing risk is key to successful trading. Traders must accept that losses are part of the game and learn to properly manage their positions. 

Mastery of one’s emotions

Emotion control rules not only remove subjectivity from our decisions but also help prevent emotional distortions that can lead us to make mistakes in times of stress or uncertainty. Basic steps to control emotions include: 

• Creating a trading strategy - every strategy should be based on analysis and research of past market behavior; 
• Discipline – following your strategy and trading plan; 
• Knowledge and practice - constant learning and analysis of results help traders improve their skills and strategies. 

Patience - a key factor for successful trading 

Any successful trading strategy requires considerable patience and discipline. Many new traders start with high expectations, often leading to neglect of the process and their strategy. Key principles for successful trading include: 

• Focus on the process, not the results – it’s important to understand that a positive outcome is a consequence of an efficient and well-structured trading process; 
• Strategy Development - focus and energy should always go first to strategy development and building an effective trading process; 
• Patience and Persistence - patience and confidence in your strategy are key elements to survival in this business, as well as achieving long-term success. 

Summary

Psychology is one of the most important aspects underlying the success of any disciplined trader. Understanding and managing emotions, including fear, greed, and fear of missing out (FOMO), are essential to a successful trading career.