What are the basics of trading psychology?
Trading psychology is about analyzing market sentiment while keeping your emotions under control. It primarily relates to market dynamics and buyers’ sentiment.
Market dynamics allow traders like you to know the financial market’s overall mood and current sentiment. Is it bearish or bullish?
Market dynamics are usually the result of conditions created by notable events from the past, company reports, economic data releases, and geopolitical tensions.
Meanwhile, buyer sentiment tackles individual investors’ psychology, which is often guided by their past experiences and expectations of what can happen in the near term.
That is commonly used in a negative context because a wise trader knows to keep a cool head under the heat of the summer season instead of making decisions based on how they’re feeling.
The big challenge of trading is overcoming the emotions you feel when you win or lose while determining whether the overall market is behaving rationally or if many traders are only going with the crowd.
Many negative emotions can ruin one’s trading play, but fear and greed are the two common ones that affect traders the most.
Being afraid of losses is a fear that every trader needs to overcome at some point. While it doesn’t feel good to see a losing position, remember that even the world’s well-known traders don’t get it right a hundred percent every time.
The way to approach fear in trading is to accept that trading always has its ups and downs, learn from your mistakes, and continue working on your technical and fundamental analysis skills.
Greed can convince traders to keep a position open for too long so they can hit the even bigger jackpot, only to miss the right time to close it and end up with a loss. That is why having and sticking to an entry and exit plan is crucial.
Overall, improving self-awareness and understanding how your emotions play a role in your decision-making is key to controlling them. Once you have the right level of rationality and emotional detachment, you’re on your way to becoming a master of the markets.