What is Trading Psychology?
Trading is an intellectual activity, one based on reason and logic. But trading is also about our money, and taking risks with money – even managed risks – incites emotions. Even the best, most professional trader must control his or her emotions while trading.
Trading psychology examines the ways in which we are affected by our emotions while on the market, and finds ways to control them.
Classic Emotional Errors while Trading
Experts on trading psychology tell us that there are some big mistakes that can be avoided in the effort to control emotions while trading.
The most obvious is trading more than you can afford. There is no more certain way to trigger fear of loss and anger when losses occur than by putting large sums at risk that you actually need. No trader can manage risk under these conditions. Fix a trading budget, and stick to it.
Another classic mistake is to overtrade. It’s terribly easy for a trader on a winning streak to make too many trades, thinking that the good strategy that has brought profit will hold up no matter what. The trader who is enjoying a winning strategy is earning his profit; the trader who just makes unconsidered trades in the hope they’ll work just as well is riding for a fall. Emotional control will help to keep you from making this mistake.
Then there is the “paralysis by analysis,” as one expert puts it. Traders should carefully analyse the market and apply trading strategy. But a trader can spend endless time and effort in study and research, and then never make a trade. After a certain point, there is only so much thinking that one can do without making a decision. Many traders, particularly after some losses, fall into this trap. It is terribly hard to risk one’s money after losing, but if one is to be a trader at all, emotional control must help you to finally pull the trigger.
Controlling Emotions with a Trading Journal
How can a trader control emotions and keep them from interfering with trading success?
One of the surest ways is to keep and use a trading journal. This is a record of all your trades, one that includes all of the details relevant to making the trade, from the price you bought or sold the stock to whether you were angry, or cool-headed at the time.
High-quality trade journaling software makes it easy for a trader to keep such a journal, providing user-friendly input for all the necessary information. And such software enables a trader to review the trading history based on any aspect that is of particular interest.
When emotions distract you from trading, call up your trading journal, and look for similar trades to the one you’re about to make. Or, if you feel like you might be overtrading, review the journal to compare the strategy you worked out with what you are doing – are you on track? Do you feel like trading more than you can afford? Your journal will remind you of the strategy you have been following, and help you to keep the risks at levels you originally set.
A trading journal can help you to keep emotions under control, applying trading psychology in the most useful way.