Trading Psychology Explained

It is time to delve deeper into the trading psychology.

The problem with many traders is that they do not take trading seriously enough to make money consistently. For example, when you do your grocery shopping, you would usually have a fix amount that you would want to spend, no more or no less. It seems easy to follow in everyday life, to stick to a budget and work around it. Well let me tell you something, trading is no different.

Just like the way you run a household with a plan you should do the same with trading. Remember that it is a business and in any business your goal is to reduce risk exposure and to maximize gain.

Be sure that before you start trading you have a plan in place. The plan must include stop and limit levels for the trade, as your analysis should encompass the expected downside as well as the expected upside.

Cut your losses early and Let your Profits Run

This statement seems like a simple concept but yet a lot of traders seem to have a difficult time implementing this technique. Most traders violate their predetermined plan and take their profits before reaching their profit target because they feel uncomfortable sitting on a profitable position.

This same profitable trade may move against them after a while in hope that it is just a temporary retracement in price. The best of all is that traders who have had their stops hit a few times only to see the market go back in their favor once they are out, are quick to remove stops from their trading on the belief that this will always be the case.

Let this be clear in your mind before you start trading, stops are there to be hit, and to stop you from losing more than a predetermined amount! Do understand that not all trades will be profitable; if it were everyone would have been filthy rich by now.

If 2 trades out of 4 taken are profitable then you are well on your way to be successful.

How to make money when success rate is only 50%?

You must be wondering if there is any secret related to those successes. Well the secret is to simply allow your profits on winning trades to run and make sure that your losses are minimal.

Do not trade with 'scared money'

The reason so many traders fail is that they tend to trade with scared money. Too much emotion is involved when they enter a trade and most of the time bail out on the trade as soon as they are in negative zone.

That’s exactly why by trading with a plan you will gradually reduce your emotional issues. Before the trade is executed you have analyzed the market to calculate your risk and your target profit.

Even if the trade turns against you, accept it and move on. If you think that increasing your stop once the market is going full force against you, it will be lethal to your account.

Bet what you can afford to lose

The biggest mistake that traders tend to do is leveraging their account too high by trading much larger sizes than their account can sustain.

Leverage is a double-edged sword. Just because one lot (100,000 units) of currency only requires $1000 as a minimum margin deposit does not mean that a trader with $3000 in his account should be able to trade 3 lots. One lot is $100,000 and should be treated as a$100,000 investment and not the $1000 put up as margin.

Most traders analyze the charts correctly and place sensible trades, yet they tend to over leverage themselves. As a consequence of this, they are often forced to exit a position at the wrong time. A good rule of thumb is to never use more than 1-3% of your account on any given trade.

Happy trading.

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