What is Trading Psychology?
One cannot talk about trading without touching on the subject of trading psychology. What is trading psychology?
It is the perception change that traders go through when they are actively trading in the markets using their own money. When trading on a demo account, it seems easy to make money.
There seems to be no reason why everyone should create a live account and start making real money. However, when a trader finally switches over to live to trade, he or she starts to feel indecisive about trades, or second guesses himself/herself before finalizing what seems to be a good trade. This is the world of trade psychology.
Trading psychology can affect the judgment of traders, particularly when the emotions of fear and greed come into play.
These two emotions have affected forex traders for years, and without being aware of these emotions a forex trader can get into major trouble. Fear causes a trader to either not makes a trade when a good opportunity rises, or to close a trade before it has a chance to become profitable. Greed, on the other hand, will cause traders to make trades that are much too large or risky because he or she is trying to make massive gains. Greed can make a trader wait for that last pip of a move instead of getting out of a trade while the getting is good.
The best way to combat trade psychology is by making a trading plan and sticking to it. Using a well thought out risk management plan can help a trader to avoid getting in over his or her head.
By following a trading plan or strategy, emotions can be held in check: a trader can feel fear, but he plan says that the trade is good so he or she executes the trade. This in turn gives the trader a profit despite the emotion of fear working against them.