Chapter 6 - Trading philosophy and capital management
How Important Is Psychology in Trading?
Psychology in Forex Trading is very significant. Psychology, and not a lack of knowledge or academic skill in application, is often the main cause of an active trader loss in the financial market. Psychology is the primary originator of business errors. Mistakes are constantly repeated by financial traders from different national, cultural and social backgrounds, which indicates that the common features we have as human beings lie at the root of those mistakes.
The trading field is a fast-paced environment with almost unlimited possibilities and risks. The odds seem to be stacked against active traders in the market, as studies show that over 80% are constantly losing money and only 1% are making predictable long-term profit.
With four out of five traders experiencing regular losses, it's surprising that anyone is willing to pursue a career in trading. After all, it is not usual for an individual to invest time and money in a company that has an 80% chance of failure. Thus, why are they attracted to trading as a profession?
The answer lies in the benefits that market success can bring to booming traders. Financial independence, self-empowerment and escape from an unsatisfactory profession are some of the privileges of those who have overcome hardships and developed an understanding of the copper ring.
Maintaining the right mindset is one of the most important factors in being a successful trader. Find out how you can improve your trading psychology to reduce the effect of feelings and biases during your time on the market.
Trading psychology is associated with some specific feelings and behaviours that often form incentives to trade in the market. Conventional descriptions of emotional behaviour in the markets ascribe most of the emotional trading to greed or fear.
General Principles of Psychoanalysis in Trading
- Trading psychology is the emotional component of an investor's decision-making process, which may help explain why some decisions emerge in a more rational way than others.
- Trading psychology is characterized primarily by the effect of both greed and fear.
- Greed leads decisions that seem to accept many risks.
- Fear drives decisions that seem to avoid risks and generate very little return.
Trading psychology is different for every trader, as it is influenced by each individual's emotions and pre-determined biases. Some of the emotions that affect trading are:
- Running out of patience