The impact of trading psychology
The impact of trading psychology
Since trading in the financial markets entails risks, entering the trading world requires a solid
foundation of knowledge, information, and self-discipline. A key element often overlooked is
the necessity of emotional control and the development of a sound trading psychology.
Despite having an optimal trading plan in place, emotional trading can result in severe adverse
outcomes.
Here are some of the reasons why:
- You second guess yourself and are reluctant to enter a position when the price reaches
your planned entry point. - If a trade turns profitable, you might close it early, well before reaching your take-
profit goal to ease anxiety from doubts like “What if it reverses?” Taking a small profit
makes you feel successful. - In contrast, when a trade loses money, you tend to hold on to it, hoping the market
will rebound. Not facing up to your error can lead to substantial losses. - Trading principles often clash with human instincts. For instance, the principle of
“Following the trend” seems easy but is tough to stick to. In a downtrend, people often
buy as prices fall, hoping to catch the bottom, resulting in significant exposure against
the trend. - When you profit, you boast and may feel you’ve mastered the market. But when you
lose, you blame the market and others, preventing you from recognising your mistakes
and improving.