subject: The Role Of Psychology In Trading Outcomes [print this page] It's important to look into trading psychology before you invest your money on any of the trading markets. Psychological factors may not be part of the technical aspects of trading. They are however, often very significant when it comes to determining the outcomes of trades. You have to look into your feelings and thoughts before you start trading.
Your emotions, feelings and subjective thoughts are important because they hardly have a place in trading. It should go without saying that the various investment markets should be approached with cold, calculating logic. You can hardly afford to do otherwise because using your feelings to determine your decisions while dealing with assets can lead to severe losses.
There are a lot of ways in which feelings can interfere with trading gains. In the psychology of trading though, there are only two popular situations that come up when emotions take a part in trading. A trader can either hold on too long to a losing position because of the fear of losing out on possible future gains or he can let go too early of a winning position because of the fear of losing when the values dip. One common element in both scenarios is the fear of losing. The emotion is what triggers the trading decisions.
There are varying culprits to fearful trading psychology. It is likely though that traders maintain this negative element because they don't have a good plan. Without a system, it is fairly easy to flounder. This is why it is of utmost importance to make sure that you have one before you start trading.
A plan that fits you perfectly can help you decide logically. This is because it takes into consideration specific rules that determine exactly when to enter or exit trades. Moreover, a concrete system can address the problem of the fear of losing by setting risk levels that you are at ease with. A plan takes charge of negative trading psychology by never letting you lose more than you are willing to let go at any given instance.
A trading system is thus, the one major key that can keep feelings in check and prevent them from ruining your chances of making profits. Nonetheless, there are some individuals who still fail to achieve success even when they have excellent trading plans. The only explanation for the failure of a good plan is a trader's lack of discipline to follow through on it. This absence of discipline is in turn the result of poor confidence. When a trader isn't all too confident, there is an obvious uncertainty over the effectiveness of a trading system.
You can control the psychology of trading by making sure your plan will more or less work according to your expectations. You can do this by subjecting it to back testing. This is a way of determining how well your rules will perform against a set of historical data.
Because traders are human, it is only normal to have feelings. If you let them rule your trading decisions though, you can be sure that you are placing yourself so much closer to failure. Whip your emotions into submission by committing to a well tested system.
