Navigating the Markets With Precision Through Trading Psychology

January 20, 2024


Successful trading requires many skills, like market research, risk assessment, and tracing market patterns. However, you should also have soft skills – non-technical traits that make working with you more beneficial.

Whether you work with prop trading firms in California or try to trade by yourself, you need a good handle on your trading psychology. Black Eagle Financial Group will explain trading psychology and how to apply it to your future trading experiences.

How Trading Can Affect Your Psyche

The market can be chaotic since new proprietary and retail assets shift interests each day. Well-set plans sometimes seem to fall through, while other opportunities show that they weren’t a pipe dream.

In an industry as occasionally volatile as the trading market, emotions often run high. Anger, fear, or greed can motivate traders to make choices they think look good. In hindsight, however, many find that their snap emotional decisions caused them to lose money or assets unnecessarily.

Defining Trading Psychology

Trading psychology describes how traders handle losses and gains regarding their assets. It can mean having the self-control to stay on your trading plan despite temporary losses or remembering to investigate potential assets thoroughly. Knowing where you are emotionally can help you steer your trading performance in the right direction.

As people, we cannot fully control or contain our emotional output. Your goal shouldn’t be to eliminate your emotions but to learn to manage them. Moreover, the mental management that works for some may not work for others, so you must develop your methods.

Common Trading Biases You Can Manage

We don’t recommend thinking of trading psychology as battling your human nature. Instead, you’re taking the reins on your emotional output and not letting yourself run out of control from positive or negative stimuli. Many traders fall into biases fueled by unmanaged emotions, causing trading losses that can further motivate a faulty decision-making process, including:

Fear of Missing Out

You’ve likely seen FOMO as part of marketing strategies to get potential customers to purchase items quickly. The fear of missing out affects people even in everyday decisions, leading to impulsive purchasing choices.

In the trading world, FOMO can lead a trader to buy or sell without analyzing the market or asset. A trader who submits to FOMO often makes snap decisions with unfavorable results, including joining positions on losing trades.

Herd Mentality

The herd mentality in sheep makes them idiotic to many people, but it has helped them survive. Traders may also adopt a herd mentality when avoiding losses during more chaotic market trends. 

However, unlike sheep, we have technical analyses we can use to make better market decisions. Traders who adopt a herd mentality and follow others without their own research may enter or exit positions prematurely or too late. They snuff out potentially winning trades by relying on a different trader’s snap decision-making process instead of their knowledge.

Fearing Small Losses

Of the many types of orders you can use to protect your finances, stop orders sometimes have a bad reputation. However, this tool can help you avoid excessive losses by allowing you to predetermine your stop price or exit point. 

With a detailed plan, you can determine when you’ve been patient enough, and your trades didn’t work as intended while reducing losses. A balanced trading psychology can help you manage your losses and lead to improved trading results in the future.

Problems occur when a trader fears loss so much they want to avoid even the smallest losses. This fear may lead traders to ignore their preset stop-loss order out of the unfounded faith that their position will rebound. Consequently, fearing small losses can lead to more significant setbacks in their trading performance and finances.

Trigger Happiness

Fearing losses or being impatient about market positions can stifle your gains. In these cases, traders may pull from their position too quickly, not wanting to lose potential profits. However, in exiting, they may lose out on a better position in markets and predictable thorough research and analysis.

Ironically, in fearing losses and jumping the gun, the trader misses improvement opportunities, which can build up to larger losses overall. Instead of relying on what they’ve learned and studied, they rely on unmanaged emotions to drive their decisions.

What Is Your Trading Psychology Now?

To find your current trading psychology, you should evaluate your strengths and weaknesses, which can be difficult to do objectively. People often struggle to admit their faults to others or themselves, but you must understand where you can grow to improve your trading results.

For example, do you stick to inefficient driving routes out of personal stubbornness? Or do you tend to equate the results of your decisions to your self-worth?

In a trading scenario, stubbornness can look like someone sticking with a declining position in hopes of an unlikely reversal. The other trader may make decisions that avoid even the slightest losses, becoming timid and failing to grow their positions substantially. They may also chase after losses in a desperate attempt to improve their position, only to worsen their financial assets.

Improve Yourself With Emotional Management

Emotional management sounds like a therapy term because it is. In the medical industry, emotion-focused therapy often entails a therapist and their patient finding out what triggers certain reactions from the patient. Then, they build better responses to those triggers, improving the patient’s outlook and outcomes.

We’re not telling you to go to therapy, but you need self-reflection to improve your trading skills.

Evaluate what makes you tick, like stubbornness or emotional attachment to your successes or failures. Then, instead of trying to stamp down on those emotions, manage them and channel the energy in the right direction.

For example, a stubborn trader can recognize when they’re acting on unmanaged emotions and return to their market evaluations. Then, they can realize the losses for what they are and leave their position before it worsens. Others can find ways to build a healthier relationship with their trading results, knowing that they don’t reflect directly on the trader as a person.

This process can be difficult. However, evaluating and improving your trading psychology can improve your trading results and perhaps your daily life.

Make Better Trading Decisions With Black Eagle

We want to see our prop trading teams improve their results, so we work together and share information for everyone to grow. Our tools include debunking common trading myths, giving constructive feedback on your results, and improving your trading psychology. When you succeed, so do we, and we want Black Eagle Financial Group associates to grow together. Are you interested in joining a prop firm with mentorship programs and people invested in your success? Call Black Eagle Financial Group at +1 833-253-2453 to learn how we can help you grow today.

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