The Four Demons of Trading: How to Avoid Them?
Psychology in everyday life studies the mind and how wit governs behavior. Psychology adopts the same role in trading but with a more financial connotation.
Notably, as a trader, psychology would mean the lens through which I determine what is happening in a forex market. This conclusion is ultimately brought about by a series of emotions and self-biases.
Why trading psychology is important?
Of course, it is common for multiple individuals to experience the same set of emotions in today’s world. There may be thousands of people who think like me. Despite this, there is a sufficient difference between the thought process of a successful trader making profits and a subpar trader losing money.
This difference lies in the psychology of trading. I need to go beyond basic strategies and shift my cognition towards psychological hindrances that affect the trading process. An example is emotional barriers. These can incur heavy losses if not managed properly.
I believe that emotions are the most significant obstacle in the land of trading. Yes, emotions help me in my everyday life, but they are of little importance when trading. If my emotions control my trading behavior, it will be almost sure that I will have to suffer a magnanimous loss.
Now, I will define and explain some of the demons of trading and how I would avoid them.
1. Greed
It is a typical trait in both you and me, but; it is the worst demon. This is because it will keep the won money for a lengthy period, which will only get lost as time progresses. A small amount of greed is undoubtedly productive, but it is counterproductive beyond this.
If the market moves in the direction I want it to, I will quickly add too much to that position based on greed and not analytical thinking.
The best course of action for me would be to avoid scaling in and properly use a money management system. Not risking too much from the get-go will also be useful to me.
2. Fear
Similar to greed, fear can make me leave a winning position and skip viable opportunities. Like fear in real life, fear in trading requires patience, practice, and discipline to overcome.
To avoid fear, I should stop and think over the decisions and situations that may cause fear and move past it slowly but surely. This can be done by placing protective soaps and price targets before commencing a trade plan.
3. Revenge
Revenge follows fear. I will engage in revenge trading if I face a loss more than I can handle. The remedy for this is also a money management system like that of greed.
4. Euphoria
It succeeds greed and will happen if I develop a streak of winnings or one large win. I will most likely become unrealistically confident, which is anything but a good thing.
Keeping my feet firm and my emotions in tune with reality will allow me to bypass this demon of trading.
Bottom line
It is indispensable to have strong control over your emotions. This is because they encompass the demons of trading and are bound to interrupt your exemplary trading process.
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