Psychology in trading: An important element!

Trading is not just about analysing charts and finding good entry points. It is also a complex psychological game, in which a trader's emotions can play a decisive role in his success or failure. Many beginners focus solely on trading strategies, forgetting about psychology, although it determines whether a person can maintain discipline, manage risk and make rational decisions in stressful situations.

Unlike traditional professions, where success is often measured by diplomas and experience, in trading there are no clear evaluation criteria. Here everyone is his own judge and teacher, and only correctly constructed psychology will help not to give in to emotions and not to deviate from the strategy. This article will help you to understand the key psychological aspects of trading, which will help you to become a stable and confident trader.

Controlling emotions is the key to success

Emotions are a trader's main enemy. Greed, fear, euphoria, uncertainty - all of these can affect decision making. For example, a trader who has experienced a series of losses may succumb to emotions and take revenge on the market by impulsively opening rash trades (so-called ‘revenge trading’). Or, on the contrary, after a few successful trades, a trader may think he or she is invincible and increase risks, which often leads to large losses. Here is what you should do to minimise the influence of emotions:

• Develop a clear trading plan and strictly follow it;
• Record your emotions in a trading diary - this helps you to understand which moments cause the most stress and work on eliminating them;
• Take breaks in trading if you feel that emotions start to control you.

Experienced traders realise that the market can be unpredictable in the short term. Therefore, it is not every single trade that matters, but the overall result over the distance. Controlling your emotions is what separates the professional from the novice.

Confidence in strategy: The key to success

A novice trader who is unsure of his strategy will inevitably face doubts and after a series of losses he will start to change his strategy, test new approaches, which will lead to chaotic trading without clear rules. In the end, this can lead to disappointment and abandonment of trading. On the other hand, a trader who has tested his strategy (e.g. by backtesting) and understands its logical foundations can tolerate temporary losses much more easily. He knows that a series of losing trades is part of the game and does not panic when he encounters temporary drawdowns.

Understanding that trading is a game of probabilities, not an accurate prediction of the future, helps a trader stay cool and disciplined. To develop confidence in your strategy, it is important to:

• Conduct backtesting: Test your strategy on historical data;
• Trade on a demo account: It is worth doing this before moving to the real market;
• Evaluate results: Analyse over distance, not on a per-trade basis.

How to stop depending on financial indicators?

One of the common mistakes of novice traders is to constantly focus on financial results. They measure their success by the amount of money they have made or lost, forgetting that short-term profit fluctuations do not always reflect the quality of their trading. A professional trader understands that money is a consequence of the right process. His goal is to follow a strategy and minimise mistakes, so he concentrates on the process rather than the result of each individual trade.

You should remember some rules to reduce your dependence on financial indicators:

• You should evaluate the effectiveness of trading by the number of rules fulfilled, not by the amount of money earned;
• Focus on the long term, not on short-term results;
• Avoid setting financial goals, as they can cause pressure and lead to emotional decisions.

Typical psychological traps of a trader

There are several cognitive distortions in trading that get in the way of making good decisions. Recognising these traps is the first step to eliminating them. Clear rules, keeping a trading diary and analysing your own mistakes help you avoid falling into psychological traps. Let's consider the most common ones:

• The Dunning-Kruger Effect: Beginners overestimate their abilities because they don't yet have enough experience to realise their incompetence. This can lead to excessive risk taking and loss of capital;
• FOMO (fear of missing an opportunity): Traders open trades for fear of missing out on a profitable move without waiting for the right conditions;
• Overtrading: Frequent opening of trades without a clear signal, which leads to rapid depletion of the deposit;
• Revenge Trading: Trying to get back quickly after bad trades, which most often leads to even bigger losses;
• Confirmation bias: Traders seek information that supports their point of view, ignoring facts that contradict their analysis.

Conclusion: Why is psychology in trading the most important element?

Trading is not just buying and selling assets, but a complex psychological game where self-control plays a crucial role. The ability to keep cool in stressful situations, to follow a strategy in a disciplined manner and not to give in to emotions - all this determines whether a trader can become successful. Developing the right psychological attitude takes time, but it is one of the most important investments in a trader's career. Working on your emotions, analysing your own mistakes and constant learning are what will help you avoid typical pitfalls and trade steadily.