Success in trading depends on a mix of knowledge, strategy, and mindset, or psychology. Some experienced traders claim that psychology accounts for as much as 80% or even 90% of their success.
Many traders keep learning to get new knowledge and improve their skills, but forget about emotions. However, simple tips can help you cope with your emotions and eliminate their impact.
How to cope with your emotions in trading
Fear and greed may damage your ability to make reasonable decisions.
•Fear can stop you when you need to take the risks necessary to achieve desired returns.
•Greed can cause impulsive trades that will be too risky.
1. Identify your personality traits.
Every trader has a unique personality. You will probably not manage to change it, but you can learn to cope with your emotions. When you notice you are about to stubbornly stick to a losing position, hoping for an improbable reversal, recognize this emotion.
2. Accept your personality and emotions.
Once you understand what emotions push you to an irrational decision, you can stop yourself. Accept your emotions and make a knowledge-based decision instead. Eventually, you can automate this and react appropriately.
3. Achieve the right level of confidence.
Both self-confidence and overconfidence can prevent you from becoming the trader you want to be. Regularly assess your strategy, analyze all your trades, and understand your strengths and weaknesses to determine your true capabilities. Act accordingly.
4. Manage your risks
Risk management tools enable you to decide when you want to close a trade beforehand and stick to this decision. This eliminates emotions from your trade. For example, stop-loss orders prevent larger losses if a position continues to move against you.
5. Build your trading plan.
Your plan should contain:
•The goals you intend to achieve
•The desired risk-reward ratio
•Your preferred trading strategy
Once you have a plan, stick to it. No matter how lucrative a spontaneous trade may look, it will be emotion-based. And you want to master your emotions and cope with them.
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