Every trader knows that success in the financial markets is about having the right mindset. You have to be mentally strong enough to withstand the various shocks that the market throws your way. For instance, no matter how good your trading strategy is, there are days when the market will go against you. How you react to this can determine whether you will succeed as a trader. It’s all part of what is commonly known as trading psychology.
So, what exactly is investing psychology, and how can you use it to your advantage as a trader? Trading psychology is having the mental fortitude to trade while withstanding the ups and downs of the market. In trading, there is something called market noise, and it can easily throw you off-balance if you don’t trust your trading. For you to weather such turbulence, you need to be strong mentally.
There are several steps you can take for you to have the proper trading psychology. Among them are as below.
Get confident in your trading strategy
To become a successful trader, you need to get to a point where you are confident in your trading strategy. Confidence in your trading strategy means that you will let a trade run regardless of the market conditions.
Market noise will likely affect your trade without confidence in your trading strategy. For instance, if your trading strategy is telling you to buy, but market noise is screaming sell, you are likely to sell if you don’t have confidence in your strategy. The problem with a lack of confidence in your strategy is that once the noise settles, you always realize that your strategy was right. This means you were initially right but ended up making the wrong decision.
To avoid such a situation, back-test your trading strategy until you get to a point where you can confidently trade without caring about the market noise when entering the trade.
Use the right lot sizes and leverage
No matter how good your trading strategy is, you will have to deal with drawdowns at one point or the other. You are probably wondering, how does market drawdown affect my trading psychology? Well, it all boils down to your lot size and the level of leverage used.
If you use excessively high leverage and lot size, the odds are that a drawdown will bring you pretty close to a margin call. This means even if your trade is right, and ultimately the market will move in your favor, you will likely close the trade out of fear of being closed out and blowing your account. It doesn’t matter how good a trader you are. If a market drawdown threats to wipe you out, the odds are that you will get afraid.
To avoid such a scenario, use a leverage level and lot size that allows your trade to breathe. This way, even an unexpectedly large drawdown does not trigger feelings of fear in your brain since you know your strategy is correct.
Invest what you can afford to lose
Ultimately, everything discussed above can be attributed to a fear of loss. When the risk of loss is high, your brain automatically tells you to find urgent ways to stop the loss, and that’s where mistakes start. Only invest what you can afford to lose to avoid such, and remain in the right state of mind for successful trading. This eases the tension and allows you to let profitable trades run to their logical conclusions. You also reduce the odds of closing out potentially profitable trades due to drawdowns.
Recap
Trading psychology refers to your state of mind when trading. To be in the right state of mind when trading, perfect your trading strategy, use suitable lot sizes and leverage, and most importantly, only invest what you can afford to lose.
