Ask a bunch of people what skills are required to be a successful trader…
Most people would say it’s being able to accurately evaluate a company’s fundamentals and to determine the direction of a trend.
These technical skills are important, but they don’t come close to the trader’s psychology and mindset.
Because understanding your emotions and mindset is what helps you know when you’re making rational and irrational decisions.
Here are 3 key emotions you need to conquer to be a successful trader;
Let’s face it…
Fear is brutal and it’s the most common emotion that plagues traders.
Because honestly, we don’t really know with 100% certainty what is going to happen after we enter a trade.
Yes, we can have strong convictions but it’s just not the same as knowing for sure…and when you have hundreds or thousands of dollars at stake, fear and anxiety sets in.
When this happens, traders tend to focus on any bad news, and irrationally act on it by quickly closing out long positions or opening new short positions. If they do, they may avoid certain losses but may also miss out on some gains.
That’s why position sizing and risk management is very important.
Another type of fear that you might be familiar with is FOMO.
FOMO is driven by a desire to be a part of a good thing, even when all signs suggest that it is not a wise investment.
You know when you see other people succeeding, and we have a natural urge to join in — even if it seems risky.
This emotion usually sets in when a stock is making a big move and you feel like you missed it. A typical reaction would then be to chase an entry based on your emotions (which is a terrible idea).
A good way to fight fear is by trading within your means and setting an acceptable loss amount.
This takes some of the uncertainty out of the trading process because you know you are only risking a certain amount.
Remember, start off small and gradually work up to larger sizes.
Greed is the other evil twin of fear.
From my experience, it is a lot more difficult to overcome. It’s often based on the instinct to do better, to get just a little more.
In this case, obvious signs of risk are ignored and bad news is blindly regarded as unimportant, while the news is viewed through an extremely optimistic lens.
One common greedy behavior is hanging on to a winning position too long to try to squeeze every last penny out of the move. More often than not, the trend reverses and you know what happens.
Remember, if you double your position size, and it doesn’t work, you’ll end up with double the size of your loss.
A trader should learn to recognize this instinct and develop a trading plan based on rational thinking.
I prefer to set a fixed profit target and take it as soon as you reach that point.
Hope might very well be the most dangerous of all human emotions when it comes to trading — or anything at all that involves taking risks.
It’s the false expectation of something good happening…even when it looks unrealistic.
The desire for something to happen overwhelms most traders’ ability to see outcomes through a neutral lens.
And when you can’t think rationally, your judgment becomes clouded, and then it becomes easier to make poor decisions…which means you lose money.
You see, greed is what stops you from taking profits on a winning trade…
While hope is what keeps you in a losing trade especially after it has hit your limit, in the “hopes” of recovering past losses.
You know the harsh reality?
The market does not care about what you desire or hope for. And it won’t hesitate to burn you by taking your cash.
Importance of Setting Rules
In order to beat emotions and get a stronger grip on psychology, traders need to create and follow strict rules based on their goals and risk tolerance levels.
When you hit your profit target, exit asap. If you lose to a certain pre-determined level, cut your losses.
Rules for Identifying Trades
These rules are vital for controlling for greed and the fear of missing out. It helps traders to identify trades in a safe area that they understand.
Rules for Executing Trades
This is the most difficult part of trading. It’s important to have a set of strict rules for how and when to enter and exit trades in order to make the most out of it and reduce risk.
Rules After You Trade
Every trade will affect your emotions — either positively or negatively, so it’s important to know how to reset the emotions from the last trade before moving to the next one.