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  • Trading Psychology

    Trading Psychology

    Often underestimated by some traders, your trading psychology could have a large impact on your success or failure as a spread bettor. 

    Market prices are moving in real time and with volatility and your open profits or losses fluctuating regularly, trading can be hard on your emotions. This could convince you into making trades on impulse without thinking about your trading plan or strategy. This is why trading psychology can be an important element to consider when trading if you want to fulfill your trading potential. 

    What is Trading Psychology? 

    In a nutshell, trading psychology is about how you feel during a trade and how those feelings can affect how you trade. As you can be watching your open profits and losses move in tandem with the underlying market, traders can often let their emotions intercede in their trading habits, and this can lead to ill considered trades.

    No Such Thing as Cheap or Expensive 

    One particular mistake that many traders encounter is the notion of 'cheap' or 'expensive' when looking at prices.

    In everyday life we typically assign the label 'cheap' to goods or services that are worth purchasing as they could be undervalued, whilst 'expensive' typically refers to goods or services which are overpriced. 

    When trading the financial markets, we must get rid of these notions as they can serve to be somewhat of a contradiction. If prices are falling, traders may be quick to call that market 'cheap' and highlight a potential buying opportunity, but in reality, the reason prices are falling is because demand is faltering and investors do not see value in the current price. Alternatively, if prices are rising, they shouldn't be seen as 'expensive' but rather as a potential buying opportunity to ride the price wave higher. 

    Running Losses 

    One particularly bad trait amongst traders is to ‘run your losses’. When traders find themselves in a losing position, they can often let their losses run (i.e. continue) in the ill fated hope that the position will turn around in their favour. Some traders even look to increase the size of their spread bet positions when in a losing position in the hope that if the market recovers, they can net even bigger gains and this can be even more risky. 

    For example, let’s say you are long the FTSE 100, and the FTSE actually falls, putting you in a losing position. Some traders may be enticed into doubling up their stake in the hope that if the FTSE 100 starts to push higher, they can recover their original losses and reap even more rewards. Yet what some traders do not consider is that by doing so, they are also doubling up their risk, and if the FTSE were to fall even more, they could lose much more than what their original trade would have netted. Some of the best traders do the exact opposite to this i.e. they cut their losses early and run their profits, meaning that their losses are minimised and if prices continue to move in their favour, their profits can get even bigger. 

    Many of these decisions are a factor of trading psychology, when your emotions dictate impulsive trades. 

    How Can you Avoid Trading Psychology Mistakes?

    Having a trading plan and thinking through trades with a clear mind can do much in helping you to avoid the typical traits of impulsive trades. 

    A typical trading plan involves thinking about the rationale of entering into a new position whilst also considering utilising closing orders to help dictate when you should exit a position for either a loss or a profit.

    Learning from your trading experiences is also an important factor in helping you to take any learnings from both profitable and losing trades to make you a better trader in the future. 

    Five-Point Checklist to Avoid Impulse Trades

    • Why are you entering into this position?
    • Consider risk management orders 
    • How much money is at risk in this trade? 
    • Are you running your losses?
    • What elements (i.e. company earnings or economic data) are likely to affect the pricing of your market?  
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