Trading psychology 101: The impact of emotional trading and how to avoid it

You could develop the most efficient trading strategy ever, but that doesn’t mean anything without sound trading psychology. It’s crucial to control your emotions when investing in crypto, as this is one of the essential traits that tells apart a successful trader from an unsuccessful one.

Any trading activity should be approached just like a business, and getting emotionally involved will likely have a negative outcome. As a trader, one of the most important things is assessing your market risks. Unfortunately, humans are often bad at this, so traders end up making irrational decisions, as economists deem them. This is known as emotional trading, which happens when investors act based on emotions rather than logic.

Understanding trading psychology

Trading psychology refers to the way you approach your trades; namely, how you handle gains and losses. Investing has an emotional aspect that can’t be overlooked, as it dictates all your transactions. You can’t completely eliminate emotions when trading, but that’s not the point, anyway. Instead, you should understand the role emotions play in trading and use this knowledge to your advantage. Suppose you are an experienced trader that has learned everything about the crypto market and honed their trading skills. If emotions cloud your judgment, you will inevitably face losses, no matter how knowledgeable you are. To succeed at trading, you must learn to identify emotional biases like fear, panic, greed, and euphoria and keep them in check regularly. Most traders spend their time and energy thinking about what will happen in the market and whether they will lose or win.

Consequently, this leads to stress and wrong decisions when buying and selling cryptocurrencies. On the other hand, successful traders are those who understand that the outcome is impossible to control, so instead of being concerned over losses and gains, they work hard to refine their trading strategy. Greed and fear are two major hurdles traders must overcome to make the most of their crypto experience. In the crypto space, greed translates into an excessive desire for profits that affects traders’ judgment. When greed takes over, you may end up buying a company’s shares without understanding the investment you make. At the same time, greed can also make you take on speculative positions in an attempt to profit from every market movement. Fear is another dangerous emotion, leading investors to make irrational decisions. Because they worry about incurring losses, investors either avoid taking on speculative positions or exit a trade prematurely.

One of the huge mistakes traders can make is entering positions based on intuition without developing an effective strategy. This happens due to a lack of knowledge, resulting in FOMO, which then leads to worries about losing cash and holding positions. Your trades are unsuccessful, and losses start building up. It’s a vicious cycle with devastating consequences, but you can avoid it by developing a trading plan and staying disciplined.

Avoiding emotional trading to maximize your profits

The emotional part of your brain is strong and can easily overpower the logical part of it. For instance, most traders know the rules of trading. Suppose you want to trade Ethereum, one of the most popular cryptocurrencies out there. You probably know how to read the ethereum price chart and manage risks; however, the reason why you may not be able to trade successfully is that the emotional part of your brain takes control of your decisions. But don’t be disappointed; know it is possible to stop emotional trading.

Step 1: Identify your personality traits.

Identifying your personality traits is a good way to step up your trading game. You’ll be aware of your negative traits and, thus, know how to overcome them, so you don’t end up making irrational decisions. Equally, by identifying positive traits, you’ll be able to make calculated moves when trading.

Step 2: Understand your risk appetite.

Not everyone has the same risk appetite. While some traders are more comfortable taking risks, others can’t tolerate a high level of uncertainty. This is especially true for beginner traders who aren’t familiar with how the industry works. Those with low-risk tolerance may have a hard time trading crypto, and that’s because the industry is highly volatile, and the chance of losing money is just as real as the one of getting rich. Thus, make sure to identify your risk appetite and create a plan based on that.

Step 3: Conduct research.

Before trading, you should take time to research all the opportunities. This means studying charts, reading news and trade journals, and carrying out industry analysis. Choosing a reliable resource when informing yourself about the industry is important, as not everything on the Internet is true. If possible, it’s also a good idea to attend webinars, conferences and trading seminars where you can have conversations with finance professionals and other traders.

Step 4: Create a solid trading plan.  

You can’t trade successfully without a plan, and expecting the opposite will only lead to disappointment. An effective plan should include your trading goals, a risk-reward rate, and the trading strategy that works best for you. You can also add a trading journal to this plan and write down observations regarding your trading journey. This can help you spot weaknesses and strengths to avoid trading mistakes and become a successful trader.  

Step 5: Prioritize your well-being.

Lastly, your mind can’t be relaxed unless you are well-rested, well-hydrated, well-nourished, and under no financial pressure. Your brain is sensitive to such things, and if you don’t take care of these aspects, it won’t take long until your judgment will be impaired. So, before making crucial decisions, make sure to take care of yourself first. Check in with your feelings; if you feel tired, get some rest. The market won’t go anywhere, and there will be another day for trading, so always put your well-being first.

The bottom line

If you want to succeed as a trader, it’s paramount to understand how trading psychology works and learn to take control of your emotions as much as possible. This will help you increase the probability of succeeding in the market, as you’ll be able to trade mindfully without reacting emotionally to losses and gains.

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