Trading Psychology: How to Avoid Emotional Trading

Science Learning

2023-11-18 22:41 Update

Summary

Trading psychology reflects the traders' emotions during the decision-making process. To some extent, every trader has emotional touchpoints. Fear and greed are two main emotions that affect traders. Both emotions can lead to poor decision-making, such as going all-or-nothing or panic selling.

Even if traders can conduct technical analysis and fundamental analysis from a higher level, if the heart is not strong and determined enough, it is easy to Being affected by emotions can also be very detrimental to their portfolios, especially in a volatile trading environment like cryptocurrency.

What is trading psychology?

Trading psychology refers to the psychological factors that influence people’s trading behavior in cryptocurrency or stock markets. The theoretical basis is that emotions can significantly affect traders' decisions.

For example, traders may make high-risk decisions driven by greed, such as because the price of a certain cryptocurrency It kept climbing and decided to buy at the peak. Conversely, fear can cause traders to exit the market prematurely.

The fear of missing out (FOMO) is common when an asset appreciates significantly in a relatively short period of time. Emotions. This is likely to lead traders to make decisions based on emotion rather than logic and rationality.

All traders are inevitably affected by emotions. For most people, losing money will be painful, and making money will be happy.

Why is it important to understand your own mentality changes in trading?

Fear and greed are the two main emotions in trading.

Fear will prompt traders to avoid all risks, thereby missing out on a successful transaction. Greed, on the other hand, can prompt traders to take excessive risks in pursuit of maximum returns, such as buying at a peak because the price of a cryptocurrency continues to rise.

Experienced traders know how to find the balance between fear and greed. Fear prevents traders from taking unnecessary risks, while greed motivates them to take advantage of opportunities. However, overreliance on any emotion in trading often leads to irrational decisions.

Learning to trade with the right mindset is just as important as using fundamental analysis or knowing how to read chart indicators. By learning to understand and control emotions, traders can make wise decisions and minimize losses.

Of course, making decisions without emotions is not as simple as it sounds. Traders face a variety of challenges every day that elicit emotional responses. Here are a few examples.

Unrealistic expectations:Trading is not about getting rich quick method. Anyone who starts trading with such unrealistic ideas will be given a slap in the face. Trading, like other skills, requires continuous training over many years of practice.
Loss: Even the best traders make mistakes sometimes. For novice traders, it is difficult for them to accept losses in trading and want to rely on their own intelligence to make profits again, which leads to more failed attempts.
Profit: Profit feels great, but it can also make people overconfident or feel invincible, forming a feeling that they will never fail. the illusion. This can lead traders to make more risky decisions, ultimately leading to losses.
Market Sentiment and Social Media: New traders can easily be influenced by what people say online. Negativity on social media can scare them, leading to panic selling. It is also unwise for traders to blindly follow the advice of a blogger to buy a certain token, especially if the blogger is sponsored and promoted for a fee.

How to use trading psychology to become a better trader?

Take a long-term view

Set achievable goals. Setting a realistic plan for what you want to achieve will prevent you from overtrading or getting too emotional with unrealistic expectations. This also helps you focus on long-term goals rather than short-term gains and losses.

Take a break

Taking regular breaks can help you shift your thinking and develop a clearer understanding of where things stand. If you are consistently winning on trades, learn to take a step back before you get too carried away and overtrade. Additionally, pulling all-nighters can be exhausting and ultimately lead to poor decisions. So getting some rest isn't just good for your investment portfolio, it's also good for your physical and mental health.

Learn from mistakes

Everyone makes mistakes when trading. Rather than getting angry with yourself or even more unwisely investing more capital in an attempt to recoup your losses, it's better to go back and analyze what went wrong. Implement new strategies based on what you learned from your mistakes, and you'll be better prepared next time.

Make rules

Set up a specific trading plan and stick to it. Listing out what you will do in different situations in your plan will help you control your reactions when faced with stress. For example, you can set stop-loss and take-profit points, limit the amount of profit and loss you can make every day, and develop a risk management strategy that is acceptable to you.

With a clear plan, you know exactly what needs to be done next instead of letting your emotional reactions get in the way Decision-making, which will ensure that you stay on track with your original plan until you arrive at a certain location.

Is trading psychology different in cryptocurrency trading?

Trading psychology applies to any asset class, including cryptocurrencies. Humans are all similar to a certain extent, especially when it comes to money. For example, most people don't like losing money but like making money. Additionally, traders of any asset experience a sense of excitement when profits follow one another.

However, cryptocurrency traders face some unique psychological challenges.

Unlike the stock market, which is closed on weekends, the cryptocurrency market is open at all times. Therefore, cryptocurrency traders have access to trading tools, assets, and potential opportunities at any time. A trader who is easily influenced by his emotions may suffer heavy losses in this round-the-clock trading.

The cryptocurrency market is also extremely volatile. The price of the coin has doubled before falling back to the starting point, which can happen in a single day. Such violent price fluctuations require traders to be quick-thinking and highly disciplined.

For example, professional traders will not impulsively buy an asset that is rising rapidly just because everyone is talking about it. You don’t risk all your money just because the market is going up one day.

Conclusion

Emotion is the most common pitfall in cryptocurrency trading. Learning to manage your emotions by understanding your mindset and emotional triggers is a valuable skill that can prevent you from overly chasing profits or panicking and liquidating your entire portfolio.

Finally, becoming a good trader requires years of continuous learning and practice. There is no shortcut or trick to getting rich through trading. Follow a strategy that fits your financial situation, practice it, and don't let fear or greed lead you to make unconventional decisions.