FTG Blog - The Importance of Trading Psychology and Discipline

The Importance of Trading Psychology and Discipline

Trading psychology is not a scary topic. If your aim is to become a successful trader in today’s financial markets then you’ll need to have the necessary characteristics and skills. A trader needs to be knowledgeable in the inner workings of a company; its fundamentals and the ability to determine trend directions, but the ability to control emotions and maintain even discipline are a few other key ingredients that are required.

Trading psychology

The psychological aspect of trading is very important. A trader is often shuffling in and out of stocks on short notice, and is therefore forced to make quick decisions. To accomplish this, a certain presence of mind and by extension, discipline, so that the trader sticks with previously established trading plans and know when to book profits and losses. A trader should never allow emotions to get in the way of trading plans.

Understanding fear

When a trader’s screen is covered in flashing red tickers and candlesticks (a sign that stocks are down) and bad news comes about a certain stock or the general market, it’s not uncommon for the trader to get scared. When this happens, they may overreact and feel compelled to liquidate their holdings and go to cash or to refrain from taking any risks. Now, if they do that they may avoid certain losses – but they also will miss out on the gains.

Traders need to understand what fear is and is simply a natural reaction to what they perceive as a threat. Understanding the fear will help.

Also by thinking about this issue ahead of time and knowing how they may instinctively react to or perceive certain things, a trader can hope to isolate and identify those feelings during a trading session, and then try to focus on moving past the emotion. Of course this may not be easy, and may take practice, but it’s necessary to the health of an investor’s portfolio.

Greed is your worst enemy

Greed amongst investors causes them to hang on to winning positions for too long. This trait can be devastating to returns because the trader is always running the risk of getting whipsawed or blown out of a position.

Greed is not easy to overcome. That’s because within many of us there seems to be an instinct to always try to do better, to try to get just a little more. A trader should recognize this instinct if it is present, and develop trade plans based upon rational business decisions, not on what amounts to an emotional whim or potentially harmful instinct.