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Do you know what is the most important thing in trading? It is not the knowledge of fundamental analysis and technical analysis. Both of the skills can be learned but the most important thing in trading is mindset. Because whatever you have learned from the fundamental and technical skills you need a trading mindset to apply it.
There are two simple things that you need to take care of, one is greed and the other is fear. You need to control your emotions and take quick decisions while trading. For that, you need to practice and develop a trading mindset.
When you are trading you need to have a strong presence of mind to enter and exit a trade very quickly. For this, you have to keep your emotions under control and execute your trading plan. Impulsive trading that means trading with fear and greed can wash away your money. Before you develop trading psychology, you need to understand when you get emotional. Because it is a very subtle process and you can lose your control without even realizing that you have made a mistake.
Understanding an Emotional Response
Whenever there is negative or positive news, investors and traders get disturbed. They may get excited or scared about the news. A point to note, investors and traders have a different game. Investors generally buy and hold it for a long time with the hope of selling it at a higher price. Whenever they get negative news, some investors get scared and sell off their holdings to reduce their losses. Sometimes they withdraw their whole money from the market.
On the other hand, traders can earn money in both situations negative and positive news. They can earn money by taking a short position while the market is going down and earn money by taking a long position while the market is going up. But traders take more impulsive trades as they have to take fast decisions due to less time availability.
Therefore, traders need to be very careful and maintain discipline as they take leverage from the trading broker. That means they are able to take advantage of the margin which allows them to buy a high amount with fewer funds. But taking an emotional response can wipe out all the money.
How to Control Your Emotions While Trading
First of all, you need to understand your mind when you are getting fear and greedy. Both of these emotions come into play when there is news. When there is negative news your fear comes into play and when there is positive news greed comes up. So you need to consciously respond to the news. It can be possible by setting trading rules which will guide you to stay disciplined.
Setting Trading Rules
The first rule is to create a money management system. A money management system includes many things. It tells you about your trading goals, entry and exit rules, trade size, risk-reward ratio, etc. You might also use it to clarify what it is you will be trading. Some people like to invest in many areas and industries to spread their investments around, whereas others would rather stick to one area. For example, ETF Sparplan says “Immobilien ETFs sinnvoll” (Real estate ETFs make sense), so you might decide to stick to real estate ETFs. As a trader, you need to be very clear about your money management system. Secondly, read the rules before start trading every day.
Start with a very small amount and practice with the same amount until you have control over your emotions. Track the progress of all your trades and check each and every trade whether you lose or win. Analyze whether it was an impulsive trade or your conscious decision.
Remember, trading is not an easy game, it is simple but not easy. You need to prepare a trading strategy and follow it rigorously. You can’t follow others’ strategies because trading is a business and you need to do it on your own. No doubt, you can take help from an experienced trader who can guide you to prepare your strategy. Hopefully, the article has helped you to develop a trading mindset.