An effective trading strategy and proper money management are the basics of trading. That without which profitable trading is impossible in principle. Underestimating the importance of the psychological component of the stock market game is a widespread mistake by most novice traders. The exchange does not like emotions. A successful trader must be able to control himself and his fear.
It is psychology that comes first in the hierarchy of importance, strategy comes second. Regardless of the trading system used, the trader will not be able to achieve stable profits until he learns to control his emotions properly. The main thesis of the article: cold calm in any situation is the key to success in trading.
Warren Buffett, who ranks second in the ranking of the richest people on the planet as a child, realized the importance of the psychological component in stock trading. At 11, he and his sister acquired shares in an American company for $ 38. A few days later, the price dropped to $ 27, but after a reversal of the course, he sold them at $ 40, making a profit of only $ 5. Over the next week, the stock price rose to over $ 200. If Warren didn’t rush for fear of losing money, he could have earned 100 times more not $ 5, but $ 500.
This incident served as a lesson to Warren Buffett that the investor should not rely on emotions and seek short-term benefits in its activities. The main thing is not to succumb to panic in the event of a decline in prices, but to soberly assess the situation. Another important component of success is the psychological attitude. The investor should have a positive attitude and not doubt success.
Fear and a sense of excitement
These emotional components to one degree or another are present in every trader. But at the same time, it is fear and excitement that are the main obstacle for a trader on the path to success. These emotions need to be learned to control, so that they do not have a significant impact on the real actions of the exchange player.
As for the feeling of excitement it is completely unacceptable and harmful for almost any business, especially for exchange trading. An effective remedy against excitement is the development of an individual trading system, and strict adherence to its rules (it will require the use of willpower).
Feeling of fear requires a separate consideration. It is impossible to completely get rid of it, and this is unnecessary, because it is a natural protection of human security. However, one should not allow doubts and well-founded fears to turn into a sense of panic. There is a technique that can significantly reduce the psychological stress associated with an obsessive fear of failure and loss of money. About it will be discussed below.
Practical advice on getting rid of fear
When opening a transaction on the exchange, both options for the development of the event should be provided for both positive and negative. Losses are an integral part of trading, so they should be treated accordingly. It is important psychologically and emotionally to be prepared to close a deal at a loss. Moreover, we are not talking about the alarming expectation of failure when opening each order, because such behavior is counterproductive.
The general meaning of the formula for successful trading can be expressed by a popular proverb "hope for the best, prepare for the worst." In this case, it is appropriate to supplement it: one hope is not enough, the trader must do everything possible to ensure that this “best” comes, but at the same time he is obliged to prepare no less carefully for the “worst” (closing a deal with a loss).
When opening an order, the trader should immediately set the limiters: take profit, which limits profit, and stop loss, which fixes the loss. Stops should be placed with the focus on the most likely forecast as a result of evaluating the totality of information about a particular asset or currency (technical and fundamental analysis).
Neither a large profit, nor a loss should bring a trader out of psychological equilibrium. Of course, by virtue of human nature, this is virtually impossible. Therefore, a trader should understand a simple rule: trading on the exchange is permissible only in his right mind, which is not clouded by the sorrow of lost funds or the dizzying excitement of a series of successful transactions with large profits.
If the exchange player is “overwhelmed with emotions”, he is obliged to immediately stop trading. It will be possible to return to it only after stabilization of the psychological state.