In this article, we will explore the important topic of “trading psychology”.
What is trading psychology?
Trading psychology is a vast term which includes aspects such as discipline, managing emotions, having a functional mindset and much more. Traders are constant decision-makers. They need to decide on which markets to trade, when to do so, in which manner to do so; when to be aggressive, when to be defensive etc. All these processes demand the human brain to be at its peak performance level.
An experienced trader has a developed trading psychology and hence will not fall victim to “greed” or “fear”. He or she will not lose control after a losing streak. Instead, traders with a strong mindset will apply a disciplined approach to the markets; this day in and day out.
Is trading ‘90% psychology’?
Generally speaking, trading is not simply “90% psychology”. Otherwise, trading would not be as difficult as it is. Many people have the discipline to other challenging things in their lives, such as running a marathon. However, since over 95% of traders end up losing money; one can see that a good psychology on its own is not sufficient in order to succeed.
Because the other factor that is needed for profitable trading is an actual “edge”. Regarding forex, one can develop a proven edge by using our MK web tool. That way, the trader can focus on the trade implementation, rather than wasting time finding an actual edge (which is almost impossible these days because of the technological barriers that exist).
What is the ‘2% rule’ in trading?
The “2%” rule implies that no single trade should risk more than 2% of the trading account. Note that this value applies to the “equity”, not the balance. Professional traders often stick to a “max. 0.5% risk per trade” rule.
It should be understood that if two trade ideas are correlated, their total exposure is seen as a single “risk per trade”. Rules such this one can protect traders from falling victim to over-leveraging or margin calls.
How to improve and apply your trading psychology?
There are various ways in order to improve one’s trading psychology.
For example, it makes sense to “journal” and to document every trade; to have more awareness regarding factors that influence each trade decision and to develop or feeling for the “sweet spot” of the leverage used. For example, if one trades with too much leverage, then this can result in bad habits. Hence, trading can be looked at as a “three-dimensional chess game”; and there is little room for human error.