If you are an investor, you are probably already familiar with the basics of investing, such as risk management, asset selection and performance evaluation. However, there is another crucial aspect that is often overlooked: the psychology of trading.
What is Psychotrading?
Psychotrading is a discipline that focuses on the study of investor psychology and how it affects investment decisions. This discipline focuses on analysing how psychological factors such as emotions, biases and beliefs can influence an investor's decision making.
In other words, psychotrading is the study of how the human mind affects trading and how trading affects the human mind.
Emotions that can affect trading
Fear
Fear can prevent you from making rational decisions and lead to inactivity.
Greed
It can lead you to take unnecessary risks that can damage your investment.
Euphoria
It can also be dangerous, as it can lead to overvaluation of an asset and impulsive decision-making.
Frustration
They can affect judgement and lead to irrational decisions.
Techniques to control emotions
Below I show you the techniques that I believe are the most appropriate to be able to keep a good control of your trading.
Create a strategy
One technique for controlling emotions is to have a clear and well-defined strategy before you start trading. This can help you avoid making impulsive decisions based on emotions.
Set limits
You can also set profit and loss limits to avoid making impulsive decisions based on fear or greed.
Discipline
It is important to maintain discipline and stick to your strategy even when emotions are running high.
Psychotrading tools
There are several tools you can use to improve your psychotrading. One of them is the trading diary, where you can record your trades and associated emotions. This can help you analyse your emotional patterns and identify areas for improvement.
Another tool is visualisation, where you imagine yourself making informed and rational decisions. This can help you reduce the influence of emotions on your trading.
Declaration of Risk:
Futures and forex trading carries substantial risks and is not for all investors. An investor could potentially lose all or more of the initial investment. Risk capital is money that can be lost without jeopardising a person's financial security or lifestyle. Only risk capital should be used for trading, and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.
Hypothetical Outcome Statement:
Hypothetical performance results should have many inherent limitations, some of which are described below. No representation should be made that any of the accounts will or are likely to have results similar to those shown; in fact, there are frequent differences between hypothetical results and the actual results obtained by any trading programme. One of the limitations of hypothetical performance results is the fact that they are prepared with hindsight profits. In addition, hypothetical trading does not involve financial risk, and no record of hypothetical trading can take into account the financial risk of actual trades. For example, the ability to withstand losses or to adhere to a particular trading programme regardless of losses are material points which can substantially affect actual trading results. There are many factors related to the markets in general, or to the implementation of any specific trading programme, which cannot all be considered in the preparation of hypothetical results, all of which may adversely affect trading results.