The influence of psychological factors on your trading process

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4 psychological factors that affect your trading

In the financial trading world, emotions are the biggest barriers between traders and success. According to many experts’ studies, the most significant difference between a profitable trader and an unprofitable one is how they manage their emotions. If your emotions are well-controlled, you already have 60% chance of becoming a successful trader.

With that being said, controlling emotions is always easier said than done. Crappy tips like “you have to control your emotions” or “you have to strictly comply with a trading system” are always overwhelming on the internet, but they don’t say how to do those things in detail.

The best way to control your trading psychology is to understand the psychological risks you face when trading. In this article, we will provide you with a detailed description of the psychological factors that affect your trades and methods to control them.

Psychological Factors That Affects Your Trading Results

People are an entity associated with emotions. Like it or not, you still have to deal with your emotions every day. You will still lose your temper when unexpected events occur, or be touched when watching a movie like Titanic. You will still get angry when you are slandered, and will feel sad when you are abandoned.

The above things are perfectly normal because emotions are one of the things that maintain human existence. However, in trading, emotions do not bring many benefits. They affect your ability to make rational decisions, leading to a poor trading result.

There are many different types of emotions such as happy, sad, angry, afraid, and others. However, they are mainly made up of 4 psychological factors: greed, fear, hope, and revenge.

1. Greed

Greed is the most dangerous psychological factor that hinders a trader from success. The most obvious expression of greed is when a trader no longer appreciates risk management in trading.

For example, as a general rule, a trader should only risk up to 2% of his account balance on each order. However, because he is overconfident in his predictions, he increases the risk to 5% with the hope to make more profit. That is when greed begins to ruin his trading results in the long run.

The long-term effect of greed is that the risk increases significantly.

2. Fear

The second psychological factor that seriously affects your trading results is fear. Try remembering, have you ever cut an order early just because you had feared that it would not have reached the profit-taking level?

The long-term effect of fear is that profits will be smaller than risks, resulting in balance shrinkage.

3. Hope

Hope is the third psychological factor that ruins your trading results. The expression of hope is when a trader holds on to losing trades with the hope that things will be fine in the end.

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Hope and fear are a perfect couple keeping you stuck in the small profit – large loss loop, which will kill your account at the end. Trading professionals rarely hold on to losing trades; they have a habit of cutting losses early and letting profitable orders run.

4. Revenge

Last but not least, revenge is the fourth psychological factor that negatively affects your trading results.

Most beginner traders experience revenge trading, especially when they have a series of losing trades. They always want to regain their losses from the market; hence, instead of taking a break to calm down or reduce the position size, they constantly open new orders hoping that they will get something back.

In most cases, revenge trading makes traders get deeper into losses.

As a trader, you will always face these 4 psychological factors throughout your trading career. They are the source of negative emotions like anger, boredom, anxiety, overreaction, and others. You will not be able to remove them completely; however, you can learn how to control them.

Methods to Control Emotions When Trading

To control greed, you will need to keep in mind the importance of risk management. Always remember that trading is a game of probability; if you risk too much on an order and lose, your chances of having future profitable orders will be reduced. Therefore, always comply with risk management principles when trading.

To control your fear and hope, remember that you will never know what will happen in the market. You should establish your setup carefully and let your order run until it hits stop-loss or take-profit. You can also trail your stop-loss levels towards the entry point when the order is profitable, to minimize risk and preserve profits.

To avoid revenge trading, you need to keep a cool head. Whenever you feel that you are losing your temper, just leave the trading platform and take a break until you calm down.

Maintain a work-life balance

Work-life balance is a term used to describe the balance between work-related and life-related activities of a person. Failure to maintain a work-life balance not only negatively affects your concentration and ability to make correct trading decisions, but also harms other areas of your life.

A bad trading result is the consequence of an unhealthy mind. So, to keep your mind healthy, you should try to maintain a work-life balance.

Believe it or not, revenge trading is closely related to a symptom called “trading addiction”. According to the legendary trader Steenberger, trading sometimes “ becomes a vehicle for destroying mind and soul “. A trader may be considered addicted when he lets the trading work negatively affect his health or financial ability.

Trading addiction is also considered one of the factors causing a work-life imbalance. If you think you are being addicted to trading, try abstaining from it for a while or seek help from experts.

Apart from this, to ensure balance in life, you also need to maintain social contact with your family and friends. Besides, take time for sports and exercise; they are great ways to reduce stress and keep a healthy mind.

The Bottom Line

Trading psychology management is extremely important for every trader. No matter how good your trading system is, you will not succeed if you let emotions affect your discipline.

Greed, Fear, Hope, and Revenge can be controlled in different ways. However, the most effective way is to keep a work-life balance and a healthy mind. Trading is a lonely and stressful profession; therefore, you should prioritize rest and outdoor activities to balance your life.

If you find it difficult to control your emotions, Finmax’s specialists can help. At Finmax, you will be supported directly by account managers and financial experts, who have years of experience in the market. They can give you useful advice on managing trading psychology, or at least company with you in your trading path.

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

The Impact of Psychological Factors on Investors’ Decision Making in Malaysian Stock Market: A Case of Klang Valley and Pahang ☆

Abstract

For years, traditional finance has always presumed that investors are rational in their decision making process in the stock market about risk return trade-offs and maximizing utility. However, behavioral finance studies revealed that human beings do not behave as rationally as economists suppose as their decisions at times are affected by their psychological feelings. Numerous studies from ASEAN, Middle East and Western countries have in fact established that psychological factors do have relationships and impacts on the decision making of investors in their stock markets. In light of this, this research attempts to bridge the gap of the differences in terms of geographical location and demographic profile between Malaysia and other countries by examining the impact of the psychological factors on investors’ decision making in the Malaysian stock market. Questionnaires are distributed to a sample size of 200 investors in the Klang Valley and Pahang areas aged between 18-60 years who are involved in the Malaysian stock market. The findings show that overconfidence, conservatism and availability bias have significant impacts on the investors’ decision making while herding behavior has no significant impact on the investors’ decision making. It is also found that the psychological factors are dependent of individual’s gender. The results of this research are mostly consistent with the evidences in previous studies. This study, hopefully, will help investors to be aware of the impact of their own psychological factors on their decision making in the stock market, thus increasing the rationality of investment decisions for enhanced market efficiency.

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The Psychological Factors of the Forex Market

There are so many factors that influence a currency’s worth from the economic, political, and even social status of the country at hand. As opposed to other global markets, the Forex market is so big, no one person can have any serious affect on the rise or decline of any currency.

However, the opposite is not true. Many different aspects of the Forex market can influence Forex traders and how and what they decide to trade. But before we take a look at the fundamentals of Forex trading psychology, we should talk a little bit about the primary means by which traders decide what to trade.

Forex analysis is of utmost importance when deciding what position to open or close. Analysis is of course categorized into two types: technical and fundamental. Most Forex traders use technical analysis and view the same charts, which leads to many traders around the globe trading in the same way and thereby causing a trend.

Fundamental analysis, however, should not be ignored. This type of analysis looks at the bigger picture. There’s no question that current events such as terrorist acts, war, big political or financial announcements can also take a big toll on the direction in which the market moves.

Rumors vs. Real Developments
As we said, the world’s current events must not be ignored when trading Forex, as it can affect the market as much as anything else. Many traders have a news website open aside their trading platform, so they stay on top of world events. However, when paying attention to world events, it is very important to differentiate between real accurate news and fabricated rumors reported on the various media channels.

Many financial institutions will deliberately release a news report about a financial development, with the intention of making the market move up or down, depending on a current position. Before acting on a piece of news, verify that it is in fact real, then after you established that it is, check again!

Intervention and the Resulting Fear
Because the Forex market is so big, no one person or institution can have a real impact on the price of currencies. However, temporary fluctuations have been known to occur as a result of intervention by one institution or another.

Let’s look at the Bank of Japan, for example. In 2002 the Bank of Japan watched the USD depreciate at a rate they believed was too rapid. They worried about the effect this would have on the competitiveness of Japanese exports to the US. The Japanese government decided to get involved and buy large sums of USDs, sometimes reaching numbers as high as 10 billion at a time. The market did not sit by quietly when one of these orders were placed. The USD would jump up to 150 pips within a few minutes. The Japanese government employed this tactic more than once and at different prices every time.

Now here is where it gets interesting. It was not the 10 billion USDs that made the market jump. After all, what is $10 billion in a market of $4 trillion? What caused this fluctuation was the fear or emotional reaction that traders had to any talk of intervention on the part of the Japanese government.

The first piece of advice any Forex expert will tell you is, when trading Forex, leave all emotion out of the equation.

“Follow the Leader” Mentality
Many traders make the error of following a lead and assuming that if so many people are doing it, it must be the right move. What they do not realize is that those “so many people” had the same thought just moments before. Now this can work to your advantage if you get in in the beginning of such a trend, but if you join late, it might work against you. So if you see such a trend, check the news and the technicals to see what might have caused such a thing and decide whether you want in.

To summarize, there is really no room for emotion or personal feelings when it comes to trading Forex. Make sure that as a trader, you stay completely objective and scientific or else you might see some very heavy losses. Now, the big question is how to control your personal emotions and keep them out of the trading “room”? The answer is a trading technique. Make one for yourself and stick to it, no matter what.

Observe the movements of the market both from a fundamental and technical standpoint and if something does not seem right to you, don’t trade, it’s as simple as that. The market is not going anywhere any time soon, come back in an hour and decide on a trade then. When trading, never trade against the trend, always remember “the trend is your friend”. If you experience a loss, do not try to overcompensate in your next trade, stick to the plan. It is all about control when trading Forex.

The best way to succeed in Forex trading is to take control of yourself, your emotions, and your Forex positions.

Hillel Fuld, a pre-eminent technology blogger and strategic advisor to dozens of tech startups, got his humble beginnings as the Content Manager at DailyForex. In this role, Hillel published hundreds of articles for new traders about how to better understand the Forex markets and how to trade intelligently. Upon leaving DailyForex, Hillel continued writing and eventually began his own technology blog. Hillel’s positivity and unique perspective catapulted him to the global arena, where he began speaking and writing about the contributions of the Israeli tech scene to the global arena.

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