Psychology represents a key aspect of trading. The best traders are the ones who are able to let their emotions aside and trade with discipline whatever the market conditions and whatever the mark-to-market of their positions. The psychology of trading intends to analyze and rationalize the trader’s emotional responses to the events in the market and in their holdings. The three most commonly spread emotions amid investors during the trading process are the followings: Fear, panic and greed.
Fear and panic are the most dangerous emotions of the trader psychology
Fear and panic are responsible for more than 90% of unexperienced traders’ losses. They are mostly experienced when a trader makes a series of unsuccessful trades and is anxious to make up for lost ground immediately. This is the worst reaction a trader can have and this reaction is closely linked to the investment psychology. Remember, if you want to be a successful trader, you need to have a trading plan and stick to it. Binary options traders are less impacted by fear and panic. With binary options, you cannot lose more than your invested capital. That is a great advantage of binary options compared to most financial instruments (forex, CFD, warrants…). Nevertheless, fear and panic can still happen when the market is going against one of your open positions or after a series of losing trades.
To avoid these emotions, you need to have clear levels in mind (entry level, take profit level and stoploss level) and stick to them. Another way to resist these parasitic emotions is to think in terms of acceptable losses rather than targeted profit. Whenever you reach you loss threshold, you should stop trading for the day and let these emotions express elsewhere than on the trading floor. Always improve your trading risk management by not risking more than 20-30% of your account capital as maximum exposure. This is why you should always look for brokers that proposes the lowest minimum investment /trade size levels.
Greed is good but greed can wipe an investment portfolio
Greed is emotion that makes trader cut their winning positions to early in order to cash in a certain (albeit smaller) profit and that makes trader let their losing positions open for too long hoping that the market will finally adjust in their direction. This emotion is responsible for a fair share of missed profits and unexpected losses. Greed will fuel the temptation to cover up ground using the Double up or the Roll over functions provided by binary options broker platforms. These functions should not be used to cover up a series of losses but should only be implemented when they fit your initial trading plan. Once again, there is an advantage to use binary options compared to most other financial instruments, binary options have short maturities. Your trading plan can thus be quickly confirmed or infirmed.
Psychology plays a major role in all forms of investment activity, causing a consistent need to keep emotions in check. This can be a tough task when money is involved, but it can be accomplished by establishing and sticking to a set plan of action. Those who precisely plan out their trades in advance, based on both fundamental analysis and technical indicators, and who stick to them tend to earn more than those who do not on average.