Simply put, trading psychology is the mental state of traders when making decisions in the market. Traders can be divided into three groups: buyers, sellers, and undecided. Buyers want to pay as little as possible, and sellers want to charge as much as possible. An essential part of becoming a successful trader is understanding and maintaining sound trading psychology.
It is important to understand that each bar of price represents a momentary consensus of value between buyers, sellers, as well as indecisive traders at the moment of transaction. There is a crowd of traders behind every pattern on the screen. The general movement of the market changes from moment to moment as the crowd concensus changes. Sometimes it gets established in a very low-key environment, and at other times the environment turns wild. When a crowd becomes either spooked or elated, prices begin to jump, causing massive fluctuations in the market. An experienced trader aims to enter the market during quiet times and take profits during wild times and this ties in with having sound trading psychology.
Charting patterns reflect swings of mass psychology in the financial markets. Each trading session is a battle between bulls, who make money when prices rise, and bears, who profit when they fall. The goal of a serious technical analyst is to discover and understand the balance of power between bulls and bears and bet on the winning group. If bulls are much stronger, you should buy and hold. If bears are much stronger, you should sell and sell short. If both camps are about equal in strength, a wise trader stands aside. He lets bulls and bears fight with each other, and enters a trade only when he is reasonably sure which side is likely to win. This is also a key part in maintaing sound trading psychology.
With maintaining sound trading psychology habits comes the added benefit of being more disciplined when following your personal trading plan. Once you are able to master your emotions when making decisions in the market, you will begin to see a true reflection of your trading ability. By learning to overcome your fears in the market, your trading will begin to flourish allowing you to move forward in your trading journey.
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