Five ways to improve your trading psychology in times of volatility Image: Supplied

Five ways to improve your trading psychology in times of volatility

The purpose of this article is to explore the psychological elements of trading with the goal of fostering a stable and rational approach.


Five ways to improve your trading psychology in times of volatility Image: Supplied

It has often been said that the financial markets are governed by two fundamental human emotions: greed and fear. While this may be slightly oversimplifying things, there is little doubt that mindset plays a critical role. This is even more relevant when discussing volatile underlying assets such as cryptocurrencies and forex pairs as well as unpredictable market conditions. The aim of this article is therefore to address the psychological aspects of trading in order to adopt a sound and well-balanced approach.

Starting off in the right direction: Trading tips at a glance

Due in no small part to the fact that South Africa is experiencing a massive influx of new traders, appreciating the nuances of trading psychology is crucial. Let us therefore examine five powerful approaches which can help to ensure that you make the correct decisions at the appropriate times.

Define your comfort level when dealing with risk

This is often referred to as “risk tolerance” within trading circles. While all assets are associated with a certain level of risk, some are inherently more volatile than others. Try to mold your approach to trading around the degree of risk that you are comfortable with. You might otherwise make snap decisions based on emotion as opposed to objective pragmatism.

Keep impulsive emotions in check

Let us imagine for a moment that one of your assets has been performing extremely bullish for an extended period of time. You might be tempted to ignore previously defined exit points in the hopes of further increasing your profit. This can be a dangerous approach and (as is likely already apparent), it is primarily governed by greed. Appreciate that what goes up will inevitably fall back down.

This is also one of the reasons why partnering with well-known and reliable brokerages such as Exness is often a wise strategy. You can base decisions off of objective analysis as opposed to being governed by greed only to realize that a position should have been liquidated at a much earlier time.

Allowing losses to govern a trading strategy

Yet another psychological tendency which can harm a trading strategy is known as loss aversion. This is extremely relevant when discussing asset classes that may suddenly change values within a short period of time. Some investors may begin to place an inordinate amount of focus upon avoiding losses; resulting in missed opportunities that could have very well led to appreciable returns. Although understanding that losses may occur is prudent, this perspective should be balanced with the ability to predict potential gains. If you find such an approach difficult, it may be wise to reevaluate your level of risk tolerance (mentioned previously).

Doubling down when it is better to pull out

“I have observed many cases of habit patterns in all activities of life, particularly business, continuing long after they ceased making sense.”

– Warren Buffett

Imagine for a moment that you have held a position for an extremely long period of time. While projected to perform well, the asset has accrued steady losses. As opposed to exiting and allocating your funds elsewhere, you choose to chase these very same losses in the hopes that they will eventually be recuperated. This mistake is made by novices and even some senior traders.

It is always important to know when to say when. Try to take a step back and develop an objective opinion in regard to the current situation. What advice would you give to others? The chances are high that pulling out might be the best option; even if a loss is incurred as a result. This will enable you to continue trading another day and it also conveniently leads us into the final point.

Mistakes can and will be made

Regardless of what you may have read online, there are no certainties within the world of trading. Otherwise, every trader would be independently wealthy. This is why it is important to understand that mistakes are inevitable. The only question remaining involves how you choose to interpret these instances.

It is much better to view such scenarios as valuable learning experiences as opposed to throwing in the proverbial towel. In the event that you are not entirely certain what went wrong or you hope to mitigate the chances that a loss occurs, it is equally logical to partner with a professional who can provide an in-depth evaluation of your trading strategy.

Putting it all together

The good news is that a good broker can help you to master the subtleties of trading psychology. Whether you wish to trade forex with Exness or you are curious to learn about institutional investment opportunities, knowledge is indeed power. On a final note, remember that becoming accustomed to the dynamic world of trading will require time and patience. Those who are willing to embrace both can dramatically increase their chances of enjoying long-term success.