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Chapter 6 - Trading philosophy and capital management
How to Improve Your Trading Psychology?
Your trading psychology can easily be improved by recognizing your feelings, biases and personal traits. Once approved, you can put a trading plan in place that takes these factors into consideration in the hope of mitigating any impact it may have on the decision-making process.
For example, if you are a naturally confident person, you may find that overconfidence and pride hinder the decision-making process. For example, losses may be allowed to work in the hope that the market will turn, rather than incurring a small loss in your trading account. This could lead to more losses or eventually the collapse of your trading account.
To counteract this, you can use "stop loss" orders as a way to reduce your losses and decide on when to close a position before opening a new position. By doing this, you become aware of your own biases and emotions, as you make a conscious decision not to act against them, but rather take steps to combat them.
How Does Bias Affect Trading?
Biases affect trading because, by definition, they are a predetermined personal behaviour in favour of one thing over another. As a result, it can hinder decision-making during your time in the marketplace because it may mask its rules and lead you to act based on instinctive rather than fundamental or logical technical analysis.
This is because trade bias means that you are more likely to trade in an asset, with which you have had success in the past, or to avoid an asset with which you have suffered a historical loss. It is important for traders to be aware of their conscious biases, as this can help them overcome such biases and deal with markets with a more rational and accountable mindset.
