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Becoming a successful CFD trader does not just require intensive learning and experience but also the right mindset as well. What is trading psychology? It is the trader’s mindset throughout their time on the financial market. Obtaining the right mindset also plays a very important role in attaining success in trading. When you have the right mindset in CFD trading, you can successfully secure some profit or incur losses if you become too emotional. What is a CFD? It is a derivative instrument that needs to be dealt with proper emotions to avoid clouding your trading decisions.
As human beings, we tend to have biases and unexplained emotions when trading. But as you learn trading psychology, you will know the pitfalls and traders that associate negative psychological traits. For traders who are well-equipped with knowledge when it comes to trading mindset, they tend to eliminate biases or any other unnecessary emotions when trading. Though different from one trader to another, the most common emotions experienced by traders are happiness, pride, impatience, fear, and anger.
Improving Trading Psychology
The most effective way to improve your trading psychology is to become aware of your emotions, traits, and biases. After you acknowledge these things, you can create a trading plan that puts into accounts these factors that can affect your trading decisions. For instance, you are a person with lots of confidence. You should understand that being too overly confident can affect the decisions you make in CFD trading. You might accept losses in the hopes that the market will take a turnaround because you are overly confident. In the end, you incur losses on your account.
As much as possible, you should counter this by using stop orders to minimize the losses you incur and to decide when to close a losing trade or open when a good opportunity strikes. Once you counter this, you are giving yourself a chance to be conscious of the decisions you make and you set up several ways to avoid them.
Biases Affect Trading
What is a CFD bias? As per definition, biases are predetermined personal favorites over the other. Because of this personal thing, your ability to decide is hindered and could generally cloud your judgments. Therefore, you decide based on gut feel rather than your technical or fundamental analysis. Traders need to be conscious of their biases since this can help get through it and create a market approach with a rational and well-calculated mindset.
Five Types of Biases
- Representative Bias – this bias is when you replicate previous successful trades. Most of the time, you have this bias without thinking much about the technical analysis because, in the past, it was a successful one.
- Negativity Bias – this is when you only see the negative side of the trade without seeing the things that went right.
- Status Quo Bias – this is when you utilize old strategies continuously rather than checking other new things. With this bias, once you fail to properly assess these old strategies if it is still working, the danger could arise.
- Confirmation Bias – This is when you give more weight to the pre-formulated ideas. In this case, you might disregard information that shows disapproval in your convictions.
- Gambler’s Fallacy – this is when you assume that an increasing asset will most likely, continue to rise.