Overcoming the emotional barriers to day trading success

View from the dealing floor. Ricardo Da Silva works on IG’s dealing floor in London. Learn how spread bet or trade CFDs on shares: www.ig.com/uk/shares

There is a rather common saying in financial circles, that the markets are primarily driven by two opposing forces namely, fear and greed. This is, perhaps, an over-simplification. There are, however, some psychological barriers that a trader should seek to understand and conquer. To ignore these will likely decrease the chances you have to become a consistently profitable trader.

Most online trading sites such as ours now offer the ability to try out and ‘paper trade’ on demo accounts in order to gain experience through a simulated environment. While this may be beneficial to learn the platform, it is impossible to simulate the psychological side of a trade unless you actually fund your trading account and put your own hard-earned money at risk.

With fast paced day trading, your strategy and profits can easily be eroded should you let your emotions muddy your decisions. Despite fear and greed ultimately being the core reactions, they do have their important affiliates:

• Hesitation: Traders need to have a trading plan and most importantly stick to their rules no matter what. As an online day trader, there isn’t always time to second-guess decisions especially while reacting to market news.

Backtesting can help build confidence in a plan while the use of automated trading tools can help overcome the tendency to hesitate before clicking on the mouse button.

• Anger: The markets won’t necessarily do what you want them to do, often at the expense of your money. Losing large amounts of money can result in the inexperienced trader losing their temper. A dangerous precedent set, always reacting to losses with anger can stop you making rational choices.

If you feel your anger rising you should step away from the dealing platform. The way to consistently outperform the market is to be as methodical as possible in your approach and clear about your risk management.

• Anxiety: This is often brought on by the anticipation of trades going wrong. Anxious people avoid whatever it is that makes them upset. This can result in the trader not making an obvious trade or perhaps holding a losing position for too long instead of cutting their losses. Also known as: not sticking to the plan.

A way to combat this is to use stop and limit orders so that you don’t have to sit on the edge of your seat watching every tick of the market.

• Boredom: It can be dull waiting for a trading opportunity to present itself. And it is during this time that traders start making bad decisions and start chasing the market. It is very important to understand that you do not always have to be in the market.

If you’re really bored, take a break, or use this time to research your chosen instrument further.

Unfortunately there is no ‘magic secret’ to trading the financial markets. Having a well thoughtout trading plan– including proper risk management techniques– can significantly improve your trading performance. Discipline is ultimately the name of the game.

It simply comes down to putting in the time and planning.

Spread bets and CFDs are leveraged products. Spread betting and CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

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