Learn how fear and greed can impact trading

There are many skills required for traders to be successful in the financial markets: The ability to understand a company's fundamentals and the ability to determine the direction of a stock's trend are two of them. But neither of these technical skills are as important as a trader's mindset: the ability to contain emotion, think quickly and exercise discipline—what we might call trading psychology.

The psychological aspect of trading is extremely important. Traders often have to think fast and make quick decisions, darting in and out of stocks on short notice. To accomplish this, they need a certain presence of mind. They also, by extension, need discipline, so they will stick with previously established trading plans and know when to book profits and losses. Emotions simply can't get in the way.

When traders get bad news about a certain stock or the general market, it's not uncommon to get scared. They may overreact and feel compelled to liquidate their holdings and go to cash or to refrain from taking any risks. If they do that, they may avoid certain losses, but they also may miss out on gains. Traders need to understand what fear is: a natural reaction to what they perceive as a threat—in this case, to their profit or money-making potential. Quantifying the fear might help, and traders should consider pondering what they are afraid of, and why they are afraid of it.

Traders would also be wise to consider setting limits on the amount they are willing to win or lose in a day. If the profit target is hit, they take the money and run, and if losing trades hit a predetermined limit, they fold up their tent and go home, preventing further losses and living to trade another day.

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