Trading psychology and risk management are central to a trader’s success.

On one hand, trading psychology helps you control your emotions and not get overexcited or panicked during a trade. And, on the other hand, risk management limits your losses to your desired level, which ensures that you don’t suffer setbacks from large losses and remain in the game for the long term.

So, emotionless trading risk mitigation techniques, together, can significantly improve your trading performance. Traders with even the best trading strategies can suffer losses if they do not follow risk management principles and get carried away by their emotions during trading.

In this article, we explain how you can improve your trading psychology and risk management to become a better trader. 

Follow a defined trading strategy or automate your trading

To remove emotions from trading, you need to create and follow a defined trading strategy for each trade. This will ensure that you take only those trades which fulfill the criteria specified in your strategy. In other words, your trading decisions won’t be influenced by your gut feelings or emotions as your trading strategy will decide which trades to take. 

Alternatively, you can consider automating your trading. Many traders encode their trading strategy into a trading program, which generates signals when the criteria in the strategy are met. By automating your trading, you can remove human intervention from affecting the trade 

Use stop-loss and take-profit orders

Stop-loss orders, as the name suggests, are used to limit losses in a trade. When the price touches your defined level, your trade is closed automatically, which keeps your losses on the trade to your specified level. Similarly, take-profit orders allow you to automatically book profits once the price reaches your specified level. 

The price levels for stop-loss and take-profit orders are set up at the time when you place your trade, based on price charts or your trading strategy. This eliminates the need for managing your trade, and you can leave your trade open without supervising it. Your trade would be closed when the price either touches the take-profit level or the stop-loss level. 

Accept losses as part of the equation

One of the common mistakes inexperienced traders commit is aiming to win and earn a profit on their every trade. While doing so, they often keep their losing positions open with the expectation that they would turn into profit eventually. They simply cannot close a losing position as their minds don’t allow them to accept the loss. They want to be correct and make winning trades all the time, which doesn’t happen in real-world trading. 

You can be a profitable trader even if you lose half of your trades, provided your winning trades are bigger than your losing trades. If you manage to keep your losses low while your profitable trades can cover two or three of your losing trades, you can be profitable in the long run. So, accept losses as part of the equation and implement stop-loss orders to close your losing trades at manageable levels. 

Avoid revenge trading

Traders with good trading psychology stay disciplined and take only specific trades. When they encounter a losing streak, they don’t indulge in revenge trading. Rather, they pause and review their trades to determine the causes of losing trades.

Novice traders usually double their position sizes after several losing trades to recover their losses, which mostly backfires. You cannot take revenge on the market. Instead, the better option is to refine your strategy to break the losing streak. 

Create a trading journal

The purpose of a trading journal is to record your trades, mentioning your entry points, exit points, your take-profit level, your stop-loss level, and the reasons why you entered and exited the trade. When you review your trading journal, you can review your past trades and can extract valuable insights from them. Also, you will be able to understand your trading psychology from your past trades and can work on improving it. 

Limit your risk per trade

Expert traders only risk a maximum of 1% to 2% of their accounts on a single trade. This means that they only risk a small portion of their accounts on each trade, allowing them to cap their losses per trade while attempting to generate greater profits. By applying this risk management technique to your trading, you can focus on your trade methodically instead of reacting to it emotionally. 

Conclusion

Trading psychology and risk management are interlinked, and they complement each other. When you improve your risk management techniques, you also improve your trading psychology, and vice versa. For example, if you use stop-loss in a trade, you can take emotions off your trade, which will improve your trading psychology and improve your trading performance. The tips we mentioned in the article can improve your trading psychology and risk management, which can help you become a better trader.

Have fun trading!

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