Trading is fast becoming a lucrative profession. The lure of making money has always attracted people. But beneath the lure lies a dark side that can engulf all your money and sanity. Making money is never easy and trading in stocks is no different.
In reality success in trading depends only on ‘you’. Can you discipline yourself to follow cold calculations instead of emotions? Can you be patient enough to watch the minute changes in the stock position for days to identify an opportunity? Can you identify and act decisively in a fraction of a second to seize up an opportunity? Can you be calm in the face of heavy losses? If you are willing to face these tasks and many more challenges for days on then you are welcome to be a trader. Trading psychology refers to a trader’s mindset and here are some points that can help you to control it.
Successful traders display more positive characteristics which help them tide over a pitfall easily. They can keep their emotion under control and do not act on their bias or sentiment. This trait helps them to stand a better chance of reaping a profit or minimize losses during trading. Whether the trading is done with or without the assistance of a broker.
‘Trading psychology’ can be improved by recognizing your prejudices, sentiments, emotions, and personality traits and factoring them into your trading strategy or plan. Thus as your emotions and sentiments are woven into your plan, you can mitigate the negative effects and act fast. You are training yourself to think with your ‘brain’ rather than your ‘heart’.
Be honest with yourself and list down all the impulsive tendencies in your personality. Keep this list with you and match your reaction while trading. You need to check to control the negative impulses while trading as they can result in anger, sadness, frustration and lead you to make a rash and erroneous decision. On the contrary, you can also take advantage of your positive impulses in your trading.
You need to identify and list your biases or prejudices as they also can influence your trading.
Your trading plan is the blueprint on which all your trading activity is based. Apart from your time commitments, available funds, or your risk-reward ratio, it should also list your personality traits and biases. These will form the framework on which you can form a plan to work.
You may have to spend long hours just observing the market, waiting for the right opportunity. Patience is integral to a calm mind and lack of it can lead to rash decisions and errors. You cannot jump into a trade because you’re feeling restless as nothing is moving in the market.
Forming a trading plan is important but it is more important that you’ve to be prepared to change, modify or even discard it if necessary. This is because the market is changing every day and there are no perfect approach or way to trade. Adaptability is the key.
A loss will make you sad or frustrated. Instead of rushing into another deal, sometimes the best thing is to take a break after a loss. You need to gather your thoughts and reflect on the trade than rush into a deal to recover losses. Successful traders use their losses as a learning experience and avoid repeating the mistake. While you’re taking a break, you’re also cooling off and realigning yourself to return to trading with a clear head.
A big win will make you happy. But it is important not to be overconfident or feel invincible. This might lead to an erroneous trade. Be calm and like losing the best thing can be to take a break and return with a clear head.
Record all your wins and losses along with the emotions you were experiencing during those trades. This record can help you to understand whether that particular trade was a good or a bad decision.
As our mental makeups are different, ‘trading psychology’ is also different for every trader. You just need to be honest with yourself about yourself and your goals and follow that trading plan to be successful.