An overview of Trading Psychology to understand what goes inside the mind of a trader: Trading psychology is the most important aspect of trading even more important than the technical and fundamental aspects of making trades. To be able to control one’s emotion, to be able to think fast on one’s feet and being disciplined, are some of the very key features of this trading psychology that every trader needs to learn eventually.
“I don’t want to be at the mercy of my emotions. I want to use them, to enjoy them, and to dominate them.” ― Oscar Wilde
Taking quick decisions, avoiding panicking, and sticking to one’s informed resolution in times of crisis is what sets a good trader apart from an average one or should I say, the winning one from the losing ones.
Table of Contents
Biggest Psychological Tension While Trading
Not maximizing and holding on to a trade for too long, are two sides of the same coin. When I am saying, not maximizing, all I am saying is that when a trade goes in favor, we tend to book our profits too quickly and not maximize the potential. And this is critical because, with the technical and fundamental view remaining the same, there is no reason to book just because something is making money. We should try and squeeze the maximum possible juice out of fruit i.e., the trade.
Similarly holding on too long on to a position and not booking substantial margins even though the market is showing a change in momentum, is another psychological issue with trading. We are always of the viewpoint, what if I book too early. But one should understand that “Profit in hand, is better than profit in books”.
Staying flexible and being open to opportunities around to better the trade price or hedging is an important psychological aspect of trading. As the saying goes in the market, “Bulls Make Money, Bears Make Money, Pigs Get Slaughtered.”
Trading Psychology – Few Important Points to Know
— Avoid Over-Analysis Paralysis
This is the most common psychological trait associated with trading. We tend to over-analyze and over research the trades, before executing them. And which sometimes leads to trade been missed or we don’t take that trade, because some of our technical or fundamental parameters didn’t signal the trade. Too much information sometimes overcomplicates trading.
— The Randomness of Market
We have to accept the fact that markets are random to a large extent. This statement might come as a surprise to many. But we have to understand that our technical and fundamental analysis only works to an extent in the market. And if markets were not random, the technical and fundamental parameters working so far should always be able to predict the market future.
But, that’s never the case. So as long as we are in sync, with the randomness in the market, we should maximize the possibility. Because sooner or later, the randomness will take over and we have to change the parameters.
— Knowing When to Exit
This skill is as important, as the art of knowing when to enter. Having a firm plan of when to exit is an important ability that every trader should develop. Having the mastery of this skill goes a long way in making the most of the profitable trades and exiting the wrong trades with minimum damage.
The best way to go about this strategy is to exit a part of your position when it makes to a decent profit. Doing this, locks in some profit and it also gives an opportunity to enter again if the markets correct again. And most importantly it gives confidence about one’s trading skills.
— Accepting when you are wrong
To accept when one is wrong is the most difficult art in humans. Similarly, in trading too, if we are able to accept that we have gone wrong in taking a trade, it goes a long way in prolonging one’s trading career. Its a proven fact, accepting a wrong trade, avoids the chain of wrong trades and which goes a long way in preserving one’s trading account.
— No more FREE internet tips
There are many fraudsters in the market who simply circulate a message (via SMS/email/any other social medium) spreading positive/negative rumors depending on whether they want to sell or buy. One should completely avoid falling for this honey trap, as people might lose a large chunk of their capital by trading this penny or rumor based tips. Traders should always use their informed judgment before entering any potions in the market.
— Have a Winning Attitude
This is an acquired trait over time. The winning attitude develops over time. What we need to understand here is that no trader has a 100% success rate with their trades. It’s our attitude, to do our background research (could be technical or fundamental) on each and every position/trade we take, makes a difference. Lack of discipline while trading, leads to disaster. The positivity with which we enter a trade makes a world of difference in the outcome of the trade.
— No Revenge against the Universe
The Universe here is the universe of trading. An individual trader is like grain of sand on a beach. He/she is simply not big enough to take revenge from the market. Therefore, we should never get into the mentality of taking revenge against the market. One always needs to remember, we are a part of the market and we cannot trade without the market. Moreover, it would not make any difference to the market, if a small trader like you or me is not there in it.
“Every trader has strengths and weakness. Some are good holders of winners, but may hold their losers a little too long. Others may cut their winners a little short, but are quick to take their losses. As long as you stick to your own style, you get the good and bad in your own approach.” – Michael Marcus
Trading psychology is the most important aspect of trading that every trader needs to learn. In conclusion, we can say that the whole psychological warfare of trading, is the sole pillar on which the world of trading runs. Mastery of one emotional quotient goes a long way in having a long and rewarding trading career.