What is Trading Psychology?Trading psychology or investor psychology refers to the trader’s emotional and mental state which dictates their trading actions. Some of these emotions like hope, confidence are helpful and should be embraced. But emotions like fear and greed must be contained. Another emotion that is very common in financial markets is the fear of missing out or FOMO.It is essential to understand and develop a sharp mindset along with knowledge and experience to become a successful trader.Let us take a look at the various psychological factors that affect a trader’s mindset and some pro-tips to deal with them.
1. FearFear is a natural reaction that we sense when something is at risk. While trading, risks could occur in many forms –
- Some bad news about the stocks or the market
- Placing a trade and realising it’s not going the way you had hoped
- Fear of loss of capital
What should you do?Every trader must first understand what they are afraid of and why? Reflect on these issues ahead of time so you can quickly identify the problem and find a solution. Your focus should be to not let the fear of loss refrain you from making profit.
2. GreedGreed enters when you desire excess profits. Rome was not built in a day and neither will your stock market fortune. If you find yourself on a winning streak, then book your profits and move on. Majority of the time, your greed will turn a winning streak into a disaster!
What should you do?To combat greed, you should have a predefined profit booking level. Even before you enter a trade, define your stop-loss and book-profit levels to avoid being swayed by greed. A sound trading psychology is when you are content with your profits and do not chase irrational profits.
3. RegretRegret in trading comes in two ways.
- A trader could regret placing a trade that didn’t work or
- Regret not placing a trade that could have worked.
What should you do?The best way to avoid a regretful trading psychology is to accept that you can’t have all the opportunities in the market. The equation in the stock markets is very simple - You win some; you lose some.Once you accept this rule, your trading psychology will automatically change for the better.
4. HopeInvestors often think that trading is gambling. It’s because they hope to win all the time and when they don’t, they get dejected.
What should you do?To become a successful trader, you must have a solid trading psychology which is not dependent on hope. If you keep hoping for things to change in the near future, you’re putting your entire investment at risk. Don’t let hope keep you invested in a loss making trade. Be practical, and book your losses at the correct time. To attain and maintain success as a trader, you have to work hard to cultivate a mindset! Let’s see how trading psychology helps you cultivate a better mindset!
How to Improve Your Trading Psychology
1. Get Yourself in the Right MindsetBefore you even start your trading day, simply remind yourself that markets are never constant. You will have some good days and some bad days, but the bad days too shall pass. Another effective strategy to improve your trading psychology is to give yourself time. You are not going to make a fortune on your very first trading day. You need to spend time and efforts in creating a rock solid trading strategy which isn't affected by the market sentiments. While you cannot completely eliminate emotions from trading, the goal is to reduce the extent of emotions controlling your trading psychology.
2. Have a Great Knowledge BaseOne of the best ways to improve your trading psychology is to increase your knowledge and trading skills. Having a strong knowledge base of the stock market is key to defeating negative trading psychology. Remember, knowledge is power!
3. Remind yourself that you are Trading in Real MoneyWhen you’re trading online, it’s easy to forget that the numbers on your screen actually represent real money. There’s nothing wrong in risking your money in hopes of generating returns. But remember to be cautious and make smarter investment decisions.
4. Observe the Habits of Successful TradersStock market is unique because it treats each trader differently. When it comes to trading, you should be aware of what your peers are doing, not to copy them but to learn from them.By observing the positive characteristics of successful traders and inculcating few habits or strategies into your own trading, you can improve your trading strategies manyfolds.
5. Practice! Practice! Practice!Last but not the least, practice is the best and most reliable way to gain mental strength. It helps you improve your trading psychology over time as you build well practised trading strategies and are well prepared for any ups or downs.
Final ThoughtsUnderstanding trading psychology and implementing it is a time consuming process. You have to continuously refine your trading psychology over long time periods. To sum up, remember these three golden principles of trading psychology
- Be disciplined
- Be flexible
- Never stop learning