What is Trading Psychology?
Importance of Trading Psychology
When we talk of trading, we see it as a part of the financial world that demands high levels of knowledge and understanding, skill and technique, and a combination of experience and instinct. A trader is supposed to embody all of these traits and is expected to work hard and make money.
But, like everyone working hard out there, a trader too is a human being and someone exposed to various situations at work and someone who goes through a lot of emotions. The one aspect of the job that probably gets talked about least and needs to be addressed is trading psychology and how to recognise it for what it is.
Defining trading psychology
what is trading psychology all about and why does it need to be given the due importance it deserves?
Every human goes through a gamut of emotions that impact his mental state. How these influence someone who is performing the task of trading is an important aspect of trading psychology. The relevance it has on the actual function of trading cannot be undermined as the state of mind of the trader can have a direct bearing on the outcome of the trades he does.
Regardless of his experience, skill and knowledge levels, his psychological state can greatly influence the efficiency and success of his decisions and functioning. A trader has a long and hectic day ahead of him that is replete with situations that call for snap decisions. Most of these are of a complex nature that requires him to both crunch numbers and follows his instincts. In the majority of situations, the decisions will require him to think logically and draw on both the market intelligence and his knowledge levels.
But it is natural for anyone to go through a difficult phase, mentally, or even face emotionally charged moments. This often can hamper cool and logical thinking and force even the calmest of traders to act illogically and impulsively. The end result can be decisions that are at variance from the plan and with the potential of landing him with huge losses.
Even at work, while trading, traders who are otherwise in a good state of mind can get exposed to situations that can unspool a range of emotions. Imagine a trader spotting what looks to be a juicy pick and he is overcome with greed. Later, when the decision turns out to be a disaster, the feeling of regret or even anger that can threaten to ruin future decisions. On a more positive note, he can be awash with hope or swell with pride – both emotions that can have a good impact on subsequent actions.
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Emotions a Trader Goes Through
Just as any other professional in any occupation, a trader too goes through a wide range of emotions at work. The state of his mind and his emotional wellbeing, both before beginning work and while doing it, can influence subsequent actions at work.
So, what exactly would these emotions be and what is the impact these have on his trading? Also, more importantly, what can he do about containing and managing these feelings?
The markets can often get volatile and unpredictable and traders, even if they are armed with experience and research, can run into uncertainty. The feeling of fear that accompanies a possible wrong decision or an unfavourable trade could well lead to pressing the panic button.
Fear can push you to pull the plug on a position and demoralise you. Psychologically, this can shake up even an accomplished trader and this is not a phase anyone wants to go through.
Now, everyone is in the market with the same objective, right? It is all about profits and how to increase earnings from all those trades you are doing day in, day out. Even with all the experience and knowledge levels, there come situations where the most mature of traders try to push their luck.
Yes, greed can be one of the worst psychological traps that can befall traders. Holding on to a rising stock in a bull run is a classic example. It is difficult to adhere to pre-decided resistance levels, hoping for more profit.
Closely linked to greed is the state of impatience where the individual uses his emotions over logic to make a decision or make a move. This can have unfavourable outcomes as an impatient state of mind can act recklessly and without due thought. In trading, the equivalent of this is to commit oneself to take or lose a position in haste which can result in losses.
There is no point in dwelling on mistakes. It can only distract you from the job at hand. Feeling regret is normal but staying regretful can impact your work. There will be situations where you miss the chance to buy a stock at a low price or miss one of selling at the right moment. But just remember there will be more opportunities coming up and it is best to just move on.
One of the most negative of emotions, anger can only destabilise a person’s normal thought process and provoke misdeeds. A trader who is angry with a client or with a situation or even himself can only lose the ability to think coolly and logically. No one wants to work with someone who is agitated and this can affect those around him as well.
Who doesn’t feel overjoyed and want to celebrate a favourable trade or a windfall? Happiness is one of those positive emotions that every human feels and every professional – be it a trader or anyone else – is sure to face this.
But it is important that you do not become complacent or choose the moment to rest on your laurels. Celebrate the moment and move on to the next trade that awaits you.
Again, here is a happy emotion that accompanies success. Feeling proud about your achievement is a natural thing and, as a busy trader, it can be a great payoff.
But with it, there is a responsibility that demands you do not get overconfident and let yourself off your guard.
Hope is also a positive emotion and is, probably, a big boost for those stressful hours that traders spend. It can be a support in a difficult situation and the motivator to keep going.
But hope needs to be used selectively and may not help traders who push their luck and try a gamble that can be too risky.
Trading Psychology Mistakes to Avoid
The reality is that everyone has emotions and runs the risk of making psychological mistakes. As a trader too, even the best of them, can face one or more of these pitfalls at least once. The trick lies in understanding your own vulnerability to these mistakes and working consciously to eliminate them.
This is a mistake made inadvertently and more by an experienced and successful trader. Once he gets comfortable and complacent, it is natural for a sense of overconfidence to creep in. By expecting all his trading decisions to perform well, there is a risk of a sense of denial when one of his trades fails.
It is important to realise that even the best make mistakes and that it is difficult to fight the unpredictability of the market and other variables. Keep aside your ego and accept the odd failure and short your losses and move on.
No one is perfect and as you have to remember that a single failed trade does not define you as a trader. The markets are governed by many variables and things will go haywire despite your best efforts.
A mistake can happen because of a wrong move by you or as a result of market forces and no one has control over everything. Instead of chasing perfection, it is more important to continuously learn and improve.
Everyone agrees that knowledge levels and skillsets need to be of the highest standards. Also, as a hard-core professional, you must learn from all situations. But avoid getting into the habit of overanalysing your actions and allowing negative events like failed trades to continuously bother you.
This can prevent you from attempting something new or ambitious as the risk of failure can hold you back. Trust yourself and get over the past. Rework plans, if need be, and tighten risk controls but resist the urge to ponder over the odd mistake of the past.
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How You Can Handle Emotions Better?
Slip into the right frame of mind
As a trader, getting into the right frame of mind can be the first step to handling your emotions better. Not carrying forward any negative feelings ensures you take decisions calmly and stay with positive vibes all day long.
Introspecting on your goals
Having a long-term goal and consistently working towards that and building experience and expertise is key to growing as a trader. Do not get distracted with the one-off failures as you will need to dust yourself off and move on to your next trade to do better there.
But if you ever find yourself stumbling more often, it may be time to introspect and revisit your goals. Are they set too high or too unreasonably? Rather than get demotivated by failures at unachievable targets or because of persistent external forces, take stock of the situation and recalibrate your goals.
Step back for the bigger picture
Traders can feel bitter and lost when their calls go awry and a position ends in a loss. But it is important to realise that one trade does not make the whole day, much less a career. Take a holistic view of proceedings and move on from individual cases to consider the bigger picture.
Understand that you are human
Remind yourself that it is okay to be imperfect and make mistakes. What matters is that you understand what went wrong and learn from those instances. You are as human as anyone and forgive yourself and look forward than backward.
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