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Your Mindset Matters in Trading: Learn Trading Psychology!

18 Oct, 2022
11 mins read

Capitalizing on volatility is the essence of successful trading.

Even the most meticulous traders have felt the repercussions of uncertainty – doubt, anxiety, fear, pessimism, lament, optimism, and a flood of other emotions. Two emotions that significantly affect trading decisions are anger and disappointment. Both emotions relate to our hopes for how we will perform and how the market will act.

When something doesn't act or go our way, usually we get angry. Because we want to succeed, we anticipate that the market will act in a manner that is consistent with our trading strategy. We become infuriated when our plans seem to have been foiled by fate or other unknown external forces (like other traders or market makers, for example).

However, being unaffected by these emotional turbulence and placing their trades well keeps them grounded and prevents them from freezing in their tracks. But this isn't the case. Trading Psychology tells you how to use these emotions to your advantage and trade to get the most desirable results.

So, without any further ado, let's get started and understand the nuances of trading psychology.

Trading Psychology: a Game of Mindset and Emotions

Also known as the "investor's psychology," the trader's current emotional mindset tends to govern their trading actions in a particular direction. Whatever the nature of your emotional mindset, it starts fostering trade biases. This implies that you are more likely to pick an asset that has helped you to enjoy an exorbitant gain in the past, and less to pick the one where you have had a major loss. It becomes indispensable for traders to decipher these biases to act as rational traders.

Long back, many successful traders used to trade by hunch or gut feeling. But recent years have shown that, acting on a mere instinct, or going by your gut, clouds your rectitude and leads to faulty trade judgments. With changing market dynamics, let's see how we can use this trading psychology to our advantage.

Trade Terrifically With Trading Psychology

Trading Psychology can help you hold the reins of these negative emotions. You might go reverse when you must close a trade account or when you must open the position. Trading psychology makes you aware of your emotional mindset, including the pitfalls and negative biases in your brain cells, so you can make a rectitude judgment. Traders who are practitioners of trading psychology are often in an optimum position to gain profit, or in a position where they sustain a minimal loss.

On average, a human brain experiences 60,000 thoughts daily, resulting in floods of emotions. Some of these positive emotions such as confidence and optimism, should be welcomed. On the contrary, one should not let negative emotions like shrewdness, anxiety, or fear indelibly impact one's thought process. This is the basic principle of trading psychology. Consider the following emotions and get to know their impact on your mindset and, subsequently, on your trading decisions:

1. Fear:

This is one of the most vexatious emotions. You get scared when something of paramount importance is at stake or at risk. Some unfavorable fluctuations in the market can cause fear. In such circumstances, panicky traders start liquidating their holdings, which might be detrimental in the long run.

Traders who practice trading psychology subside this fear, so that it doesn't dominate their long or short position. Wondering how? First, understand what you fear and why. Make sure you do this often so that you can take adequate steps to mitigate it when uncertainty strikes. Do not let fear refrain you from making gains.

2. Avariciousness (Greed):

Too much gain makes you greedy, which cannot be more accurate when trading. After having a few instances of gain, one often starts craving for more. And in most cases, this craving turns into a catastrophic event for your trading account. Make a mental note that neither Rome nor a lucrative trade account was built in a day.

If you are crashing your own winning streak, trading psychology is happy to pull you out of the woods. It's never too late to book profit or mark a stop loss. Avoid being swayed by avariciousness and stay profit-gratified with trading psychology.  

3. Remorse:

When a trade you have invested in doesn't work the way you want it to, or when you have missed placing in a trade you could have gained, you experience trader's remorse.

To combat remorse, accept the blunders and the fact that you can't gain everything the market offers. Not everyday is a Sunday, and not everyday is a day of gains. Once you inculcate this in your mindset, your trading psychology will turn the tables for you.

4. Constantly staying hope-driven:

While staying hopeful is a positive trait, staying hopeful consistently in the trading sphere that you will emerge victorious every time, might make you feel dejected at times.

So, it's essential to go about with a strong trading psychology rather than a hope-driven one. If you stay too hope-driven, you might end up succumbing to the dynamic market fluctuations and losing your trade account. Take a pragmatic approach and maintain a stop-loss mark. Make your trading a process driven methodology rather than a hope driven methodology.


Managerial Abilities and Trading Psychology

These managerial abilities can assist you in remaining composed and effective while trading:

1. Risk management

Regardless of your level of expertise in trading's technical aspects, such as your grasp of algorithmic trading, your aptitude for numbers, etc., a risky situation could result from poor risk management. It is a straightforward but essential quality that can help you avoid loss. Risk management is a discipline that every trader must follow. There are times when traders need to understand different types of risks associated. It's similar to taking preventive measures before having to do so under exigent circumstances.

While it's important to keep an eye on the quantitative trading checklist, which includes finding better indicators, searching for accurate entry signals, working on ethical trading practices etc., putting risk management to the side can obstruct your progress toward becoming a profitable trader. Provide equal emphasis on this as you would on learning and developing your technical and fundamental trading skills. Also watch:

2. Money management

Although it appears simple, managing money is a challenging task. A process of earning, budgeting, saving, spending, investing, and other related activities can be referred to as money management. It is, in essence, the entire process of using cash for any person or organization.

Everyone who trades is aware of the 2 percent rule, but when it comes to applying it, we all tend to ignore it. According to the "2% rule," you should never risk more than 2% of your capital on a single stock.

Detailing the 2 percent rule:

  • Start by concentrating on the 2% of your trading capital that is at risk.

  • You should subtract the cost of your buys and sells, such as brokerage, in order to obtain the maximum permissible risk.

  • Determine the risk per share. Your stop loss should be subtracted from the purchase price to determine the risk per share in the case of a long position.

  • When going short, you should perform the opposite operation, i.e., subtract the buy price from the stop loss before adding slippage.

  • Divide the maximum permissible risk by the number of shares in order to reach the maximum number of shares.

A well-known saying goes, "More sweat in training, less blood in battle." The basic principles are the same for trading. Plan your trade, and then smartly trade your plan. This can be a trading maxim.

Tips for Mastering Trading Psychology

1. Cultivate an unerring mindset: 

The moment you are about to begin with your systematic trading, just tell yourself that markets are dynamic. Even if a bad trading period is going on, it will pass because markets never stay the same.

2. Take your 'trading' time: 

Since we are talking about markets here, you cannot expect to nail a fortune on the very first day. Give time to the trader in you. Create a strong trading strategy. While we cannot restrict emotional indulgence in trade, we can restrict it. And this is what trade psychology is all about.

3. Expand your trading knowledge: 

The most effective manner of improvising on your trade psychology is via an ever-expanding knowledge base. Defeat negative emotions with the ultimate weapon of knowledge.

4. Take inspiration from others: 

The trading business is full of epitomes of success. Take inspiration from successful traders. Don't imitate but take ideas from their trading moves. You can modify their strategies and can implement them on your trade account.

Final Words:

Trading can transform your life drastically, only if done cautiously and systematically. A trading methodology is essential for everyone. Keep striving for a stronger and better trade strategy that remains unaffected by emotions and biases. Last but not least, traders should regularly evaluate their own results.

Additionally, traders should review their returns, specific positions, and preparation for trading sessions. A trader can improve overall returns, correct errors, and bad habits with the aid of this routine evaluation and interacting with subject matter experts. If you have any such topic or question in mind, you can visit FYERS Community and drop your question to answered by the expert traders.

May the trader in you get the most desirable results with trading psychology. Happy trading!

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