By Vishweshwar HS, www.showmytrade.com
There are many skills required for a successful trader — stock market knowledge, trading experience, and skill set to repeat these actions every time. But the most critical attribute is a trader’s mindset—the ability to control emotions, quick thinking, and exercise discipline. Trading psychology represents aspects of an individual’s character and behaviors that influence the trading actions.
Trading psychology refers to emotions and mental state, which dictate success or failure in the stock market. The two most critical aspects of trading psychology are discipline and risk-taking.
Human emotion is the trader’s worst enemy. They quite often cloud the mind, resulting in huge losses. The trader must recognize these traits and train the mind! Let’s look at the emotional aspect:
Greed: Holding on to the position too long in hopes of higher profit even it starts to fall. Greed is the main reason behind many trades that have gone from substantial gains to substantial losses. The other causes may include making high-risk trades, buying shares on rumors, or irrational judgment. Because the stock price is going up rapidly or purchasing shares without researching the underlying investment. In bull markets, greed is most apparent when speculation runs rampant, and investors throw caution to the wind.
Define the objective of the trade. When a position gives you a significant run-up, ask yourself whether the reasons behind your initial investment remain. If not, close or significantly reduce your position. Avoid buying irrationally rising or falling stock without solid research of the stock. There is a saying in the stock market “Fear when others are greedy, be greedy when others are fearful.”
Fear: It can prevent a trader from entering trades or exiting the positions far too early. Traders are too much concerned with potential loss or the risks that come with a trade, Often dissuading from an excellent opportunity. A trader is more susceptible to fear, may sell out of a position too early based on the fear of losing the gain. It can prevent a trader from enjoying a much more significant profit. Fear is predominant during bear markets, and it is a primary reason why traders act irrationally in their haste to exit the market. Fear often morphs into a panic, which generally causes significant selloffs in the market or panic selling.
Practice with a small quantity of trade and experiment! Develop a super trading edge with technical analysis. Gradually, intuition for market movements will develop for trading and capitalizing on the full potential of the trade. In the bear market, increase your time horizon of the trade for more significant profits when tied turn towards an uptrend in sentiment.
The other significant emotions that need to concur are:
(a) Too much analysis clouds the judgment with conviction and
(b) Regret trade, which causes out of missing a developing trend and buying the stock at a very higher price (peak of the trend).
Trading psychology is characterized primarily as the influence of both greed and fear. Greed drives too much risk, and Fear drives generate too little profit. It is imperative to recognize these emotions.
Trade using technical analysis, but also form strong instinct by developing trading psychology for better returns with minimizing risk. Constant focus and practice help improve Trading Psychology. They are setting our expectations low, real-life understanding situations v/s fantasy. Traders with keen attention to comprehensive security price influences, discipline, and confidence show balanced trading psychology that typically contributes to profitable success.
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