When it comes to stock market trading, traders tend to place a lot of emphasis on charts, analysis, market mood, corporate performance, and other external considerations. Even when they are discussing the attributes required, they prioritize market knowledge and awareness, analytical capacity to read and detect patterns from charts, and so on.
But they often overlook one of the crucial factors, i.e., the psychology of trading. Most of them would have probably heard specialists’ advice against making trading decisions based on emotions. While this appears to be reasonable, human emotions are far more complicated. The way humans act or react to a certain situation is what comprises their psychology. This is why it is of monumental importance to understand the psychology behind trading.
TRADING + PSYCHOLOGY = TRADING PSYCHOLOGY
Psychology is the study of the mind and behavior. As a result, when we discuss trading psychology, we are primarily concerned with the majority of the feelings and emotions that a stock trader experiences when trading. Understanding how our mind responds to particular stimuli and how it makes us feel, as in most aspects of our lives, can set the groundwork for a controlled mental state, a skill that is required to be a successful trader.
Trading psychology may be just as important in evaluating trading performance as other characteristics such as awareness, experience, and competence.
COMMON EMOTIONS WHILE TRADING
Trading psychology is unique to each trader because it is impacted by their emotions and pre-determined biases. The following are some of the emotions that influence trading:
Fear
When it comes to stock trading, one of the first feelings that come to mind is fear. It's a natural emotional response to a looming danger. When we enter a trade, we anticipate the market to move in the way that we predict. But when the movement is in the opposite direction, fear begins to sneak in. The prospect of a loss instills dread in our minds, prompting us to make rash decisions to square off our positions without planning ahead of time.
Greed
Greed is the next common emotion that we have to deal with daily. Simply put, it is an excessive drive for profit. This is a tough emotion to have because traders are in the market to make money. In an attempt to squeeze out every last penny, greed tempts the trader to stay in a winning transaction longer than is fundamentally or technically advisable. Greed among traders is most common in a bull market when traders trade without any regard for risk.
Regret
Regret is a feeling that can manifest itself in two ways: a trader may regret making a transaction or regret not making one. Regret may motivate a trader to enter a trade after originally missing out due to the stock's rapid movement. This results in a breach of trading discipline, which could result in significant losses for the trader. All we need to know is that it's perfectly acceptable to miss a few opportunities or make a few terrible trades. No one can take advantage of all of the market's opportunities.
Hope
Trading based on hope is akin to gambling. Many traders let the prospect of recovery keep them from cutting their losses. When a transaction goes against us, emotions like hope enter our minds, leading us to believe that if we hold on to the trade just a little longer, any losses will be erased. Only by recognizing the role of hope in your trading conduct before it destroys your capital can you avoid it.
WHAT IMPACT DOES BIAS HAVE ON TRADING?
Trading is influenced by biases, which are defined as a predefined personal preference for one product over another. As a result, they may obstruct our decision-making while trading because they may confuse our judgment and drive us to act on instinct rather than reasoned fundamental or technical research.
This is because trading bias implies that we are more inclined to trade an asset on which we have previously had success or avoid an asset on which we have previously lost money. Traders must be aware of their unconscious biases to overcome them and approach the markets with a more rational and calculating mindset
HOW TO AVOID EMOTIONAL TRADING?
Identifying your personality features early on is one of the keys to establishing successful trading psychology. If you have impulsive tendencies or are prone to react out of anger or frustration, you must be honest with yourself and admit it. If this is the case, it is critical to keep these characteristics in check while actively trading, since they might lead to impulsive and ill-advised actions with little analytical support.
It is critical to have a trading strategy in place to ensure that you meet your objectives. A trading plan serves as a template for your trading and should include information such as your time commitments, available trading funds, risk-reward ratio, and a trading method that you are comfortable with.
Patience is essential for discipline, and you must be patient with your positions. When you act on emotions like fear, you risk missing out on a profit by closing a position too soon. Be confident in your analysis. It is imperative to have a trading strategy but it is also important to bear in mind that no day is the same in trading and one cannot claim the existence of winning streaks in the market. Considering this, you should get used to assessing how the markets change from day to day and adapting your strategy accordingly.
A trading journal will allow you to keep track of all of your losses and gains, as well as the emotions you felt throughout each trade. It can be used to keep track of when you decided to cut your losses and what price the asset eventually reached. This will allow you to determine whether or not you made the correct decision
TO SUM UP
Trading psychology is all about how you think while you're trading, and it might help explain why you're making money or losing money. Before joining a position, you must be aware of your shortcomings and biases, but it is also essential that you are aware of your strengths.
Keep in mind that the stock market is a volatile environment. Furthermore, it is hard to foresee the direction of any stock's price movement. While there are signs that predict a particular tendency, any external event can quickly reverse it. As a result, it's critical to maintain emotional equilibrium and a sound mental condition when making strategic trading judgments.
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Yes it is true most the decision are made on emotions and individual likings. Price or cost is mostly state of mind to decide , to what extend the individual can to push the limits.
This article is well illustrated on thinking and keep going further deep ..
Good Job
As humans it is very challenging to contain emotions and to be unbiased while trading , several times have been under Representative / Status Quo bias. it's very well articulated and written clearly !! continue in uncovering more bias and emotions of humans !
Nicely written Chaithanya
Good One💯