Psychology of Trading

February 21, 2014 8:23 am

psychology_iconTrading is an infinitely interesting phenomenon that as a whole is much more than the sum of its parts. Just like a clock can’t work without having everything in place, a trader can’t be considered good without knowing the ins and outs of the process.

And just like the different gears and wheels connect and form the intricate clockwork mechanism in order to give us something almost magical in its simplistic perfection, so do the different methods and techniques unite to give trading that unique sense of wonder and establish it as an art form.

Psychology plays a great role in trading. If a trader even dreams of becoming good at it, he needs to be able to harvest his own psychological energy and make it work for him; become a master of his emotions and be attuned with himself; be confident enough in his abilities in order to act with resolve, yet humble enough to double check everything and carefully think about what he is doing and what kinds of risks he is taking. If you think it’s easy to become a good trader, then you have a lot more to learn about the art of trading.

Trading Psychology

In other sections of our site we’ve given you a guide to technical analysis. It’s undeniable that you will need to be a good analyst in order to be a good trader. However, acquiring technical knowledge of the processes, trends, charts and methods is but the first of many on the road to becoming a competent trader. You need to realize that technical analysis gives you the key to room. Once you venture into that room you realize that it’s a new realm possibilities but that this comes at a cost – there are many doors leading out of the room and you will need to figure out which one to take if you want to reach your destination – success.

Technical analysis can give you hints on the way, and tell you what is the most likely to happen, but you are the one who will have to make the choices. This is where the psychological component comes into play. You will need to take actions and the further you venture into the field of trading, the more you will realize that there is no one destination, and there is no one path. If you are to be victorious, you will need patience, discipline, as well as a master of your emotions – one of traders’ greatest enemy. Fear not, however. We’ve helped you with the technical part. We will help you with the psychological part, as well.

Fear

Fear is one of the most basic human emotions and one of the biggest obstacles for many who are trying to achieve something. In your case, you want to be a good trader, but sometimes fear is going to stand in your way like a big wall you don’t feel like you can overcome. When you’re under the influence of fear, you will make brash decisions and will make wrong choices. You won’t take calculated risks and you will passively lose all that you could’ve gained. Your overreaction to this natural biological response to a perceived threat is what’s causing you to fail. It’s also affecting your confidence which is one of your best assets. A trader must be confident (note that we are saying “confident”, not “arrogant”; there is a difference) if he wants to be successful.

A big part of this overreaction to fear is because most people don’t understand it. The psychological component of trading has always been neglected by the majority of the traders, which is not surprising considering how little we generally know about the human psyche. However, in a general, and maybe more applied way, we can definitely say that we know enough to help you improve your trading.

Let’s say you get bad news. Stock you thought would go up are actually going down fast. Your pulse starts raising as adrenaline and cortisol are pumped into your bloodstream. You are afraid of the outcome so you start looking for a way out. There has to be something you can do in order to mitigate the effects of the decision, right? What you would do in a normal situation is take nervy decisions. You lose your cool. You lose your ability to think straight. Fear has gotten the better of you. You must prevent that from happening.

Steps To Overcoming Fear

The first step to overcoming fear is to acknowledge it. There is no shame in being afraid. We are all afraid one time or another, but you need to realize that fear is changing the way you think, which means that you shouldn’t make decisions when you’re afraid. If you think that not taking any risks, even when there is a big chance you will profit, or simply liquidating your holdings is the right thing to do because market has taken a dip, then you’ve lost the battle.

Don’t get us wrong, this may be a sound decision, but you need to make it rationally and not emotionally. The way to do it simple – once you’ve acknowledged fear and fear-based choices, just take a little break and clear your head. You need to figure out what to do but those decisions need to be yours. Don’t make decisions while you’re affected. Once the affect is gone and you can see more clearly, reconsider what you were about to do. You will be surprised at the difference in mindset. Once your head is back in the game, nothing can stop you. Just don’t let fear get the best of you.

In subsequent sections we will help you to better understand yourself in certain situations. We will give you more information and help you overcome your emotions, manage your money and stress levels, stay disciplined and more. The psychology of trading is an interesting, fascinating and useful subject. Don’t underestimate it. It will definitely make you a better trader.

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