It’s All In Your Head! : Why is Psychology So Important In Trading?

In their quest to become successful, traders will attend courses, seminars, listen to podcasts, and read as much trading material as they can lay their hands on. This enables them to acquire the skills to review the financial value of a company before deciding to purchase stocks, then analysing the markets to check how their stock is performing and finally deciding if / when they should sell the stock. This is the technical side to trading but what is often overlooked is a trader’s mindset referred to as ‘Trading Psychology’, which is equally as important.

Trading Psychology is when we refer to the emotions and mental wellbeing of a trader. Traders are known for their quick thinking and fast actions, as it enables them to buy / sell stocks at a moments notice. Their discipline and state of mind is fundamental when trading as if mistakes occur — they can prove costly.

Fear and Greed:

Fear and greed are two common emotions traders can experience. It’s easy to become overwhelmed with these emotions and make rash decisions! Comprehending your emotions and learning to keep them in check is an important skill.

We’ll show you exactly how to do that…

Overcoming Fear in Trading:

Traders may receive bad news which has affected the economy and stock markets, causing them to become nervous. This in turn could lead to them to overreacting and feeling pressurised into selling stocks. The trader has to remove themselves from incurring losses, but this also means they’re missing out on the opportunity to obtain potential profits. Understanding how to react in these situations will enable the trader to make decisions that are not based on an emotional response. Remember knowledge is power, it can also help you overcome fear.

Overcoming Greed in Trading:

It’s hard to bring greed under control, it is a fixed pattern in our behaviour to want to try harder and achieve more. Therefore, traders need a trading plan to adhere to and not be guided by decisions made on impulse. A well known Wall Street saying is ‘pigs get slaughtered.’ Now ‘pig’ is an old slang word used to describe an investor who is viewed as greedy. They are not focusing on their trading plan, but are holding onto a stock that has already achieved great results in the anticipation the stock will continue to do well. Unfortunately, a price reversal occurs and the price of stock declines, resulting in the ‘pig’ getting caught out.

Rules are there for a reason!

Traders are required to create rules for when they trade, so they know when the right time to enter a trade is and the right time to exit. You follow the rules not your emotions. Decide on the maximum amount you ideally want to make for that day and the maximum you are prepared to lose. If you achieve your profit goal — then great, the day has been a success, bank your winnings. Same applies to the losses, once you have lost a set amount of money then it’s time to exit. As tomorrow is another day…