Psychology Of Trading in stock market
Psychology of trading is nothing but the brain game that power the trader to trade profitably. Many advices are there on how to trade keeping your emotions (market emotions as well as traders emotions) under control and what are the best ways to stay out of a trap.
Importance of trading psychology/ emotions?
Hope is one of the most important human emotions. But when it is intertwined with greed, fear and regret, it stops profits. To ignore this one element of psychology can turn, many times, profit into losses. The stock market is all about money. There is information on graphs, trends, strategies, technical and fundamental analysis. Still a very important aspect of human nature, his psychology plays a very important role in rewarding or punishing in money making.
Following emotions need to be controlled while trading in the stock market:
1: Controlling small losses (emotion involved regret)
When we make blunders by making big losses, then we regret. We are filled with the feeling of sadness and disappointment for a loss done.
When you know you are making losses, control then and there. One of the lessons we have to learn here is to evaluate what went wrong and move forward. Small losses can are be controlling line and it reduces the anxiety of regret along with the anxiety of losing fortunes.
Have a loss limit plan
2: Reducing Risk (fight Fear)
Fear is a good emotion if it takes you out of a falling trade. However, fear can work unfavourably when the trader becomes fearful in entering the trade because of the previous loss. People have known to commit suicide out of fear during market panics. But no one has ever thought of committing suicide because of greed. If fear is showing up in your trading, reduce your risk. The smaller the potential loss, the less scared you are of the trade.
When there is fear, steer clear! When in doubt, get out!
3: Excessive desire for Profit Taking (emotion involved Greed)
Greed is an antonym of fear. It means desire from a trade or stock to provide immediate and superficial returns. When greed is hovering over a trader, his only focus is on how much money he can make while staying in a trade. But he does not realize that profit cannot be claimed until a position is closed. Till then the trader has a paper profit. At this time don’t forget the practices offered by SEBI to put ‘stop losses’ in the trade. The discipline of understanding the technicals are vital and equally important to control greed factor.
Don’t marry your positions
The other greed that harms a trader trades, when he starts by increasing position size. The trader thinks of doubling the position in anticipation that he can double the profit. But along with profit his future prospect of loss also multiplies. The best way to conquer the emotion of greed is to religiously follow risk rules. If your wallet allows you to take the maximum risk of rs. 10,000, then never take a position size that increases that risk. This is the only way to safeguard your wallet.
Winning traders play defence before offence.
The Bottom Line :
Controlling your emotions does not give you the edge over trading. It simply teaches you to master your emotions for long-term trading success. With persistence, you can control your emotions and losses.