Why Trading Psychology Is Important

Introduction:

Trading is a high risk job where stakes are bigger than you think and at the same time it is a highly profitable job if you master it. A professional trader knows that in trading it’s 10% and the rest 90% is psychology. If you mastered the psychology in trading then you have almost cracked the code of trading. Psychology is a big factor in trading, it can make or break the trader from the market.

Today we will understand the psychology in trading, key psychological factors that affect the trading and how to manage and excel the mindset while trading.

Importance of Psychology in Trading:

Psychology plays a crucial role in the journey of trading. It is the emotional factor of a trader which impacts their decision making and its outcome.
Trader is also a human being born with basic emotions and a specific mindset which can be seen in their trades and logic behind the trades they take. Psychology is a key factor in decision taking and the gap between loss making and profitable traders.
Even if you have mastered the depth of the market like Technical and fundamental analysis still it will fail without proper mindset. A broken mindset will never let you hold the profit and will never let you cut smaller losses.
If you are in small profit a broken mindset will tell you to play safe and take exit as soon as possible which never let you make bigger profits and in the same time if you are in loss and clearly you are seeing that your strategy has failed but your broken mindset will never let you cut that trade making you think that lets exit once it comes back at entry price, let’s exit once it recovers some of the loss and it keep going on.
And this is basic human nature and there are specific reasons behind that, you cannot become a successful trader with normal human psychology. You have to become a wolf in the market.

Psychological Pitfalls in Trading

1. Fear and Greed:

Fear is one of the reasons for unsuccessful trades, fear takes over the ability of decision taking and that leads to the hesitation in taking entry at the correct point even if the setup is working properly. Hesitation leads to the missing opportunity.Even if you take the entry, fear will make you take a premature exit.
On the other side greed makes you do overtrading where profits gets converted to losses and it makes you hold on to losing positions even if the setup is going against you and you start taking over risk in trading.

2. Overconfidence:

As a new trader after taking a few successful trades your confidence will be on the peaks which will lead to over trading and higher chances of loss.
There is a term known as Illusion of control, it means you will start to believe that you have greater control on the situation than you actually do. In this situation you will feel that you have cracked the code of trading and get trapped in the illusion and make bigger losses.

3. Confirmation Bias:

Sometimes Traders do not see the reality and want to see what they believe. They come to trade with a fixed mindset which leads to huge losses.
It is so dangerous to not see the reality and living in your own world while dealing with finances is crazy.

4. Loss Aversion:

Traders take a position and fix their mind that either profit or loss which leads to the overholding of the instrument. In options trading if you hold the contract more than needed it’s premium will decay and absolute loss will be there.
A trader should not trade with a fixed mindset or at least they can cut it off when a trend is going against you.
Not losing the capital is equal to the gain in the market.

Importance of Discipline and Patience in Trading

1. Create a Trading Plan:

Having a plan is very important in the journey of trading. Plans keep you on the track and if you stick to it then deviation will be very less. Plan consisting of Goal in short term and longer term, No. of trades per day, Loss limit of the day, Profit Aim, etc. Sticking to the plan is way harder than making the plan and that needs discipline.

Having discipline can help traders to avoid emotional decisions.

2. Power of Patience:

Taking position and Taking position at the right time are a lot of different things. Having patience and waiting for the best opportunity is the right way to trade. Experts suggest waiting for the right opportunity to take a position.

How to Control Emotions in Trading?

1. Mindfulness and Meditation:

Being aware and mindful while trading will always keep your mind relaxed because you won’t be missing anything. Staying calm and observing everything like an Eagle is the key for emotional control while trading. Observe every step you are taking while in the position. If you are already in the position you must keep calm and observe the market and be ready to cut it off if it hits your stop loss. We say cut your finger before it becomes so big and start asking the whole arm.
To keep that calm and mindfulness you have to do the meditation regularly. It’s all about having calmness and avoiding the hurry. You will rise as a successful Trader.

2. Maintaining a Journal:

Maintaining a journal is always better for a trader to track your journey. You have to write all the reasons behind taking that trade and then reason behind the exit of the trade. You will understand what are the mistakes you are doing while trading by cross checking the journal and actual outcome.

It will keep track of your mistakes and correct decisions which you can reduce gradually over the time.

3. Have rules and limits:

Have strict rules while trading in that you should have predefined entry and exit points. If you are planning to take a prior entry or exit, the exact reason should be mentioned which would help in the future.
Limits should be defined before trading on percentage of profit booking. There should be a limit of maximum trades per day, Limit on losses.

4. Have Breaks regularly:

You must step away from the screen a few times while trading. It will give us a clear mind and wont let us go through burnout and emotional fatigue.

Build mindset in the long term process

1. Focus on the process:

Focus on the process by being consistent and trade execution over the time. Sticking to a strategy and working on it again and again works like magic.
Having a process oriented mindset will lead to long term success.

2. Learn from losses:

As discussed earlier we need to track our trades and write every reason behind the trade. Once you start doing that you can see the journal and start learning from the losses. We say that there are no bigger teachers than losses if you start learning from them.

3. Being tough and continuous learning:

As a trader you must understand that you have to be tough as well as ready to learn. If you show your weakness, the market is going to crush you.

Conclusion

Having a clear mind and calm is very important while learning in the market. Being aware and resilient in the market is very important to keep the psychology in track and keep up with the market. Meditation is the key to calmness and calmness leads to a better outcome. Discipline and patience is very important for a successful trade and maintaining a journal is also important to learn from the trade.

Also Read: What is trading? – Types of trading in India

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