There are many necessary skills that traders need to be successful in the financial markets. For example, the ability to understand a company’s fundamentals and the ability to determine the direction of a stock’s trend.
Yet neither of these technical skills are as crucial as a trader’s mindset. The ability to control emotions, exercise discipline, and think quickly are skills that fall under the trading psychology.
Trading psychology refers to the mental and emotional state of traders. It tells you what can affect your overall behavior when trading. The subject also deals with your discipline and risk-taking.
Your mind is essential in making sound trading decisions. And knowing what you think about trading can be just as crucial as your knowledge of the stock market.
Understanding Greed and Overcoming Fear of the Market
Your emotions play a big part in your trading approach and being able to contain them impacts your ability to be a productive trader.
There’s an old saying on Wall Street – “pigs get slaughtered.” The saying refers to greedy investors hanging on to winning positions too long, trying to get every last tick.
If left unchecked, personal greed can convince you to remain in a specific position for far too long, because you feel the need to squeeze every cent out of that position.
Greed could also be part of the reason why you tend to deal with risky and speculative positions.
Such emotion is most common during the end of a bull market when speculations go crazy among investors.
You must learn how to formulate a trading strategy based upon practical business decisions, and not from emotional impulses.
When traders get bad news about the overall market or specific equity, it’s common to get scared. They may overreact. As a result, they may feel compelled to liquidate their holdings and go to cash or to avoid taking any risks. If they do that, they might prevent certain losses, but they may miss an opportunity to profit as well.
Fear is often present in bear markets. Fear can also worsen as it turns into panic, which can result in significant selloffs.
Setting and Following the Rules
Quantifying fear can help. Thus traders, including you, need to think about what you are afraid of and why you are scared of it.
If you’re going to pursue a trading career, you need to make sure that your emotions and mindset are both in good condition.
The psychological aspect of trading is essential. Traders usually need to be smart and fast with their decisions, darting in and out of shares on short notice.
You need to have a certain presence of mind to do that. You will also need the discipline to follow your pre-established trading plans and recognize when to book profits and losses.
An efficient trader knows how to handle their emotions – even when everyone else is losing control. To achieve this condition, traders need to create rules. They should plan guidelines based on their risk-reward tolerance for when they will enter a trade and exit it.
Remember that containing emotion and exercising discipline is key to making money. Moreover, being aware of how fear and greed can impact trading, developing trading rules, experimenting, and periodically self-reviewing are vital to a trader’s success.