When it’s about trading, most of us tend to focus on numbers, charts, the performance of a company, and many more among other things. However, most of us tend to overlook a critical aspect - Psychology. Trading psychology is as good a skill you need to be a successful trader and get your calls right.
While you must not base your trading decisions on emotions, knowing the common trading psychology can help you navigate markets better and steer clear of pitfalls. So, what are some of the most common psychology of trading? Let’s find out.
It is one of the most prevalent trading psychology that stems from several factors. For instance, if you have placed a trade and the market goes in the opposite direction than what you anticipated, fear creeps in. The feeling of potential losses makes you fearful, which may cause you to square off your position without a proper plan.
Also, because of fear, you may continue holding to a loss-making investment. Thus, fear not only leads you to stick to losses but also prevents you from not initiating a trade altogether.
Another common trading psychology that most investors tend to battle all day is greed. The desire to earn more profits often leads to poor calls that can be detrimental to wealth creation. For example, when markets are in a bull run, valuations of fundamentally sound stocks tend to inflate, and even penny stocks seem a profitable bet.
However, the greed to chase them can result in wealth erosion. Also, it’s greed that tempts traders to hold onto their position longer than expected. In the long run, greed can cost you significantly and affect your trading strategies.
Hope is a tricky trading psychology. While it’s good to have it, hope devoid of logic can result in a disaster. For instance, if you have invested in a stock whose price starts to drop after the initial surge, its hope that forces you to hold onto it for a little longer to recover the losses. While there’s nothing wrong with it fundamentally, mindless hope can result in capital erosion. If all indications suggest that prices will not surge, it’s better to exit.
Recognise the factor resulting in hope in your trading behaviour and continue with it if it’s backed by logic and numbers. Don’t attach hope with greed, as it’s akin to gambling.
There are two ways through which this stock market psychology can creep it. You could regret placing a bet in the first place or not placing one at all. It may lead you to get into a trade after missing out initially or rue your decision of not entering into trading. For instance, if a stock has rallied and you held yourself back at the last moment, regret creeps in for not investing.
On the other hand, if you have invested in a stock just because others have invested in it and its price starts to fall, you may regret putting your hard-earned money in it. Understand that you will miss out on some opportunities in trading, and some trades will go wrong. Keep your calm and move ahead.
FOMO, or the fear of missing out, leads to anxiety that others are benefitting while you are missing out. Sometimes, because of this trading psychology, you end up chasing fundamentally weak stocks or taking positions after the opportunity window has closed. FOMO, more often than not, results in impulsive behaviour, and you become a victim of herd mentality.
It can also cause overly high expectations and the unwillingness to wait. FOMO leads to neglecting trading plans and exceeding levels of risk.
Ego stems from losing more trades than you win. Alternatively, if you have the habit of winning more trades, losing a few can hurt you. You find it difficult to digest the loss and in a bid to overcome that, can indulge in revenge trading.
Ego robs you of your reasoning ability, and you fail to see the big picture. It makes you act irrationally and lowers profits significantly.
To keep emotions at bay while trading, you need to:
Knowing your limit will prevent you from going overboard. If you are unaware of something, embrace it, and know how much you can afford to lose. This will prevent you from undertaking irrational decisions.
Always have a risk management strategy in place to counter risks associated with trading. A proper risk strategy will come in handy in case things don’t turn out the way you want them to be.
A trading plan encompassing skill assessment, doing your homework, setting goals, and formulating entry and exit rules will help you ward off emotions. Additionally, sticking to discipline by following the plan can result in consistent and profitable trading.
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