What the hell is trading psychology? Why is it so important?
The word trading psychology for most sounds very complicated and I understand that completely.
So let’s change this to a much simpler word i.e. ‘Trader’s mind-set’
The right ‘Trader’s mind-set’ will help him/her to create financial abundance and any other mind-set will only contribute to losing money.
Well! How do we define the right ‘Trader’s mind-set’?
The right ‘Trader’s mind-set’ is an ability to think rationally and maintain self-discipline and not to succumb to emotions while trading. Simply put, To be able to follow a course of action as planned before getting into the trade and not get tempted to modify his/her course of action in between market movement.
We ‘humans’ are emotional beings, all of us are designed at the base level to react in a way that avoids any kind of pain, be it physical or mental and therefore, react impulsively affecting the growth on a broader perspective.
Well! You might wonder how difficult is it to follow a trading plan while engaged in a trade? It surely is simple but not easy.
So let me take you on a tour inside the trader’s mind while engaged in a trade.
Before proceeding you need to understand that trading is the only profession where your profits and losses can be seen in real-time on your terminal i.e. if you buy a particular stock and the price goes up you can see your trade in profit instantly and if it goes down you see your profits going down. I want you to understand this because it plays a major role in affecting your psychology while trading.
Let’s say you buy a particular stock, the price goes up and your trade is in profit, let’s say you are in a profit of 5000 and suddenly price starts to fall (it can fall). Your profit of 5000 reduces to 2000 and further reduces to -2000. I want you to imagine yourself in this situation.
Your excitement level was high when you are looking at a profit of 5000 and you would probably be telling yourself that “It’s so simple to make money!” Possibly making plans of how you could do this every day and become financially free. And as the profits reduce from 5000 to 2000, you tell yourself that this is just a minor fall and it’s going to shoot up. Now imagine that it shoots up to make a profit of 10000, you are super happy right?
Well this is just our favourite wishful scenario! Let’s get back to our original situation where we see our profits falling from 5000 to 2000. You are really not that excited, you are telling yourself things like “This is just a reverse movement to go up higher up” or “I wish I would have closed the trade when it was at 5000 profit!” Pretty mixed up feelings right?
Now when the market goes down to -2000 loss, you are Angry, you start hating yourself and you so desperately want the market to go up that you don’t want to close your trade unless it goes up. Even if the technicals are showing you otherwise. In simple words, your analysis is saying that there is a probability of the market going down, you just don’t care and start looking for reasons it could go up.
Now the risk management is out of the window, and this is just the beginning of a big disaster. Let’s say the price goes up which made you feel a lot better and then falls down to -5000 (and guys it can fall down. Most of us, while engaged in a trade don’t think it will but it definitely can.)
By this time you are no longer rational you are just miserable. Now instead of closing the trade, you plan to buy again convincing yourself that you are getting a better price and if it goes up recover faster. You also know that if it goes down you will be losing at double the rate you were before, but you don’t seem to care.
And before you know it your account has taken a huge hit and also your MINDSET.
After that how do you think you are going to approach the next trade, Don’t you want to take revenge?!
I’m pretty confident those who are trading and are reading this reminds them of themselves at one point in time. And I know this because I have done this many times myself and also spoken to more than 900 traders who have come for help to our firm Hexaurum.
And I hope the ones who are new to the markets have gotten at least a slight idea of the importance of psychology with this example.
How I define trading psychology is – “It is a trader’s mind-set on how he or she reacts towards the market movement when engaged with the trade”.
So is there a way how we could have a right trader’s mind-set? Find out in my next blog.