As a trader at any skill level, you know how important it is to do your homework and understand the status, fundamentals, and inner workings of a company you’re investing in. It is also important to recognize the direction of market trends. Still, it is even more important to maintain a high level of discipline over your emotions.
business psychology
As a trader, you know that you often have to make quick decisions because you are quickly getting in and out of stocks. This is where trading psychology and discipline are important because he needs to be in a certain frame of mind to stay on top of his investment efforts. A big part of this discipline is controlling your emotions and fully adhering to your trading plan and understanding when to post profits and losses.
understanding your fears
When you’re involved in trading and stocks are down, it’s understandable that you’re a little scared. Unfortunately, this fear can cause you to overreact and liquidate your holdings, go to cash, and refrain from taking further risk of losing money. This action could save you some losses, but you also risk missing out on potential profits.
One way to help deal with fear is to understand what fear is. By definition, fear is a natural reaction to what is perceived as a threat. In trading, that fear could be a reaction to a threat posed to your profit or potential to make money. You will handle fear better if you consider exactly what you are afraid of and why you are afraid of it.
If you reflect on your fear issues at a time when you are not emotionally charged, you will be better able to determine how you might react in a given situation. For example, if you think things through ahead of time, you may be able to identify your feelings of fear during a trading session. By acknowledging your fears, you can focus your efforts on overcoming emotions that might distract you from completing a successful trade. This exercise takes practice, but it is necessary to preserve the health of your portfolio.
Greed is your worst enemy
A common statement quoted on Wall Street is pigs are slaughtered. When investors are winning, many of them hold on to their winning positions much longer than they should in the hope of getting as many ticks as possible. This is risky and can result in a devastating blow to your position.
Despite being aware of the greed factor in trading, it is a difficult emotion to overcome. Many traders have an inherent desire to keep doing better, which is why they push the limits of their trades. It is important that you recognize this emotional trait and build your trading plan on rational trading decisions, not emotions.
The importance of following business rules
To avoid the risk of emotions undermining your trading efforts, it’s a good idea to set guidelines based on your risk-reward ratio before entering a trade. These trading rules can function as a safety net that can prevent you from catastrophic loss. For example, if a particular stock is trading at $15 a share, you might consider exiting at $15.25 or even below $15 to put a stop loss and exit.
Your rules may not only apply to price targets. You may consider certain macroeconomic reports or specific positive or negative earnings as a guide that will affect your trading decisions. For example, a signal to exit a trade could be if a large buyer or seller enters the market.
Another guideline could be a limit on the amount you win or lose in a day. For example, if you earn a certain amount of earnings, according to your earnings rule, you are done for the day. On the contrary, if he loses a certain amount, it could be a signal for him to go out and come home for the day. Sometimes it’s better to just take what you can get and walk away even if the market has the potential for bigger profits.
Creating your business plan
A good rule of thumb to follow in trading is to learn as much as you can about your area of interest. If your primary interest is in a certain area of technology, you should learn as much as you can about that industry.
You should include a plan to educate yourself as part of your overall business plan. There are many trade publications and other resources where you can learn about your area of interest. Learn about industry seminars, conferences and forums where you can interact with industry experts. Knowing the functionality of your chosen industry is important, but you should also spend time understanding the financial health of your industry. Arming yourself with knowledge of your particular industry can help alleviate some of your fears with trading.
While it’s a good idea to develop a level of expertise in your chosen industry, it’s also important to experiment with new processes. For example, what other options are there to mitigate the risk? How will moving your stop losses affect your trading strategy? Experimentation is a good way to learn about trading and helps you contain your emotions during a trade.
Your trading plan should include intervals where you review and evaluate your performance. Some of the components you should check include:
· How updated are you in the markets?
How prepared are you for a trading session?
· How are you progressing with your educational efforts?
Periodically evaluating your performance helps you correct past mistakes and prevent similar mistakes in the future. It also helps keep your mind clear, in the right zone and psychologically ready to trade.
Bottom line
As a trader, you need to be able to read a chart correctly and have access to the right technology to successfully execute your trades. This is the mechanics of trading. You should also consider the psychological component of trading. This involves creating a solid business plan, establishing business rules, and researching your areas of interest. All of these components can help you overcome many of your fears in trading.