Since our childhood, our parents always discussed the losses one of our relatives faced due to the stock market. But they never addressed the reason behind their failures.
According to the sources, only 8 out of 132 crore people invest in mutual funds, of which 50% don't invest due to fear. Containing emotions, thinking quickly, and exercising disciplines are crucial for trading- which is what trading psychology is all about!
When discussing trading in the stock market, we focus on chart patterns, company performance, and other external factors. But we often ignore our emotion-driven trading decisions.
Factors Affecting Our Trading Psychology
Keeping the right mindset is one of the essential factors in being a successful trader. Also, trading psychology is distinct for every trader, as it is influenced by each individual's own emotions and pre-determined biases. Some of the feelings which impact trading are:
Fear
Fear is a natural emotional reaction to an understood threat. Fear starts edging in when the market moves are in the opposite direction.
Greed
Greed; a trickster whose desire never ends! Greed starts developing when the market anticipates in your direction, but at the time when you should stop.
Regret
Regret when your mind said a Yes, but your heart said NO! Then, learn from your mistakes, calm your mind, and move on.
Fear of Missing Out (FOMO)
FOMO; social anxiety after seeing others benefit from the opportunities, and you are NOT! Your time will come. Clear the negative clouds and start learning.
Ego
It is a tiny spark that can burn your invested capital! But, always remember, you will probably lose more trades than you will win. So learn from your mistakes and move ahead.
Steps to Overcome Emotional Trading
Traders who have better control over their emotions tend to make logical decisions in the market than those who follow their feelings. Hence, we are presenting you with some points that might help you to overcome emotional trading and make your trading journey successful:
1. Having Lower Expectations
The stock market is not a gamble or a casino where you can double your income instantly! Instead, it's a business where investors use their research strategies, gets meaningful insights, & invest their earnings to gain maximum returns.
If we start investing in mutual funds, we should expect a maximum of 15-18% returns yearly. Don't rush or expect higher returns.
If one expects to earn 100% of their investment, they might end up with just 1% or nothing. So rely on real income & sustain longer in the market.
2. Create a Trading Journal
It is necessary to keep an eye on your trades. Therefore, it is advisable to maintain a trade journal to track your daily transactions.
Grade your existing trades on a scale of 1 to 10. Pen down the research strategy you use to buy or sell trades. The past performance, insights, company revenue, charting patterns, etc., should be noted.
It will help you identify your good or bad performing trades in the market. You can summarise your portfolio and know your gains at the end of the day, week, or month.
Also, note down the mistakes or opportunities you felt during the trade timing. It will help you acknowledge the insights about yourself & avoid errors in the future.
3. Gain Expertise in Single Trading Instruments
If you are an unprofitable trader, it is essential to focus and learn about one trading instrument.
If you direct your brain in all the instruments-equity, bonds, futures, options, commodities, currencies- it will lead you to nowhere, and you will end up with nothing!
For instance, a 9 to 5 working professional should focus on commodity instruments, as one can trade them from 7 pm to 11 pm. If one has time in the morning, one can concentrate on equities.
Depending upon your taste, likings, or knowledge, direct your mind on a single trading instrument for the meantime.
4. Keep Losses In Control
Usually, an investor faces losses when they don't have emotional control.
For instance, there are times when the price of your favourite trade is on the edge of stop loss. Then, based on your assumptions that it might rise in the future, you remove your stop loss & attain more decline in the period.
We advise you to create a minimal risk strategy to overcome such a crisis. For example, if a person has invested INR 1,00,000 in the market, they must only invest their 3% to 4% funds in risk trades.
Always remember, there is always risk in mutual funds. Hence, taking a minimal risk will help you on a psychological level.
5. Make a Systematic Trading System
Creating a systematic trading system will help an investor to achieve long-term goals.
Carefully use technical analysis of market data such as price or volume to detect market trends. Then, hold the trade position from 9 am to 3 pm and pen down its performance and insights.
Tracking them every day will help build a portfolio to generate maximum returns and efficiently minimise risks. Also, use the fundamental analysis to ascertain your trading worth.
Final Thought
Understanding trading psychology and implementing it is a time-consuming process. You have to refine your trading psychology over long periods constantly.
To sum up, remember these three golden principles of trading psychology
- Listen to Your Mind
- Be Agile, and
- Always Stay Updated
We can't control the market. But, we can manage our emotions & act according to the market situations.
All we need to do is, Believe in Own Insights!
