Beyond the technicalities of trading and stock investment, is an overlooked aspect of trading and investment decisions. The psychology of a trader or investor is one that needs to be recurrently balanced if consistent profitability is to be achieved.
Trading, as we know it, is not tied solely to the understanding of chart patterns, fundamental analysis, sentimental analysis, or even a company’s performance in stock trading analysis. These external factors are very important to trading and investment processes but are not the core of profitability. I see these external factors as compliments for trading success.
Let’s delve a bit into what psychology really entails, narrow the concept of psychology to investment decisions, and understand how trading psychology plays a key role in every trading and investment outcome.
Take a step towards becoming a successful trader by opening your trading account today.
A Quick Understanding of Investment/Trading Psychology
When looking at the concept of psychology, we are trying to understand how the mental environment of a person works and how certain mental frameworks affect decision-making, and inevitably the outcome of such decisions.
What we know as the Mind is that part of our entire being responsible for our thought patterns, emotions, and decision-making ability. The Mind literally controls the outcome of a person’s life and if not properly understood and controlled could be very disastrous to the individual concerned.
Going forward, trading psychology is simply the understanding of the thought patterns, belief systems, emotional charge, and decision-making ability of a trader or stock investor. The ability of any investor to understand how their mental framework works, is key to avoiding emotion-driven investment decisions which oftentimes lead to poor investment outcomes.
When journeying through the corridors of the financial market, a trader will be faced with several emotional challenges which he must learn to overcome, in order to scale through and emerge on the other side a success, and one to be celebrated.
In this blog post, I will be discussing some basic emotional challenges traders/investors can likely experience whenever they choose to become participants in the financial market in any way.
Fear
Fear is a defense system against a perceived threat. It’s purely emotional, but stems from past experiences one has had with the environment, creating a distorted perception of that environment; whether it is our conventional physical environment or the market environment, it works in the same way.
Fear really does not exist until there is an initial interaction with an environment through which a negative outcome was experienced, thereby creating and storing negative-charge energy as thought patterns which in return, alter how we interpret the same circumstances when next we experience them.
A trader who just took a huge loss in a previous trade has a likelihood of perceiving the market as threatening in subsequent trades. Most times, this creates a repetition of results because our fears create our realities. Fear could begin to create a certain effect on trading outcomes, ranging from the immobilization of the trader to the inability to accept a losing trade, down to the trader’s inability to wait for maximum profit actualization.
Greed
When profit appetites are not controlled, we can confidently say that greed is at the door. This could lead to overleveraged trades and preposterous investment decisions. Traders are in the market to make a profit, but what amount of profit is enough?
The inability of traders to objectively analyze price action and ascertain possible reversals or pullbacks could lead to a loss of already accumulated profit and a loss of investment portfolios. The greedy trader always feels that price will keep going in one direction without a correction. This emotional state blinds the trader from seeing what the price is doing currently and that there could be impending corrections.
Regret
This trading emotion stems from a seeming lost opportunity which in the trader’s mind could have been utilized. In most cases, due to fear or second-guessing on the trader’s part, he forfeits a very good trade setup which later plays out as anticipated.
Regret is spotted when traders start asking the ‘had I known’ series of questions. Dwelling on these thought patterns could create a negative charge which in most scenarios, leads to impulse trading; the result in most cases is damaging to the trader’s account. The trader’s ability to accept missed opportunities and look forward to better trade setups while learning how not to second guess themselves is a key to overcoming the malady of regret.
The Fix
Understanding your emotion is key to controlling them. Knowing how your mind works define the foundation of how you respond to them. Place objectivity as a criterion for trading. Even when using your intuitive ability in the marketplace, ensure that they are backed up by proper analysis of price action.
Pay attention to proper risk management and ensure that your profit and potential loss targets are set on every trade. This is how you become a successful trader or stock investor.
Take a step towards becoming a successful trader by opening your trading account today.
Featured Image Credits: SoFi
