“Trading isn’t about the number; it’s about mastering one’s mind.” ~ As cliche as this may sound, it is very accurate.
Trading can be defined as the act of buying and selling both physical and online goods. Psychology deals with the emotional, mental or behavioural aspects of an individual. In this context, trading focuses on buying and selling online assets. Trading psychology encompasses the biases of a trader, emotional state, discipline and self-control towards trading and its outcomes.
Due to the psychology of a trader, biases and prejudices can be made on a particular data and analysis. These biases can impact the decision made by the trader, either resulting in errors in judgment or great trading activity.
This article will serve as a guide to understanding emotions in trading, mastering your mind and becoming a successful trader.
The Emotions of Trading
In trading, different emotions get traders or investors to make decisions on what shares or coins to buy or sell. When traders understand the psychology that drives them, they can overcome their biases towards trading and make more rational decisions. Let’s consider the emotions experienced by traders and what differentiates winners from losers.
These emotions are:
- Fear
- Greed
- Hope
- Regret
- Pressure
Let’s consider each one of them.
1. Greed
Greed clouds the rational judgement of a trader or investor when they aim too high. It is often driven by an excessive desire for wealth or the belief in overnight success. When traders and investors are blinded by greed, they tend to forget the knowledge of the market.
An example of a greedy investor will be Alex, a day trader with a history of successful trades. Alex was a successful trader with a series of wins; one day, he found himself chasing more significant profits. He had a rule on when to exit trading, but on that day, he refused to use his usual exit strategy; he kept trading, hoping for that one big score. Unfortunately, the market turned against him, resulting in significant losses. This example shows how excess greed can lead to the downfall of a successful trader.
2. Fear
Fear is an emotion that causes doubt in one’s mind; it makes them believe they are unlucky or things will crash. Fear makes traders or investors close out their trade and sell their coins or stocks prematurely to avoid the risk and make losses. Fear can also be seen when a trader only invests in low-risk assets to avoid risk and not lose capital.
Sarah is a relatively new trader and has witnessed a rapid decrease in the value of a particular cryptocurrency. Driven by the fear, she only invests a tiny portion of her savings into the market, scared it will crash on her too. Due to Sarah’s fear, she is losing out on potential returns and a boost in her wealth.
3. Hope
The psychology of a greedy trader or investor is usually made up of hope for quick gain, but most of the time, it is met with regret when it comes crashing. Sometimes, traders know the coin or stock they are hopping on has no real value. But they go ahead, hoping to cash out before it crashes. Some go ahead and overhype their skills or the value of the shares, thereby holding it to a bit longer than it crashes.
4. Regret
The other side is where a trader regrets missing out on a stock or coin that brought quick gains. Not to lose out the second time or have regret, the trader goes ahead and buys the stocks or coins without understanding the value behind them. This often comes from a lack of discipline and belief in oneself. Each time decisions are made in the stock or crypto market due to pressure or greed, it always ends with regret.
5. Pressure
There is the fear of missing out, the regret of not joining in, and the belief of being the next multimillionaire from a gain in shares or coins. All these emotions are founded on pressure. Pressure from friends who have made gains from those shares and stocks, pressure from social media as everyone is talking about the share or coin, but it seems you are missing. Pressure that you will never make a good profit as everyone is already a multimillionaire by 18.
Moving past the crowd and avoiding them will go a long way to help as a trader. As a trader, you must recognise the emotions people or society are projecting to you. Then go ahead to avoid them at all costs.
Risk Management
The first rule in trading is establishing trading rules and being disciplined to carry through. These trading rules can include not trading on big days till you understand the market more, reducing screen time when you are done trading to avoid the temptation of opening more trades or not adding to losing positions as a newbie.
There are strategies and tools you can use to manage risk in the market. They are:
- Setting a point to take profit
- Avoiding trading on emotions
- Keeping a consistent level of risk
- Setting the stop-loss order at a different interval
- Maintaining a balance between risk and reward
- Having various investments with different risk levels
- Minimising the amount of money used to trade per interval
Establish a risk management technique that is not overshadowed by the emotion of greed or paralysed by the emotion of fear. You must make rules and abide by them because once you start making lots of losses, you will become more cautious with trading. With this cautiousness, you won’t go all in when it is time to be aggressive with trading, thereby missing out on more gain. You will have more doubts and become afraid to trade.
The stop-loss order tool serves as a safety net. You must set a limit: the amount you are comfortable losing or the market’s movement. With a stop-loss order, your money will be immediately withdrawn when the market goes south. That way, your emotions won’t be in a jumble, deciding when to call it quit or to go harder.
Cognitive Biases
Cognitive biases are thoughts or prejudices you may not be aware of. There are common cognitive biases that also affect our trading decisions. There are different cognitive biases that one may have. This includes overconfidence, being unlucky, etc. A practical example will be Alex. Since Alex has had a series of wins, he becomes overconfident, thinking he is way above failure. Cognitive biases can be dealt with through self-awareness of the unconscious state of mind and discipline to understand oneself and follow set rules.
Discipline and Patience
As cliché as it may sound, no one can achieve greatness in a field without discipline. This has made discipline one of the most demanding skills to master or a lifestyle. Discipline is knowing when not to enter trades because it is the newest in town and being patient by sticking to that decision despite pressure from either peers or social media.
The market consistently rewards those who stay in it longer. Being patient in the stock or crypto market can not be overemphasised. Patience as a trader is being consistent with your trading rules and knowing that one day, you will be the next big thing.
There are ways to develop discipline and patience as a trader. This includes:
- Living by the trading rules that have been set and not jumping from one trade to another looking for quick gain
- Understanding not to close your position or sell your shares even when your risk aversion subconscious is pushing you to do so
- Elongating that trade position, hoping for more gains when the technical analysis and your knowledge prove otherwise
Build A Trading Mindset
With the right mindset, you will be able to win. Building the right mindset in trading takes time but starts with self-awareness. You are aware of all the biases you have built or adopted from someone. The right trading mindset is understanding that today may not be good, but tomorrow will be better.
The following are ways to build the proper trading mindset.
1. Become Self-Aware
As a human, you are filled with biases, either ones you experience or ones adopted from someone. Become self-aware, identify your biases, and avoid taking on someone else’s prejudice. Traders, especially newbies, usually don’t know where to start; they start reading books. People don’t understand that books have a great way of influencing you.
If the professional you read from has some prejudice or bias towards the trading system, you may unknowingly pick it up. Being self-aware is realising the bias of authors, coaches and professionals while trying not to absorb or imbibe it.
2. Tactically look at each trade.
The market can be random. This is not to say fundamental or technical analysis doesn’t work. But sometimes, a trader or investor with significant capital can fund a share or coin, making it rise higher than its value or the market demand.
Any method can be used to predict the market; sometimes, your prediction may work, but other times, it may not. When the market doesn’t follow your prediction, don’t assume the worst of yourself or your skill and become fearful.
The longer you are in the game of trading, the more you will realise that the perfect market analysis is how much an event, season or person can influence the market and move a stock up and down in price. It’s much simpler to adopt a successful trading psychology and mindset once you realise that everything in trading is a game of probabilities with random outcomes.
3. Tune out the noise.
There are many perspectives and market analyses available on the internet. Countless websites predict the activities market. It is your responsibility to understand what works for you and follow it. Understanding what works for you will come from the research and education you get on trading. With this knowledge and belief in oneself, you must choose what suits you best.
In trading, you have to think for yourself, trust your gut, and come up with original ideas—mute people who pressure you and try to change your course to theirs. Research set your rules, and abide by them. In trading, you have to be intentional about not allowing other traders in the market to influence your choices.
Stress Management
Trading is stressful. The constant market fluctuations, financial risks, and pressure to make the right decisions can take a toll on even professional traders. Stress can affect your decision-making in trading. When stress levels increase, rational thinking often takes a backseat. Impulsive decisions, increased risk-taking, and emotional reactions become more likely, reducing your trading psychology.
But how best can you handle stress as a trader:
- Regular exercise as physical activity helps release endorphins, reducing stress.
- Eating healthy and nutritious food
- Prioritising tasks based on urgency and importance
- Take short breaks to recharge and avoid burnout
- Being mindful and meditating
When stress is under control, you can make more rational trading decisions. Ensure you incorporate these techniques into your routine, prioritise your well-being, and watch how they transform your mindset and overall performance in trading.
Learning From Mistakes
Statistics show that ninety per cent of traders fail in their first year. When you start trading and make some losses, you may unknowingly start believing that the market is rigged and meant to make you a loser. Instead of having this mindset, look at those failures as a lesson and ways to improve. Become self-aware and learn. With all these failures, you will know what works, what the market says, and how the tools work.
There are different mistakes traders make, and these are common ways to avoid or recover:
- Lack of planning: Develop a detailed trading plan with entry and exit strategies and stop loss orders to avoid this mistake.
- Excess Leveraging: Use a proper risk management plan to avoid trading with high leverage.
- Ignoring Market trends: Stay current with market movements and adjust your strategies to prevent this.
- Beating oneself for failure: Be self-aware and forgive yourself despite past decisions to avoid this. Remember, failure is also a lesson.
Jesse Livermore is considered one of the founding pioneers of day trading. He faced bankruptcy a lot of times, and he rose from them. But one particular day, after a series of failures in the market, he ended his life. It can be said that even if Jesse Livermore learnt his lessons, he didn’t forgive himself. And if he genuinely learned from his past mistakes, he would have seen that he recovered from every bankruptcy and would have recovered again.
Mindfulness and Meditation
Mindfulness and meditation will help traders become more self-aware of their thoughts and cognitive biases. Traders should incorporate simple mindfulness practices and short meditation periods into their daily activities.
Steps to practice mindfulness and meditation daily:
- Use mindfulness apps
- Stay open to trying different practices
- Create personal time to play or try out hobbies
- Integrate short mindfulness breaks to reset and recharge
- Use lunch breaks for a mindful pause and stress reduction
- Maintain focus during trading tasks, avoiding distractions
- Starting the day with a mindful routine to staying present during trading tasks
The Place For Professionals
As a newbie or professional, you still need someone to guide you or talk to you when you become overconfident in your skills. Having a mentor or coach will serve as a guide on your journey as a trader. You will also have someone who understands your path, and you can talk or rant to them when things are not going well.
Get trading psychologists and counsellors who serve as friends and guide your trading journey if possible. You can learn more about professionals by reading their books or listening to their podcasts. Examples will be Trading in the Zone by Mark Douglas, Encyclopedia of Chart Patterns by the famous and wealthy Thomas N. Bulkowski, etc.
Conclusion
To be in control of one’s mind is a huge step to winning in trading. A trader or investor who understands their emotion will be able to control them and make more rational decisions than others. With Funded Trader Markets, you will be able to understand your action or the push behind it without yielding to it. You will be a different entity from your body as you study your actions and emotions without making any decision till it is rational enough.
Our team of seasoned professionals is dedicated to transforming your trading experience, providing tailored solutions that adapt to market dynamics. Join us now on Discord for exclusive updates on financial evolution.
