Trading Psychology

December 15, 2021 by Vandana S · 4 min read

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Trading can be a tricky and scary place for many. The myths surrounding trading and the fear of losing everything have made many first-time traders make risky calls due to the mindset of the individuals. I remember when I invested for the first time in Nifty bees, my concern was multifold- who is a good stockbroker? What will happen to my hard-earned money? What if I lose it all due to the market fluctuations, what will happen if the risk is not minimized? All these questions wrapped my head and when I spoke to my investor, I wanted to earn returns but have a minimum loss. My investor laughed at me and urged me to follow his suit.

Right Mindset

I followed his suit, although the fear lies. This is the side of an investor. But what will be the condition of the trader be? Are they having the same fear as I am having while investing? What will happen if I follow suit and my trader losses all the money? Many skills are needed to be a successful trader, ability to evaluate a company, read through the fine lines of Profit and Loss statements, and so on. Above all these skills set, a good trader should have the right mindset.

Greed and Fear

In trading, two emotions rule over the bear and bull. One being fear and another being the greed to earn more. A good trader should have confidence in his ability to understand what stocks to be bought and what shouldn’t be bought. The market research and the presence of mind to quickly change through the currents of the fluctuating market. One should not allow emotions to override technical decisions.

What is fear in trading?

Let’s understand the emotions of fear- It is the threat that one faces towards the profit from the sum of money invested and erosion of capital. When a trader hears bad news, the first reaction is to secure the funds to safety. While doing so, the capital is saved, but gains might get lost. A good trader needs to be clear about the concept of fear. What exactly is the trader afraid of and how will it affect his portfolio. This knowledge needs to be derived before the delivery of bad news. a future road map needs to be created by the trader where the concept of fear and other emotions play a part.

What is greed in trading?

The next emotion to understand is Greed. It is the tendency to get more than what is already present. Many traders fall prey to this emotion. A famous proverb- A bird in the hand is better than two in the bush. The idea of more gains and a fancy portfolio is the dream for all traders, although sometimes the urge to gain more can be a risky game. A good trader should be able to follow the instincts and know where to draw a line and focus on what’s already gained rather than hoping for just a little more.

Techniques to learn

There are few techniques that the trader can follow- Setting a strict guideline to follow. A target can be set per quarter, the risk appetite should be understood and clearly defined, setting stop loss to control the emotions taking the front wheel in trading decisions. Flexibility is another key. It can sound contradictory, to have a strict guideline and remain flexible, but the balance between the two is beneficial to the trader. Sometimes the trader can choose to experiment and try new things but needs to stay within the set guidelines to ensure the risk is handled.

Finally, a trader needs to set their chart of performance. How has the trader faired every quarter, every year, and what has the progress been like? Is any upskilling is needed? Any new strategy to be learned? One should keep track of their knowledge and weakness in the market and learn from it.

We at Optionables follow the above-mentioned techniques. Are you following them?

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