Power of psychology in trading and tips to deal with emotional trading.
Intuition?
Traders often have to think fast and make quick decisions, darting in and out of stocks on short notice. The intuition of a beginner is not going to be as correct as that of an experienced trader.
So how can you improve your intuition?
With practice, you’ll be able to make smarter and quicker decisions.
Understanding Fear
When traders get bad news about a particular stock or the economy in general, they naturally get frightened. They may overreact and feel compelled to liquidate their holdings and sit on the cash, refraining from taking any more risks. If they do, they may avoid certain losses however-they may also miss out on some gains.
When it comes to Intraday trading, fear is due to multiple reasons, some of them being
TIE Tip -“focus on the process, not the price.”
Overcoming Greed
Investors tend to hold on to a winning position-they intend that they want to obtain every last upward tick in price. However, that's never the reality- at a point, the trend will reverse, and unfortunately, they would’ve missed out on a profit.
Example- You enter into a trade with a pre-planned target and stop-loss, once the price reaches the target if you don't exit, then whatever you do after that is emotional/ greedy. Everything that follows after that is out of the plan and isn’t logical.
The optimum mindset to have is:?
" Let the markets go up even after I exit so that the others who have bought at that level will also make a profit".?This well-wishing mindset, combined with gratitude about what you were able to get as profits- is of utmost importance to overcome these negative biases/emotions.?
TIE TIP- One of the best ways to isolate emotions while trading is to make decisions based on data and not based on feelings. Once you master this, you will be a master at trading!?
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?Ultimately, the goal of all of this is to be happy as Gaur Gopal Das says " It's not the people who are happy that are grateful, but rather the people who are grateful that are happy"?
Understanding regret
This emotion comes in three situations generally?
1. When you exit early from a winning trade, you REGRET that you could have stayed longer?
2. You planned to enter into a trade but did not because of some reason- now you see that your analysis was correct. You REGRET that you hadn't entered that trade.?
3. When you lose money and try to recover the losses and lose more money and trade recklessly until you cannot afford to lose anymore - at this point, you have the highest level of REGRET.?
Many traders approach us when they have lost large sums of money in the market to recover the same. The first thing we tell them is to never trade in recovery mode. The moment you are thinking about your past failures/losses while trading, you are trading emotionally, which means there is no logic involved, at that point, it's just a gamble.?
?Setting rules?
It’s a rational tactic to maintain limits on losses and wins in a day- once you achieve a profit target- take your wins- once you reach your losses of a predetermined limit- call it a day, and stop trading.
TIE TIP - Use the kill switch mechanism in Zerodha, which will automatically stop allowing you from trading further once you reach pre-set loss.?
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Conducting Research and Review
Devote as much time as possible to research, read trade journals, and do industry analysis. Assess your performance and returns, reflect on how you’ve prepared for the trading season, how up-to-date you are on the markets and how educated you are in strategies and tactics. Applicable assessment is one devoid of emotional statements and influences.?
TIE tip: Check out the Varsity app by Zerodha and High-Probability Trading by Marcel Link
A well-researched trading system should consist of the following: