Trading is often referred to as the art of reading charts, patterns, trends, market sentiment, company fundamentals, et cetera. However, it is much more than that. It is about being disciplined and controlling impulses as well i.e., a strong psychology. To be a successful trader, you need both intellectual skill and psychology in equal proportions and one without the other is just like jam without bread.
Trading psychology is a combination of emotions and state of mind of a trader when he is participating in the market. It is governed by their behaviour i.e., their responses to market’s stimuli which is anything and everything that is unanticipated or unwanted.
It is very easy to have faith in your strategy when all is going well. For example, in 2007, the market was in a mad bull run and almost every second person was making money whether they deployed any strategy or not. However, the real test came when the bubble burst and the markets crashed in 2008. It is then that one needs to realise that they are not a bad trader, nor do they have poor strategies. It is just a bad market situation where all is going awry and if one holds patience and sticks to their strategy till the end, they are bound to succeed with flying colours.
Trading psychology comes into play when you have something at risk – whether it is your own money or your job (if you are trading on behalf of your firm). When you have something substantial to lose, you feel indecisive about whether to hold on to your gains/losses or exit your positions. A lot of newly launched mobile/desktop applications allow you to get a feel of playing in the market by first letting you trade with fake money. This is a good way to learn the nitty gritties of the market – the what and the how! However, it does not give you an accurate picture of how the environment will affect your decision-making process because you have nothing to lose when you are participating in the market through a trial account.
In this module, we will study all about how a trader’s mindset differs from that of an investor, what are the common mistakes that a typical trader makes and how can you improve your psychology to overcome those mistakes. We will learn about some behavioural biases prevalent in the market that actually give birth to these common mistakes. All the sections in this write-up aim to showcase the importance of trading psychology and ways to control it.