Trading Psychology
Jan 06, 2022Trading Psychology refers to the emotions and mental state that help dictate success or failure in trading. It represents various aspects of a trader’s character and behaviors that influence their trading actions.
To become successful in trading, trader needs to have a solid foundation and strict implementation of these three main pillars: technology, strategy and psychology. These three main pillars can make or break a trader’s career. Trading is like standing on a three-legged stool. If one of the legs is weak, the stool will break under one’s weight and one will fall flat on his/her face. Same thing with trading, disregard one of the pillars and a trader would not be able to become successful in this business. In trading, psychology is as important attribute such as knowledge, experience and skill in determining trading success. Two of the most critical aspect of trading psychology are discipline and risk-taking. These two aspects are influenced primarily by both greed and fear. Greed is the excessive desire for wealth, so excessive that it can cloud rationality and judgement. Fear on the other hand, causes traders to close out positions prematurely also can refrain a trader from taking on risk because of concern about large losses. It can also be in the form of fear of missing out or "FOMO" that can lead to chasing a stock. A mental awareness of greed and fear serves as a guide rail in trading. Denial of these emotions that are present in every trade is hazardous to a trader. It is through these guard rails that a trader can protect his or her capital so he/she does not blow up his/her account. The practical example of this is having stop loss in every trade and confidence in one trade that trading is indeed just a game of probability. That a trader does not need to prove himself or herself right at all time but the only goal is to make a profit. This profit is a natural by product of a sound mind, strategies and technology. Today's trading had initially led me to a challenging mental disposition. I have been stopped out with 6/7 trades. I was ready to throw the towel when I saw this good setup that I have in my play book. I could have give in to fear or greed and would have mess up my trading day. I on the other hand, left my trading desk, walk and come back with a fresh set of thinking and emotions. Though I was stopped out 6/7 trade, I entered RIVIAN trade ticker RIVN with small position and adding to a logical level while partialing in the logical support and resistance line. This turned my day around and covered all the losses I had for the day and coming out with the profit of almost 3K for the day. There are days like this that are not as easy compared to other days. If we do not have our guard rails in the form of risk management to protect us, for example a logical stop loss, then we could either obtain a big loss or worst blow up our account. Having a game plan in the form of if-then statements and having a trade book or what I call a "play book" with all your strategies, risk reward ratio, profit target, stop/loss before facing the battle of trading is one of the critical aspect of becoming profitable. You do not want to be like a deer who freezes at the sight of a headlight and get run into by a car. You want to be prepared once a curve ball is thrown at you. Learn how to trade with a sound mind, emotions and if you have to take a loss then take a loss with grace. Live to trade another day. You will find your setup at the right time, losing is inevitable in trading. This is the reason traders have to cut their small losses and let the winners run. You have to be patient and have to protect your capital at all cost to stay in the business. Having a sound mind and emotion, self discipline will help you trade in the zone thus enabling you to take one good trade after the other. Below are the 7/7 trades that I did today. I got stopped out in 6/7 trades. I needed to walk away from my trading room. I came back and found my setup in Rivian and I trade it as per my play book and had made my day.
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