I want to introduce you to an important topic; the trading Psychology in the Financial Markets. We often experience so many emotions, such as fear, greed, FOMO etc., when investing, which often leads us to making irrational investment decisions. Paying attention to Psychology allows us to identify and manage these emotions and behaviours.
The BIG QUESTION is, how can investors start working on their TRADING PSYCHOLOGY?
One of the classic books to get you started on market psychology is TRADING IN THE ZONE by MARK DOUGLAS. The book talks about personal analysis, where Mark compares a great trader/investor to a world-class athlete. Both have reached the point at which a winning performance is an automatic and unconscious process – hence they are said to be operating in the zone. To reach this zone, investors must have mental self-discipline and follow a consistently strict system. So, let me give you five valuable tips on this:
1. Develop a trading plan
A trading plan is used by Investors as a guide throughout the trading process. It is a set of rules that outline the conditions that should be met before buying a stock, deciding which company to invest in and when is the right time to sell. The purpose of a trading plan is to ensure that the investor remains accountable and sticks to the plan.
2. Have a trading journal
As an Investor, it is important to assess your progress and to identify areas of improvement. A journal is a great way to do this, as it allows a trader to keep track of all trades and assess what worked and what didn’t. A good trading journal should include self-analysis and market observation – what were you considering at the time, and what were your thoughts? It should incorporate a balance of self-criticism and positive reflection. A journal will also help you identify gaps in a trading plan or strategy that may need to be addressed.
3. Set realistic expectations and build confidence
Confidence is vital as a confident trader is more likely to take calculated risks, and to accept the outcome of those risks. This is because a confident trader is usually one who is aware of their own trading psychology and has put measures in place to manage these factors. One possible way to build confidence in trading while learning about trading psychology would be to trade on a demo account. The goal is to set realistic expectations and treat the demo account as if it were real money.
4. Practice risk management
Risk management is something an investor cannot afford to ignore. Determining risk/reward ratios, trading with stop losses and trading reasonable trade sizes are all essential elements of a good risk management strategy.
5. Having a Trading Therapist/ Psychologist
YES!! You heard that right. We have therapists for Traders, just like top athletes have psychologists/ coaches. Their main job is usually to switch a trader’s mindset from an emotional to a logical approach. Having a trading therapist will also help you address issues such as how you manage risk and handle your profits and losses.
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