The most important factor for any trader is to control emotions at all times; because emotions drive traders to make bad decisions in their trading life. We have listed a few Trading Psychology that will help you keep your emotions out while trading and make consistent trades.
Trading demands a lot of attention, hard work, and skills. After a few successes, you may get addicted to trading, but a few drivers may ruin your excitement, such as emotions. Sometimes you might get exhausted looking after numbers on the screen, but if you are focused, these numbers can be very rewarding too.
When you see your trading is profiting, you may feel like sitting on the seventh sky and imagine the opposite scenario. How difficult is it to digest that loss if the market goes against you? First, we shall see why this happens and then move forward to check the methods of how to control your emotions.
FOMO: The term FOMO is used when you have fear of missing out. Imagine you are watching the market rise, and you feel like jumping right in and buying the shares, thinking - this is the best opportunity, and you don't want to miss that. It's not only with you; many traders feel the same way. Well, it's not only for swing traders who feel this way; even day traders or seasonal traders have such feelings.
Many traders have faced this type of situation in their life.
Sitting quietly when there are plenty of opportunities right in front of you is very difficult. It seems the most challenging task, and as a trader, you need to master this one. What can you do to master it? Consider trading as a business instead of a hobby. Learning to stay calm will help you in your long-term business.
Consider trading as a business:
You can only make a profit if you consider trading as your personal business. If you take it as a hobby, you will never attain the seriousness needed to achieve your trading goals. You will always struggle to move forward.
There are some steps by which you can treat it like a business; first of all, clear your "why" why you want to do trading business and always remember the answer to this why. The second is to make a plan, list your strategies and goals, and most importantly, do all this while keeping the emotions out.
There is an emotional trading cycle that defines greed and fear based on the volatility of the market. If traders keep themselves out of this cycle, they will have an internal urge to be productive.
Learn how to control emotions:
Before beginning the trade, a proper mindset is a must. If you are feeling bored or unenthusiastic, it will directly impact emotionally on your trading decisions. Whereas, if you are feeling calm, keeping updates on the news, and the stock market, involving yourself in reading the industrial reports and trying to interpret them, etc., then the chances of you getting the best opportunity to trade increases.
We are listing a few practical things that can help you to be more productive and will help you take control of your emotions.
1. Keep updating your knowledge about trading:
There is nothing wrong with learning new strategies and new models/methods of trading. When you constantly learn about new things and update yourself, you will feel less bored, and it will help you control your emotions. You might be curious to know RSI, MCAD indicators, or any strategy such as Iron condor, credit/debit spreads, etc.
Today, traders have many options to update themselves, such as video tutorials, educational websites, online books, interviews, podcasts, and more. As you choose your favorite method and start learning new things, your perspective will get broader, and you will adapt to the new changes in the market without any fear. You will also have in-depth knowledge of tackling that new change or situation.
2. Do market research:
Due to a lack of market understanding and not knowing what to do next, traders get emotional and make wrong decisions.
To avoid such scenarios, take a deep dive into the topics you always were curious to know. You may start with who designed a particular strategy, in which countries it is used, when it was founded, etc., when you are learning what you have wanted to know for a long time will boost your confidence, and you may enter the market with a new concept and zeal.
The market is perpetually ever-evolving, and many facets are always unknown to you. When you get familiar with them, it might help you balance your emotions.
The best way to do market research is to find a newsletter that updates its content regularly or search for a reliable investment agency. You will surely gain some knowledge, changing your belief about something you previously agreed or disagreed with.
You will see things differently when you have a deep understanding and broader perspective with more knowledge to apply practically.
3. Follow a paper trading strategy until you are confident:
If you have learned a new strategy or methodology or have come up with a new indicator and want to check its working, you must paper trade first. A paper trading strategy might not be a perfect solution, but it will help you avoid financial loss on the trade. Paper trade allows a controlled environment wherein you can trade without risking your original trade.
4. Creating a trading plan:
If you are trading for quite a good time and your strategies are not at par with your goals, then it is high time to make a plan. Sit with a paper pen, start writing your trading objectives, and continue with your plans of what you want to achieve, by what time, how you will achieve that, and every small relevant detail.
As we said above, clarify your 'why'; why are you trading? Is it for hedging, speculating, or wealth maximization? Half of your plans are done here.
Once you are clear with your why, the next statement you can give yourself is your vision and mission statement, they might seem identical, but there is a difference in both. The vision is your short-term goal, which can include learning new strategies, day trading, and weekly options trading, the things that can be achieved in a short period. Whereas the mission is something for the long term, for example, I will make X amount after X time, if wealth maximization is your goal, or say I will use my knowledge and skills to generate profit, or it can be like I will open a charitable trust and donate X amount I earn from trading in the long run. It can be anything, depending on your objective.
After deciding your objective, vision, and mission statement, your next step could be writing down the milestones. No one can reach the top in one leap, you need to reach step by step carefully, and that is what your milestones are. Learn, implement, earn and repeat.
5. Learn to analyze new charts:
Over time, traders develop an emotional attachment toward the stock or the instrument they are trading as they have spent a lot of time looking at the stock's behavior and pattern. This attachment cannot be a productive thing. Thus, please search for the few new charts of that company to which you have got an attachment and try to interpret them with a neutral mind.
Next, list companies, check their bearishness and bullishness, and identify if they are good for buying or selling. Train your mind to think as a businessman keeping the emotions out.
To help you start with this, write down three companies from a bearish market and three from a bullish market. Analyze from the charts; what will happen the next day, week, or month, as per your trading style; combine your research and do paper trading. It will help you think with a rational mind.
What else can you add?
No one can ever control the market completely, and you don't know what it will be like tomorrow. So, you must learn how to keep the emotions away and be productive.
Apart from trading and share market-related things, there are plenty of things to keep yourself up. Check them below, and if you have something different than the ones listed, you may share it with your co-readers.
Going out for a walk:
Keeping your eyes on the monitor screen the whole day can be exhausting, so give yourself a short break, go for a walk and breathe fresh air. The walk in the fresh air will help your blood circulation in the body and will help you think faster and more logically.
Involve yourself in some creative hobby:
Give time to your hobby and do something creative such as cooking, listening to music, and playing various indoor/outdoor games; etc. if you do not have any hobbies, you may try out simple exercise or yoga to stay physically fit and mentally at a calm stage.
Alter your surroundings:
Looking at the same picture on the wall may bore you after a while. So, change your trading desk location and rearrange it creatively and ergonomically. Try sitting near or facing a window to breathe natural fresh air, which can keep you fresh all the time.
Emotions are an inseparable part of human beings, and it is very tough to separate them. But if you follow the steps mentioned on this page, you will surely be mentally relaxed and confident in your trades.