In our previous article, we extensively covered how you can guard your trading capital with a few techniques and methods. Going forward in the same series, the next thing an aspiring trader should master is a winning psychology. Performing technical and fundamental analysis about a company can be taught and absorbed with enough dedication and practice. But to adopt yourself to maintain psychological equilibrium during profits and losses (especially losses), takes much more than just reading about it. Going into a trade with a healthy psychology is integral if you want to make a livelihood out of trading. To be able to exercise discipline and cut your losses short or even say ‘enough’ to the profit you make from a trend actually determines the longevity of your trading career.
Emotions and feelings to be avoided
As a trader, you will have to be quick on your feet to determine the capital split up between your trades for the day and finalise the entry, exit and stop loss prices. This depends on your trading plan and strategy. What determines your success or failure is your ability to stick with your plan in the long run without letting your emotions get the better of you. For most traders, this might not be as easy as it sounds and is almost always the reason why more than 90% of day traders fail. So, what kind of emotions and feelings should you keep at bay before donning the traders’ hat?
The price of a stock is affected by various reasons like global trades, movement of currencies, national news and events, company results and institutional buying/selling. The impact of these events on the share market is inevitable and spontaneous. Share market crashes have happened within a few hours of the same day. But, if you are prepared and positive enough, these impactful news can also act as your golden ticket to enormous profits. So, instead of fearing the impact of global events, brace yourself for it and make plans to use it to your advantage. Again, it is easier said than done but if you observe closely, the share market is a zero sum game and it is up to you to cut your losses and choose what side you want to be on.
When you are on a profit run, it might be enticing to carry on with it despite the price hitting your target. Try not to make a habit of it because you can never know when the price of a stock can reverse. The same applies for over trading. Three out the four stocks in your watchlist might have hit the target and you might be tempted to place an extra few orders from your screener but try to refrain from doing that. If the new trades turn out to be loss making trades, it will reduce your profits for the day and can ultimately discourage you. Once your target for the day has been achieved, call it a day and close your systems.
If you have been making consistent losses over a certain period of time, it is only natural to feel anxious and irritated. During times like that, take a step back and analyse your entire trading system and find out what went wrong. If your strategy or screener has to be changed, take a few weeks to work on it and back test the same till you gain more confidence. Get back to trading after a break of few days and maybe you’ll be renewed with optimism to carry on with your efforts.
The minute you become an overconfident trader, anything negative that happens to your portfolio will seem amplified and that will certainly dishearten you. Celebrate your profits but always be the humble student of the market. Nobody can stay above the market – even trading and investing giants like Porinju Velaiyath have their bad spells. Once your system consistently allows you to make daily profits, continue refining it and always keep an eye out for events and news that could affect the performance of your portfolio.
To take emotions completely out of the picture, it is imperative to analyse your trading aspirations and what the market can offer you. If these two images are drastically different, it can lead to emotional friction and disappointment for you. So, be realistic about your expectations from the market, negative returns and minor mistakes any trader could make. Like with any art, trading requires consistent commitment and practice to perfect. When successful traders are enquired about the secret of their success, most of them attribute it to discipline, psychology and risk management. Once you finalise a strategy for selecting stocks and fixed the entry and exit rules based on its risk:reward ratio, stick to the rules and make sure that you don’t cross the boundaries. Discipline always leads to perfection and in the market’s case, increased profits. Happy trading!