What are the qualities of a profitable investor? How do they leverage their risk and continue to profit even after inevitable losses that come along the way? What’s more important, psychology or strategy. Or rather market anticipation, predicting market reactions and understanding how people think? When it comes to successful trading, having a strategy that allows for you to manage your risk, determine your entry positions and help hold you accountable are the bare minimum to getting started. However, what’s even more essential is having the confidence, tenacity and discipline to stick through your strategy even when things go wrong. Emotional discipline and psychology play a huge factor in determining your success in trading and ensuring you’re holding your self accountable, but also in understanding market reactions and how news events, earning reports and unexpected spikes or drops will affect trader psychology and how you use this to your advantage when attempting to turn a profit.
Many people when starting to invest are more than susceptible to market movers, FOMO and other uncertainties that can make investing a stressful and tedious process. However, as one develops the skills and strategies necessary to gain a better understanding of markets and develop ways to manage risk, many come to realize that they are their own biggest barrier in their path to financial success. Whether it is through impulse buys due to lack of knowledge of the market, lack of confidence in their strategy or giving into fear, their emotions and self-doubt prevent them from anticipated gains. Lacking confidence in yourself and not being disciplined enough to stick to your trading strategy is what often leads to the biggest losses and liquidations in any investor market.
- Psychology also applies to understanding how other people react in specific scenarios. Acknowledging that the trend is your friend and predicting how people plan to invest gives power to those who can understand when the market is overextended or undervalued. Knowing that a news article which scared many investors into selling early and this has no long term affect on the valuation of a stock requires the ability to look at situations from a third person point of view. To know why people are giving into fear or greed, if there is validity to their emotional responses and how you can benefit in the long term or short term is something a successful investor can analyze and implement into their strategy. For everyone that is a retail investor, you must acknowledge your investment as a small drop in a large pond filled with investment bankers, large companies and individuals with large amounts of wealth. Fighting against these individuals is an upwards battle and a fast track to liquidation. The psychology of understanding institutional investors, retail investors and how market makers can trap retail investors through fear and greed will put you on the side of the big fish who often win in the market as opposed to the small everyday investor that tends to lose.
- Undoubtedly, the factors that set distinguished traders apart from amateurs and intermediates is their experience, emotional discipline and understanding of market psychology. Once investors spend time formulating a trading strategy that works for them and their financial needs, it isn’t too often they spend time readjusting and scrapping their plans. They know what works for them and what doesn’t based on the market they’re in, their past trades and how they anticipate the market will behave in the future. With emphasis on their routine and habits, advanced traders treat investing as a lifestyle in which it affects every part of their lives and the apply the same mentality in everything they do. They are aware of the risks and benefits, analyze situations and inform themselves of the proper information to make a decision that will benefit them in the long run. Also known as intentional living, this lifestyle isn’t a choice for many professional investors as they know what they focus on expands and how they perform in one area of life tends to be how the perform in others. They understand and believe that implementing emotional discipline and healthy habits into every aspect of their life will reap long term benefits that will also trickle down into their finances.
- Discipline and risk management are the two integral factors that determine trading psychology while fear and greed are the two major emotions that traders must overcome to react properly. Often times hope and regret can move the hand of a trader in unfavorable situations, but knowing these factors can affect your trading do nothing to help you if you don’t recognize them in your own trading sessions. Your trading strategy should always include input on which you have reflected on your emotional state at the time you executed your trade, the logic behind it and the end scenario that played out. With this in place, you’ll start to understand if a trade was placed during a time of stress, whether your logistics backing it up were solid and if it was a good trade and start to notice trends between emotional state and whether you have a successful trading session or not. After taking the time to analyze if and how emotions are affecting your trading, start to take the steps to better understand your emotions and use them to gain a favorable position.
- Taking control of your emotions does not mean suppressing them, because emotions will tend to surface up later in undesired ways. Your strategy should be start with acknowledgement and acceptance of your emotions. Then start to understand why you are feeling them and using that information to direct your desired outcome. Suppressing your emotions leads to problems down the road such as neglect, impulsive behavior and lashing out in unhealthy ways that go beyond just finances, but can affect personal relationships as well. Accept that your feelings are being heard and you have a right to feel whatever way you do, but know that acting out of these emotions won’t bring you closer to your end goal. So, the proper method is finding a way to channel these emotions in a way that will bring you closer to success. Whether you’re feeling excited due to massive wins and a strategy that went to plan, it is important to not let these emotions overwhelm you. Emotions are an inevitable part of the game akin to losing money, but reeling them in, accepting them for what they are and reacting out of logic rather than impulse distinguishes a succesful trader from one that continuously loses money.
Being Grounded as a Trader
- The influences of greed and fear are the main constituents in which trading psychology is comprised of. With fear accepting too little risk and cutting profits short and greed neglecting risk and exposing yourself to major losses, a combination of both is a deadly pair, and if a trader tends to give into one emotion, you’ll often see him giving into the other. Weighing too far into greed tends to cloud your judgement and neglect for your rational trading strategy. Whether it is the obsessive desire for wealth, to prove other people wrong or prove yourself right in that you finally deserve to be acknowledged as a good trader, you are willingly relinquishing the hand you have to play in your own financial future. Acknowledge that money isn’t the end goal but rather a tool to help you implement ideas and changes to live the lifestyle you want. Money won’t make you happy, so accept it as an important tool, nothing more or less. The purpose of investing and trading is to build wealth and expand your capacity for it, which includes accumulating knowledge, losing money and improving daily. Entering a trade or investing in an attempt to get rich quick isn’t investing, it’s gambling, and you gain no valuable knowledge in doing so. Greed is most prevalent towards the final stretches of bull markets where investors are susceptible to FOMO and throw caution to the wind. People may be regretful they missed a good entry and hope they could catch some profit to make that feeling go away. Understand that missing a single position won’t determine your trading career and no gains is always better than a potential loss. You should never enter a position out of negativity but rather feel fortunate or lucky that you bought a position so low. Often people buying out of FOMO may feel anxiety or hope that their position will continue higher so they can sell. Understanding that an entry should never be associated with feelings of anxiety will help prevent you from many losses in the future. That gut instinct should be an indicator that if you don’t feel grateful that you entered at a good support level, you’re not confident in your entry and it will most likely lead to a loss.
- Fear is responsible for cutting gains short and is usually associated with major losses that have occurred in the past. Distinguishing present trades from past trades is what allows a trader to grow and improve his trading strategy. If an investor is stagnant, he poses a risk to himself, his assets and his partners. Investors should always be learning from their mistakes and applying them to future scenarios. People who are fearful when exiting a trade usually have had many bad experiences with trading and are unable to dissociate them from the present. For successful traders, the losses are inevitable and a part of the learning process. They understand how losses can be turned into wins if they can gain valuable knowledge from that instance and apply it to future strategies. Don’t cheat yourself when it comes to exiting out of fear. Instead, understand why you are feeling fearful and reflect on it. Did market sentiment change or is it because of a loss you experienced in the past and you just want to be green for once? Don’t act out of this emotion but use them in your strategies. If market sentiment has changed, there should be a scenario you had in place in case this occurred as well as the appropriate action to go along with it. If you have experienced a string of losses and have the potential to be green, even if it’s just a little, does it match your pre-determined exit strategy? If it doesn’t, is there any valid reason why you should exit? Does selling a quarter of your position to break even and holding the rest due to market sentiment seem like a viable strategy? Self-reflecting requires full disclosure of emotions and actions in an organized way, ideally in a trading book, a coach or a team to help hold you accountable. Without learning from your mistakes, the only thing that will continue to grow will be your losses.
Trading psychology is the most important and difficult skill for any individual to excel at because it is something you can’t master. Having control over your emotions is an ongoing process that requires constant discipline, habits that support your mentality and living an intentional lifestyle. Becoming a successful trader entails cutting yourself loose from a lot of the impulse decisions, instant gratification and comfort that society has accustomed us to. Intentional living is the cornerstone of any successful individual regardless of if they’re a trader or not. Supplement your choice to be a successful trader with a mindset, routine and lifestyle that supports it and watch as it affects your relationships, career and finances.