Trading psychology is a concept that integrates the concept of emotions and human mind in the financial market. The concept applies both to traders and long-term investors.
Discipline yourself and your psychology is fundamental to succeed in day trading. But There are seven emotions that can ruin your career. Think of these emotions as the seven deadly sins of the day trading world.
In other words, avoid these feelings at all costs.
»Day Trading Psychology: why do we Fail?«
Role of emotions in day trading
Emotions play an essential role in trading and investments. Indeed, in the past, we have seen excellent traders and investors losing money not because they did not know how to trade but because they failed to manage their emotions.
A good example of this is what happened between March 2020 and May 2021 as the prices of cryptocurrencies surged. At the time, many prominent investors rushed to buy then because of fear of missing out (FOMO).
Therefore, managing your emotions is an essential thing you can do. In fact, a book, tutorial, or course on trading and investing is not complete without a chapter on emotions or psychology.
Emotions in market: some examples
There are many examples of the role of emotions in the market. For example, a trader who buys an asset simply because its price is rising or one who shorts it because they see it falling. Another example is a trader who avoids opening trades because they are fearful of what will happen.
Further, there are traders who regularly extend their stop-loss to prevent it from being triggered.
Emotions to keep under control when trading
Instead of wasting precious minutes, use time between trades to learn more about day trading. If you begin trading to ward off boredom, you'll take risks that aren't worth the gamble. And, you know, day trading is not gambling.
Make every moment a productive moment by learning patience and exercising it daily. You can avoid boredom by taking time off, traveling, or even watching some YouTube videos (we suggest TraderTV... fun and learning). Doing such simple things can cheer you up and give you the motivation you need to start trading.
Depression is a serious emotional challenge that many traders and investors go through. In 2020, it was reported of a young man who committed suicide after seeing a big negative balance in their Robinhood accounts. Many such stories have been reported before.
Many traders get depressed mostly after making a single big loss or several small losses. Fortunately, there are several approaches to avoid depression as a trader. First, take time to learn more about the financial market and the risks involved before you start your trading career.
Second, always open trades that you are comfortable losing. A good way to do this is to always risk amount of money that is less than 3% of your trading account. Third, always protect your trades with a stop loss or a trailing stop loss. Finally, always consult a qualified counsellor when you feel like you are suffering from depression.
The odds and numbers change so quickly that even the most experienced day trader will experience doubt from time to time. Try your best not to second guess your choices.
If you’ve committed yourself to continuing your education and staying on top of the latest news, stand by your choice. Only worry about the changes you can make now. Do not dwell on what you could have or should have done differently.
Fear is a common emotional issue in the market. The most widely known fear concept is known as FOMO (Fear of Missing Out). This is where you try to buy an asset simply because its price is rising or short one whose price is falling. We often see fear in many situations or during bull markets such as when the prices of cryptocurrencies rose.
Another concept of fear is when you are afraid of entering the market. Here, you do all your analysis but are fearful of initiating the trades. The impact of doing this is that you will often miss so many opportunities in the market.
You can prevent fear by spending a substantial amount of time learning about the market and creating and a strategy that identifies your entry and exit strategies.
Fear is also the main reason why 90% of Day Traders Lose Money.
When you reach the point of anger, it's usually because your doubts and fears have been confirmed. Take a deep breath, there's nothing you can do now.
The only thing you can do is learn from your mistake (a day trading journal can help you in this ). Right now is the time to walk away for a moment, because you never had to trade in anger.
A common form of anger in the market is known as revenge trading. This is where you attempt to make money after recording a significant loss. For example, if you lost money shorting 100 shares of company X, you could decide to buy 200 shares of the company.
In most cases, you will lose money when you decide to revenge trade
Recovering from a bad trade is a process. Your first few trades after a loss are likely filled with anxiety.
Day trading can be risky. It would be foolish not to have some anxiety from time to time. However, get back on the horse and Trade again.
You can avoid anxiety in trading by coming up with a good trading strategy. Further, you could start trading with low volume and leverage. This will help you gain confidence while risking only a small amount of money.
After a series of positive trades, your confidence may shoot through the roof. While confidence is usually a good thing, too much can really hurt your career.
Always assess risks from a statistical perspective. Do not assume that you cannot lose!
Only trade what you would be comfortable doing without. You never know when the market will change, so try your hardest not to let greed get the best of you. Day trading is more than knowledge in action; day trading is a symphony of personal accountability, education, and awareness.
Be cautious about risky propositions, but maintain confidence after making a decision. When you make a trade, stand by your choice and if it fails learn from your mistakes.
Remember to learn from all transactions, good or bad. This way no experience is wasted.
External Useful Resources about Day Trading Psychology
- Trading Psychology, 11 Things that Separate Winners from Losers - TradingSim