Psychology of Trading Pt. 1

Psychology of Trading:

  • Trade with discretionary money (DO NOT TRADE MONEY YOU DON'T HAVE)
  • Prepare for some losing trades
  • Never go live until you are successful on demo
  • Continue to practice strategies on demo after you go live
  • Hogs get fat, Pigs get slaughtered (don’t spent too much time on the market)
  • Set an attainable goal and then quit for the day
  • Trading is not a get rich quick scheme, take time to learn and practice. Get Rich Slow.
  • Start your account with less than $5,000
  • Have an exit strategy that you will use with real money
  • Don't let trades pass you by because you're over analyzing a Chart
  • Be prepared for announcements and news at any time
  • Keep your trading simple

Emotions

  • Many skills are required for trading successfully in the financial markets. They include the abilities to evaluate a company's fundamentals and to determine the direction of a stock's trend. But neither of these technical skills is as important as the trader's mindset.
  • Containing emotion, thinking quickly, and exercising discipline are components of what we might call trading psychology.
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There are two main emotions to understand and keep under control: FEAR and GREED.

Understanding Fear:

  • When traders get bad news about a certain stock or about the economy in general, they naturally get scared. They may overreact and feel compelled to liquidate their holdings or immediately take themselves out of trades and sit on the cash, refraining from taking any more risks. If they do, they may avoid certain losses but may also miss out on some gains.
  • Traders need to understand what fear is: a natural reaction to a perceived threat. In this case, it's a threat to their profit potential.
  • Quantifying the fear might help. Traders should consider just what they are afraid of, and why they are afraid of it. But that thinking should occur before the bad news, not in the middle of it.
  • By thinking it through ahead of time, traders will know how they perceive events instinctively and react to them, and can move past the emotional response. Of course, this is not easy, but it's necessary to the health of an investor's portfolio, not to mention the investor.

Overcoming Greed:

  • There's an old saying on Wall Street that "pigs get slaughtered." This refers to the habit greedy investors have of hanging on to a winning position too long to get every last tick upward in price. Sooner or later, the trend reverses and the greedy get caught.
  • Greed is not easy to overcome. It's often based on the instinct to do better, to get just a little more. A trader should learn to recognize this instinct and develop a trading plan based on rational thinking, not whims or instincts.

Setting Rules and Following your trading Routine/Strategy:

  • A trader needs to create rules and follow them when the psychological crunch comes. Set out guidelines based on your risk-reward tolerance for when to enter a trade and when to exit it. Set a profit target and put a stop loss in place to take emotion out of the process.
*REMEMBER! If you truly have tested a certain strategy for a month(s) and know it is 75% accurate (for example) emotionally and mentally you need to remember that you will have a loss 25% of the time. But that is completely fine since you know that 75% of the time it will be a winning trade and as long as you are using correct risk management you will be profitable with a percentage like that. That should take emotions out of it and keep you from taking yourself out of trades prematurely.