Psychology of Trading Pt. 1
To be a successful trader, you must possess not only technical skills, such as evaluating a company's fundamentals and determining the stock's trend, but also a strong trading psychology.
Trade with discretionary money only, and never risk more than you can afford to lose. Prepare yourself for some losing trades, and don't let emotions cloud your judgement.
Before going live, practice your strategies on a demo account until you are consistently profitable. Even after going live, continue to use demo accounts to refine your techniques.
Remember that trading is not a get-rich-quick scheme; it takes time and practice to become successful. Set achievable goals for each day and don't spend too much time on the market.
Start with a small account, less than $5,000, and have an exit strategy in place for when you use real money. Don't over-analyze charts or let trades pass you by because of indecision.
Be prepared for announcements and news that may affect the market, and keep your trading simple. Remember, hogs get fat, pigs get slaughtered, so take profits when you can and get rich slowly.
There are two main emotions to understand and keep under control: FEAR and GREED.
When traders receive bad news about a particular stock or the economy as a whole, it's normal to feel fearful. However, this fear can lead to overreactions and hasty decisions, resulting in missed opportunities for profit. It's important to understand that fear is a natural response to a perceived threat to profit potential.
To overcome this fear, traders should first try to quantify it. They should identify what they are afraid of and why. This introspection should occur before any bad news is received, to enable rational decision-making in the moment.
By understanding their emotional responses to events, traders can move beyond them and make calculated decisions that benefit their portfolio. While it's not easy to do, it is necessary for the trader's success.
On Wall Street, there's a saying: "Pigs get slaughtered." This adage cautions against holding onto winning positions for too long in the hope of maximizing profit. Greed is a difficult emotion to overcome, as it is driven by the desire to do better and get more.
To avoid falling prey to greed, traders must develop a trading plan based on rational thinking rather than instincts. Recognizing the urge to hold onto a position for too long and being able to let go is crucial. Trading should be approached with a disciplined mindset that focuses on long-term growth rather than short-term gain.
In order to navigate the psychological pressures of trading, a trader must establish clear-cut rules and consistently adhere to them. These guidelines should be rooted in your personal risk-reward tolerance and outline when to enter and exit a trade. To eliminate emotional decision-making, set a profit target and implement a stop loss. It's important to remember that even with a strategy that has been thoroughly tested and boasts a 75% accuracy rate, losses will still occur 25% of the time. This should not deter you from staying the course and following through with the plan, as it will ultimately lead to profitability with proper risk management. By sticking to the plan, you can avoid prematurely exiting trades due to emotional reactions.