Learn The Stock Market Lesson – Trading Psychology

Trading psychology is one of the most important tools that one needs to obtain in order to create a profitable trading career. Many investors tend to look past this because they feel that it is not necessary or that they are not affected by fear and hope. Many simply believe that they just need a good trading method, but that is only part of winning. Here is a main technique that if you haven’t yet made its usage your habit, it would be wise to start now!

Controlling Your Emotions
An essential part of a successful trading career should begin with your inner self. The majority of traders lose because they are unable to control their emotions, which then leads them to make irrational trades that could be avoided with the right mindset and the appropriate skills. Whether you are winning or losing, up or down, you have to throw all your emotions to one side and not let it affect you. It’s sort of like playing poker – being able to keep a “poker face” and not let your emotions affect you.

In trading psychology, two emotions are constantly present: fear and hope. Both of these are destructive emotions and all traders are influenced by them. For example, you become upset after a loss from a stock but you refuse to sell it because you want to “break even.” Often times, the trend has already reversed and will keep going down, until finally, you might realize that it is time to get out, but that might already be too late. Many traders are puzzled on why the markets always seem to reverse immediately after they dump their losing position. This is because members of the crowd are gripped by the same fear and everybody dumps at the same time. But once the selling has ended, the market goes back up, optimism returns, but most importantly, greed returns.

Hope and fear can make traders act irrationally. They know what they should do but they don’t because they are controlled by their emotions. To overcome these destructive emotions, you have to follow a trading method with discipline and know the conditions that you will enter and exit a trade. You can control your emotions by having a specific plan and trading strategy. Otherwise you end up losing your independence and will feel the desire to imitate the crowd and overlook objective trading signals.

With this said, always remember to think carefully first before you trade. In addition, you need to be sure that whatever the majority does, feels, believes, and says does not affect what you do, feel, believe, and say. You have to stand apart from the crowd in order to succeed.

This entry was posted on Monday, June 29th, 2009 at 11:00 am and is filed under Learn The Stock Market, Technical Analysis. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.