Trading Psychology: You Might Not Know…
Trading psychology is what its name refers to, psychology or the way minds work in trading. You might find it irrelevant to your trading career as it does not bring about any profits instantly. Yet, if you seriously take trading as a professional career, trading psychology should not be an overlooked aspect.
The lack of emotion control might lead you to costly mistakes. Frankly, we cannot eliminate emotions from ourselves as we are humans not robots. So, learning trading psychology is to learn to control our own mind where all trading decisions are made.
This article does not walk you through definitions or academic explanations, but the questions that many traders like you ask about trading psychology.
Which One Do You Think Is More Important, Technical Analysis, Fundamental Analysis or Trading Psychology?
Trading psychology, technical analysis, and fundamental analysis are three main aspects of a successful trade. We cannot divide them into separate factors and decide which ones we should prioritize.
Technical analysis examines price movements and volume to draw insights into patterns of statistical trends. It scrutinizes the supply and demand of a security to forecast the impacts on price, volume, and implied volatility. As a result, traders develop viable strategies to deal with reversals and take advantage of optimal trades.
Fundamental analysis focuses on the measurement of a security’s intrinsic value through related economic and financial factors. In simple words, it tells the value of an investment based on the company’s financial situation, current market, and economic conditions. Thus, you can see whether the security is undervalued or overvalued. It is valuable for long-term investors to decide on their holdings.
Trading psychology relates to three factors — emotions, quick thinking, and discipline. Insights that traders and investors have from fundamental analysis and technical analysis are not enough to make things work. You need the right time for the right action. It is time for trading psychology to turn up. At the most chaotic moment, can you calmly analyze databases and come up with the right tactics? At the opportune moment, can you just stop overthinking and make timely actions to win huge profits? If you want a yes to two questions above, you see an important role in trading psychology!
What Are the Types of Emotions While Investing in Psychological Trading?
There are two main emotions that psychological trading mentions, Fear and Greed.
When bad news spreads to the whole market, fear of losing money crawls in. Then, panic selling may be a consequence. The chaotic market will become more chaotic.
Meanwhile, favorable news keeps the market lively with continuous growth. People gain profits but they want more and more. Greed naturally leads to the ambition of investing more with the expectation of earning more!
What Are the Top 10 Psychological Errors that Traders Make?
- Put the Low Value on the Process
The shortcuts are not bad as long as it does not filter out important foundations. However, the bad moves of the trading market and the fluctuations might push you to skip the steps, especially crucial ones. You are freaked out or anxious about the potential losses and want to take action right away. Yet, it can lead to worse consequences or have you miss the chances of rebound.
- Take the Revenge
After the loss, some traders or investors might come back from where they failed with the hope of making more money to cover their losses. You can win at the place you fell but with the deep research and a calm mind, not an intention of taking revenge.
- Focus on Profits not Risks
It might be a mistake of new traders, totally being immersed in profits not measuring potential risks. You need to pay more attention to risks you might undertake if you invest. It helps you have much bigger pictures to view, then you can make the right decisions rather than being drowned in illusions.
- Being too Discreet
Worrying so much about the risks can slow down the decision-making process on a trade. As a result, you might miss the chances for phenomenal growth of investing income. Let’s say you should think it over but don’t overthink it!
Do I Need to Learn Psychology to Get Better at Stock Trading?
Yes, as the knowledge about trading psychology can help you avoid the emotional traps of the tumultuous markets. So, all traders in not only stock trading but also other trading instruments can benefit from the mindset mastery. Amidst the crypto winter and the stock market crashes, the role of trading psychology becomes much more highlighted.
Which Trading Psychology Books Should You Read?
1. Trading in the Zone — Mark Douglas
This book is considered as among the must-read books for those who have difficulties in getting consistency in the tumultuous market. The topics that the book discusses include the existence of short-cuts in trading, the control of fear and greed, distraction vs. concentration, etc.
It addresses the roots of trading issues and comprehensive solutions. Trading psychology, trading practices, techniques, etc. are what you need to achieve the admirable consistency of profitability.
2. Reminiscences of a Stock Operator — Edwin Lefèvre
It was first published in 1923 and immediately listed as one of the best books in trading psychology. Reminiscences of a Stock Operator has many stories with a deep insight into the crucial factors to successful trades.
After nearly 100 years, the book still maintains its relevance over generations. It means that it shares the underlying principles that stand through the test of time and chaotic periods of market changes.
3. Sway: The Irresistible Pull of Irrational Behavior — Ori and Rom Brafman
You will not know how interesting the book is until you end up finishing the whole book in the shortest time ever. Thus, this book is a rare page-turner although it is not fiction. Ori and Rom Brafman approach and share effective solutions to the dilemma traders have to encounter.
This book also uncovers the concepts such as diagnostic bias, chameleon effects, etc. through stories and thorough research. Thus, it helped traders ease their decision-making process and come up with the right tactics at the right time!
4. The Art of Thinking Clearly — Rolf Dobelli
This book includes a short but punchy description and illustrations of a concise manner in 99 chapters with two to three pages each. It covers psychological pitfalls that not only traders but also everyone can stumble into.
It does not just address problems but share deep dives into the roots then figure out comprehensive solutions. As a result, traders can stifle their development and growth.
5. Market Wizards — Jack Schwager
Instead of teaching you how to become a top trader, why don’t you learn the lessons by yourself? The book series offers informative and insightful interviews between Jack Schwager with top traders.
Through each interview, you can learn how the most successful traders invest in the markets and how they react to different periods of the trading market. There are both best practices and common mistakes you can learn from the compelling stories of top traders.
The Market Wizards series includes the New Market Wizards, Hedge Fund Market Wizards, and the Little Book of Market Wizards.
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