Do you ever get the impression that every time you anticipate a stock's price to go in a certain direction, the exact opposite occurs?
That leads us to today's subject: trading psychology.
The term "trading psychology" refers to the feelings and thought patterns that affect a trade's likelihood of success or failure. Biases and other cognitive biases that traders are prone to make, as well as strategies for overcoming them, are covered in trading psychology.
Trading is mostly influenced by two emotions: fear and greed. While greed encourages us to enter the market with a never-ending desire to make enormous riches, fear causes us to avoid risk for probable gain and generate only little profits. As gullible people, we need a framework for thinking in order to profit from the market and must obtain an advantage over others through fundamental and technical research. In general, fundamental analysis entails determining a stock's true value, especially when it is undervalued. The study of trends and patterns in behavior across time is known as technical analysis.
We will discuss what it might take to be a trader who consistently wins here.
"The stability you seek is within your own mind, not in the markets."
- MARK DOUGLAS
We discovered that how well you understand yourself while trading, rather than how well you predict the market, is what matters most in his renowned book "Trading in The Zone" by MARK DOUGLAS. Trading psychology has received a lot of attention lately thanks to Mark Douglas, and numerous studies and discoveries have been made in this area.
Regarding what could be necessary to consistently make winning transactions, these are:
1. A Method: The real deal is finding a method that works for you. It will be more beneficial to combine fundamental and technical analysis, or to have an advantage over a single indication, than to use a variety of indicators. In the world of trading, the HIT RATE is the percentage of times you are correct in your trade, and the RISK TO REWARD ratio is the return on any given deal. Your earnings depend on your HIT RATE and RISK TO REWARD.
2. Manage your finances: While a high HIT RATE is often the focus, traders lose more money when they are incorrect than they gain when they are correct. Because of this, weighing reward and risk is essential.
For example,
90% hit rate
10 trades total.
Getting a trade properly earns 10 while getting it wrong costs 90.
Payoff = (1*90)-(9*10)=0
This is what occurs when an appropriate risk and return framework isn't used. To remove emotion from the process, you should establish rules based on your risk-reward tolerance for when to enter and exit trades. You should also set a profit target and put a stop loss in place.
What determines our capacity to handle money in trading is how well we can control our undesired anxiety and greed.
3. Control ourselves: After three or four straight profitable trades, people are sometimes prone to become enthusiastic and making poor decisions. People frequently place large bets and lose their money. Being able to manage oneself may be the most difficult of all challenges. Everything depends on this skill.
Cognitive and emotional biases, such as negativity bias, loss aversion bias, gambler's fallacy, confirmation bias, hindsight bias, and self-serving prejudice, can have an impact on everyone.
Building a discipline and maintaining it throughout the trading time are necessary to counteract such biases and inconsistent trade returns. Again, the main issue is to stick to such a plan for more than 20–30 trades without deviating because, as humans, we are unable to dissociate ourselves from any biases and there is no neurological avenue to do so. In trading games, people who have better strategies and higher chances of success still occasionally lose because they don't stick to one method until a neural pathway is established.
Therefore, we can begin setting up a journal where we can establish the entire system of generating trading judgments without any attachments and adhering to only those predetermined principles in order to create a neural pathway capable of rejecting such biases in the decision-making process. Self-control, self-awareness, and the ability to cultivate emotional detachment are equally important.
In summary, biases are an unavoidable aspect of human cognition and perception, and we can only reduce the degree to which they affect our trading outcomes. We can attain it with the right discipline and awareness, but we'll never be free. Just establish a system and stick with it despite all obstacles.
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