Trading Psychology
Basics of options trading

Trading Psychology

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Traders gain knowledge, learn many skills for trading. Much analysis is being done for a successful trade. But there are certain things which are equally important but are often ignored. These things are emotional control and self-discipline which works before, during, and after the trade. Market actions can’t be 100% predicted but our reaction to those actions can help us in becoming a successful trader.

Trading psychology actually deals with the fact that how our emotions, behaviour can affect our trading actions. They are equally as important as knowledge and experience in trading. On this topic everyone adds some of their experiences and so did I. 

Emotions we experience during trading:-  

1. Fear – It is the most common emotion that a trader experiences. Before making a trade, trader experience an emotion of already failing, lacking confidence in his or her knowledge or skill. During the trade, the fear of losing the already earned profits which leads to panic selling and missing the big move because of incomplete execution of the trade. In the case of trade failure, the fear of taking looses and not believing the fact that the trade has failed or the analysis has gone wrong.

2. Greed – Often, when things work in our favour during the trade we become greedy and let our emotions overcome the practicality. Urging for more profit when fundamental and technical aspects of the trade are going against it is a form of greed. We somehow know that it is done, but still want to stick for more. Greed makes us ignore our rational decision making. 

3. Hope – Hope in trading is almost like gambling, it doesn’t include any facts or analysis. We know it’s not going to work or chances are low but still hope that it turns out positive. On a losing trade we hang on and hope for its recovery, this often occurs when our trade goes against us but we still want to hold maybe due to no acceptance of our wrong analysis. We lose our path of a trading plan and instead move towards already lost beliefs and hopes. 

4. Regret – Going against the trading plan by getting into already moved stocks creates an emotion of regret in us, sometimes during the execution of trade or after losing the trade. There are plenty of opportunities in the market and we can’t take advantage of everyone. There’s no use of running after a missed train or opportunity

These emotions generally occur when we don’t have a trading plan/system or we have but don’t follow it. 

Overcoming our emotions while trading:- 

1. Fear is an emotion which can make us miss out some major gains. Trusting your knowledge and the trading plan is a must to overcome fear. This can definitely help us in becoming a confident trader who executes and completes his/her trade rationally. Avoiding too much noise or unnecessary news also helps in minimizing fear as they create panic and the trader often walk off the trade sooner. Risk is something we know when we enter the financial market. It is something that we can’t control but manage. Risk management also helps in minimizing or controlling the emotion of fear. 

2. Greed is something which is just opposite to fear. It actually makes us overconfident about our trade even when we know it’s done. It reflects ignorance of our own knowledge. When the system has worked out great just exit from the trade instead of just pushing it unnecessarily because at some times it may have devastating effects. 

3. Understanding market randomness is very important. As said before we cannot completely predict the market and accepting this fact is very important to be a successful trader. Don’t get emotionally attached to a trade. When things don’t work out according to you accept your mistakes and exit instead of hanging with a

4. Everyone has their own trading system, according to which they work. There are enormous numbers of opportunities in the market and we just need to take advantage of those particular opportunities which fit in our trading system. Running with the herd without a clue where it’s going is dangerous. Don’t make yourself regret after consequences.

In conclusion, I will only say one should work on their own trading system as the market is an ocean of limitless possibilities. Trust your system and wait for the opportunities which get fit in your system.

 

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