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Trading Psychology In this short video, we will discuss trading
psychology. We will first touch on developing an investment style and the important of trading
your style. We will then move on to describe a trader's mindset along with facing your
trading fears. We will wrap up with a number of pitfalls that face traders when first initiating
trading positions. Investing in the capital markets is a business
that requires a strategy and risk management that will consistently generate returns. To
achieve success as an investor, individuals need to develop a trading style that is in
line with their personality and level of risk tolerance. Once an investor designs a style
and strategy it is imperative that they endeavor to stick to that style.
Veering off course can be hazardous to the health of any business plan, and can generate
a negative spiral that eventually puts the business in a situation where losses can ruin
the business. Developing an investment style requires some
analysis of your business personality, along with your risk tolerance. Trading styles often
lead into trading strategies and sound risk management techniques. Developing a trading
style is based on your market psychology and the way you handle losses and gains. Winning
trades and losing trades are part of any successful trading strategy and investors need to deal
with losses as successfully as they deal with gains.
You're Mindset Developing a mindset that is focused on trading
returns is a process that takes time. The process is about the formation of a business
plan and becoming comfortable with following that business plan. It is easy to say that
you are interested in a strategy that focuses on valuing investing, but much harder to purchase
a stock and hold it through losses as it finds its relative value. There are no short cuts
through this process. You cannot learn a formula that will prepare you for the ups and downs
of a trading business. The best and most efficient way to actually learn the process is from
your own trading experiences. Developing a trading mindset will eventually help you handle
account draw-downs, losses, as well as profits. Each individual has unique value systems which
helps determine their trading style. For this reason, even the most popular styles of trading
will have different results for investors. A proven trading approach can even provide
negative returns for some investors as their mindset is different and they cannot approach
a specific style in a way that has been successful for other traders.
Facing You're Fears Psychological issues affect all investors
and it is important to recognize these issues and be aware of these issues as they occur.
Denying that you are facing psychological issues when facing a difficult trading environment
will only hurt your trading results in the long run. In order to handle problems as they
unfold an investor needs to be aware of their mentality, and embrace it in order to create
a fix that will generate the correct outcome. Psychological Trading Issues
Issues related to trading vary amongst investors, each facing a unique set of problems that
can affect their overall returns. Market fluctuation is constantly moving based on fear and greed
within a marketplace which spills over into each investor's psychology. There are a number
of typical issues that face investors which include:
Unfortunately losses are part of trading and investors need to accept this as part of their
trading business plan. It would be very unusual to trade a strategy that does not experience
losses and avoiding associating this issue from your ego is an important step in creating
an important trader mind set. Stopping out of position early is another
issue trader's face. The pain associated with a losing trade is very hurtful to many new
investors. In an effort to eliminate the pain, many traders will stop out of positions early
in an effort to eliminate the trade and move on to a new experience. This scenario will
play itself out numerous times as it is very difficult to place a trade and have it move
into the money immediately. Many times trades move against an investor and their willingness
to hold a losing trade is tested. Many new traders expect immediate gratification from
trades, and unfortunately this is part of trading that generally does not occur.
Many traders are not willing to admit that they are wrong on a position, and will add
to losing trades despite a strategy that tells them to stop out of a position. Investors
will sometimes believe that they are right on a trade despite all the tell tale signs
and marry a trade that is destine to lose money. Following a prudent risk management
strategy is the key to generating robust returns despite an investors overwhelming feeling
that they have a successful trade in the making. Trading compulsively and not following a strategy
can lead to capital destruction. Trading is a business but unfortunately many new investors
don't perceive their investing in this manner. You rarely see a technology company start
to sell consumer staple products on the fly, but many investors who start as relatively
value traders begin day trading when they believe the market is ripe for a move. This
type of compulsive trading will likely lead to losses as traders fail to format a risk
management profile that is consistent with their compulsive strategy.
Only experience can create a strong trading mindset, and developing a robust trading psychology
is just as important as implementing a trading strategy or developing a strong risk management
process.