Trading Psychology: Why Behavior Matters for Traders

Technical analysis is not usually done with paper and pencil these days. There are software packages that help create charts and graphs for the purpose. The typical trading room has access to all of the leading newswires, constant coverage from news organizations, and software that constantly scans news sources for important stories.

  • Ask yourself whether or not you’re allowing other market participants to sway your decisions.
  • We think this is a great strategy for overcoming bad trading habits and discuss it more in-depth in our post on how to overcome over-trading.
  • At some point in your progress, you have to allow time and opportunity to work in your favor.
  • Make sure that if you follow someone’s “hot” tip, you do your own due diligence as well.
  • Day trading podcasts are a way to introduce you to the real traders in the community.

Much like cognitive behavioral therapy can address a lot of underlying bad habits, habituation can often bring about the desired change we need in our trading. On that token, we are big fans of AllDayFaders on Twitter and his nuggets of wisdom and strategies. He’s been around the block for a while and really sums up the physiological aspect of a day trading despair and impulsivity. 90% of traders dont fail because they’re stupid.

#2 Assume Your First Losses as a Fee for Learning

Never underestimate the force of stock market psychology. Nothing can wreck your trades faster than emotions. Fear, greed, hope, regret — they can all wreak havoc on your trading. More importantly, you will begin to think of the market in terms of averages.

Greed in the stock markets, on the other hand, is when investors seek higher returns irrespective of the risk. This means they are just buying into a position or using too much leverage in hopes of making huge returns. As a trader, you need to be able to recognize the emotions of other traders on a macro level.

Start here:

Like cognitive biases, emotional biases impact a trader’s decision-making process and lead to suboptimal outcomes. Awareness, self-reflection, and emotional regulation techniques can help traders navigate these biases and make more rational and objective trading decisions. Day trading is a fast-paced and highly competitive field that requires traders to make quick decisions in order to capitalize on short-term price movements in financial markets. While technical analysis and market research play a crucial role in day trading, the psychological aspect of trading is equally important. However, the limited scope of these resources prevents them from competing directly with institutional day traders.

Many professional money managers and financial advisors shy away from day trading. They argue that, in most cases, the reward does not justify the risk. Day trading involves frequently buying and selling securities throughout the trading day. Day traders attempt to anticipate and make money from intraday price changes in assets like stocks, bonds, commodities, and exchange-traded funds. Then, in the 1970s, Prospect Theory was introduced.

To profit, day traders rely heavily on market volatility. A day trader may find a stock attractive if it moves a lot during the day. That could happen for a number of different reasons, including an earnings report, investor sentiment, or even general economic or company news. how to read candles Many day traders end up losing money because they fail to make trades that meet their own criteria. As the saying goes, “Plan the trade and trade the plan.” Success is impossible without discipline. Wise day traders use only risk capital that they can afford to lose.

#2 – Understand the Herd

Perhaps you need to be a bit more diversified in some areas of your life, like being a father or a husband. Take the things you value in life seriously and with intentionality, then apply this to your trading career. Trading Discipline is a matter of intentionality, according to the most prolific trading psychologist of all time Dr. Brett Steenbarger.

Let’s start by imagining a hypothetical scenario for the sake of discovering similarities in our lives or trading experiences. Perhaps you’ll “see” yourself in this situation from one time or another. If we can do that, it will be worthwhile to examine the causes of our trading anxiety and depression within that context. And if we can identify the cause, constructive action can take place. To trade effectively, the right mindset is essential.

Is day trading a realistic career?

That said, accept small losses and focus on achieving profitability over time. At this point, you’re clueless, helpless and hopeless. It feels like you’re at the mercy of the market and have zero control over your situation. As a bear market becomes inevitable, a wider panic among investors afraid of further losses leads to massive market withdrawal. Having reached your breaking point, you’re now ready to sell out your position at any price. The idea is that it is better to avoid more significant losses by getting out of the market.

The key is to recognize when you’re wrong and learn from it. You can’t improve your mindset if you never take a real risk. You can and should start by risking small amounts of capital, but you do have to take dual momentum investing the leap. If you’re the type of person who can’t accept the possibility of a small loss, it might cost you big time. If you’re in this camp, remember to put your stops in right after you enter a trade.

Understanding Trading Psychology Better

You may be driven to master trading because it holds the secret not only to your financial future, but to your own self-mastery. Mental strength is thus absolutely fundamental to trading success. Furthermore, about 95% of our actions are subconscious, and we tend to replicate our behaviors over and over again. All too often, this replication means repeating the wrong or even disastrous courses of action. A lot of things in life do not give us that absolute necessity to be in the moment.

“For those high on the N1 anxiety scale, it will probably serve you well to avoid frequent checking of your trades, as this will probably only heighten your anxiety…. Along those lines, the best you can do is mitigate the disappointments by intentionally exploring the realistic amount of time, training, and paths required for success in the markets. Add to that an awareness of the systemic hype that is influencing you, along with the pressure you feel to perform. At this point, it’s time to call out the demons causing the anxiety and depression, or at the very least the stress, and take action on what’s holding you back from success. Many of my coaching clients report that as their day trading improves, the quality of their life improves along with it.

“Indeed, it’s often because of our need to make money and our overconfidence that we pursue shortcuts in our learning processes as traders and take too much risk. That leads to volatility of P/L and losses, which in turn trigger our nervousness, tension, stress, fear, and worry.” Dr. Brett Steenbarger, Ph.D. The goal, of course, is to become a trader who learns to manage his emotions and make wise decisions.

It’s no wonder why, then, that expectations set us up for failure what with the constant bombardment of psychological priming done by the entire trading industry. There is no loss of discipline without a prior loss of self-awareness. hammer candlestick guide on how to use it As humans, we often succumb to certain images of ourselves, feeling helpless to overcome who we think we are or ought to be. In the case of trading, as with other scenarios in life, we may fall prey to the sunk cost fallacy.

Think for a moment about some of the higher-paying jobs available in the US economy. Lawyers, doctors, IT directors, coders, airline pilots, investment bankers. Shoot, just imagine an average job like being a teacher or electrician. We won’t spend much time on this topic, but it’s worth addressing first because it touches on the concept of identity. Perhaps your personal journey has been slightly different than “John Doe’s.” Nevertheless, we all experience the ups and downs of trading.

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