Winning Psychology (TRADER’S MIND)
To attain winning psychology, traders need to overcome three major destructive emotions; Fear , Greed and Hope.
FEAR is the major source of many errors in the markets and it is the most destructive mental force for a trader. Fear is a complex emotion taking many forms such as worry, fright, alarm and panic. When fear is given free rein, it typically combines with other negative emotion such as hatred, hostility, anger and revenge, thereby attaining even greater destructive power. Fear is basically caused by ego and money. Primary trading fears are being wrong, losing money, missing out a trade and leaving money on the table.
The solution for trading without fear is learning to admit that losing is part of the game and ACCEPT THE RISK.
Traders must accept the risk consciously as well as subconsciously. The trading rule
‘Never Trade More than You Can Reasonably Afford to Lose’ makes a lot of sense in handling fear.
Only ‘Risk Capital’ should be used for trading. If you trade with scared money, possibility of losing any portion of it, will create a lot of stress & fear and impact your trading psychology and decision making.
The next destructive emotion,
GREED results from the combination of overconfidence (euphoria followed by success) and a desire to achieve profitable results in the shortest amount of time. Though certain extent of greed is necessary to succeed in trading, traders become reckless and sabotage themselves when greed exceeds the limit. In this age of leveraged markets,
it is common for people, to be tempted and carried away by the lure of quick rich dreams, start overtrading beyond their risk tolerance/limit. People do not understand and take into consideration that leverage can work both ways; unlimited potential for profit as well as loss. When this emotion takes over, a trader will usually throw caution to the wind. Also, after a series of wins, traders become overconfident and plunge into more risk taking with careless decision making, which always leads to disaster.
Successful traders often make a deliberate effort to stay out of the markets after they have experienced a profitable campaign. Greed is created when one thinks only about rewards.
When you learn to analyse the markets with risk – reward potential always, you won’t be carried away by destructive greed.
HOPEcould be a positive emotion in real life but hope will ruin traders as it is just a wishful thinking and many times it turns a small bearable loss into account/career damaging serious loss. Hope is one of the greatest obstacles to clear thinking and maintenance of objectivity in trading. It is prudent to follow the popular trading rules
‘Never Trade Based on Hope & When in Doubt, Stay Out’.
Whenever you can identify hope as the primary justification for holding a position, it is advisable to close it out immediately. Many times, traders will get clarity about market trends after closing out their losing position.
Closing losing positions will free traders from biases and reinstate objectivity in market analysis.
While overcoming three major destructive emotions,
traders must learn to think in probabilities to succeed in the game as trading is a probability game. Traders have to be flexible in their expectations so that they can adapt to the ever changing market conditions quickly. They need to develop some more key positive characters to win consistently in markets. They are;