The Importance of Psychology in Trading

Published by Sharekhan Education | April 4, 2022

The Importance of Psychology in Trading

Fahim Ansari | Sharekhan Education
Does psychology play a role in trading? Short answer: YES, it sure does.

Let me attempt to explain just how and why.

To taste success in financial markets, a trader needs proper understanding and knowledge of fundamental and technical analysis. But that’s not all. A trader also needs to have a steady temperament and emotional strength to succeed, and the lack thereof has caused many traders to fail. Traders who can manage their trading psychology will often taste more success than traders who don’t have control of their impulses, it doesn’t matter what trading strategies one applies.

What is Trading Psychology?

Trading psychology refers to a trader’s mindset during trading. It refers to a trader’s mental and emotional state and can relate to the way a trader approaches, thinks about and feels about the market. Emotions such as fear, greed, overconfidence, temptation, etc. all play their part. Why? Because there is money involved! As real money is involved in trading, emotions can’t help but creep in.

Greed is the excessive desire for gains or rewards in the stock market. It makes a trader stay in the trade for long without booking or capping profits. This generally can happen in the bull markets where traders might think of having more and more profits if they are in a long position. On the other hand, fear can force the trader to exit a position too early after placing the trade if the position goes even marginally in the opposite direction. Fear might also stop the trader from initiating a trade due to the fear of loss, especially in the case of panic selling.

Whether you are a professional or beginner, you will experience emotions in trading. It isn’t easy to completely get rid of emotions. But while traders can’t keep emotions at bay, there are ways to deal with them.

Dealing with Emotions

Traders well-versed in trading psychology will avoid trading based on emotions or favoritism. This can enhance the probability of earning a profit during a trade or even minimize heavy losses – that’s precisely why we believe understanding trading psychology is one of the keys to success. And by following a rule-based strategy, emotions can be tamed or minimized to a certain extent. The end goal is to develop your psyche in such a way that you only make rational, logical decisions.

Improving your Trading Psychology

The foremost thing needed to improve your trading psychology is for you to inculcate the traits of patience and discipline and not act on subjective biases or impulses. Here’s a checklist I share with budding traders who want to work on this aspect of trading:

• Get yourself educated
• Have a plan and follow it with rock-solid discipline
• No trading beyond your means
• Maintain your trade log regularly and keep track of progress
• Be accountable
• Maintain patience & discipline throughout the trade
• Have realistic expectations

We at Sharekhan Education heavily emphasize the importance of disciplined trading. And for a 360-degree understanding of trading and investing, its concepts and its strategies, we highly recommend you go through our extensive courses and pick out the one that best caters to your needs!

By Enrolling yourself in this stock market course, a learner can learn the basics and the various aspects of trading in Futures and Options Trading.