The Psychological Part of Trading
The Psychological Part of Trading
The Psychological Part of TradingTrading in today's market is a difficult profession that will find few people making a steady income and a majority of the rest finding a hard time staying afloat. The puzzling part of the market, however, is that a vast amount of people, with good fortune or bad fortune, all invest in similar stocks and find different outcomes. Does it have to do with luck or timing? Does it have to do directly with brokerage firms or the online stock trading software that are being used today? When it all comes down to it, the main focus of who makes the money and who does not comes down to psychology.
Psychology can be defined in a variety of different ways but usually boils down to the mental patterns and behavior found in human nature. This science dives head first into what causes people to think, feel and do the things that they do on a daily basis. A main subject in regards to psychology that plays a huge role in trading is the ability of oneself to control emotions. A daily tally of the amount of emotions a trader may feel in one day could be astronomical or very minimal. The variance regarding how a trader may feel is going to be based upon how well they are able to capture and control their emotions.
Loss aversion is a staple of trading psychology and how emotions affect the success you may have on a daily basis. A trader will invest a healthy amount on an investment at the beginning of the day. This investment looks like it will do well on paper but yet starts to slide as the day progresses. This same trader will continue to hold on to this stock in hopes that it will turn around by the end of the day but will find nothing but loss when the market closes. Loss Aversion is a psychological tendency found in traders to avoid losses as much as possible even if it means losing more in the end. An adverse effect can also happen in regards to loss aversion when someone who has earned a healthy amount from investments early is afraid of losing this profit so therefore they sell too soon and take a small cut of what could have been a financial windfall. The mindset of a trader should always be to cut their losses when things are going bad and let the profits fly until they no longer have wings.
Some traders say that luck wasn't on their side during a horrible turn and some may say that they knew exactly the right moves to make when everything went in their favor. When it is all said and done, those who have no control over their emotions will suffer and start looking for a job that will cover what they have lost trading. Only the true professional trader who is able to focus and control their emotions in this volatile profession will find success when it is all said and done.
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