Psychology plays role in stock trading
Around 90 per cent of the traders fail in stock market while trading or investing.
Around 90 per cent of the traders fail in stock market while trading or investing. Trading is all about having a good strategy, good risk management and right trading psychology. While trading in live market you need to control your emotions.
Risk management and technical analysis, strategies can be learnt by reading some good books or by attending some seminar or webinars. Risk management is all about position sizing, setting up a stop loss. In fact, psychology is the heart of trading.
Most of the traders cannot handle trade when the price of a stock reacts to some news in the market. Right strategy is as important as having a right mindset. All successful traders have their own strategies, methods and unique style of trading. They are successful because of a right balance between technical know-how and their trading psychology.
Trading is mainly a mind game. During trading, we take trades based on emotions which ends up in losing big money. Whenever we take a trade and suddenly if we see the prices falling, we cling on to it assuming that it will rise and in this process by not putting a stop loss in the right place we end up making a huge loss.
In live market, one goes through a range of emotions which could be happy, sad, anger etc. A successful trader trades without emotion and strictly follows the system and finally succeeds in his business.
Human emotions which are common in trading are fear and greed. Greed will make one raise the profit target, eventually losing profit which was already in hand. Fear causes you to book quick and small profits, eventually breaking your rule.
Hope makes you stay in a losing trade hoping for a turnaround and eventually blowing up the account. Winning position turns into losing position because you broke the rule to greed. Sometimes after exiting, the stock the price may rise again and then we repent. When we book early profit due to fear, we miss the target.
We take a trade before it comes to right location in the fear of missing out the opportunity. Whenever a trader loses money, he takes new trades immediately to cover up his loss of earlier trade. Sometimes a trader over trades by taking ten to fifteen trades.
Sometimes you stay in a losing trade hoping market will turn around so that you exit at break even. Discipline is important in strict risk management. One should be able to take strictly only 1 to 2 per cent risk per trade.
Traders constantly change their strategy or system in search of the holy grail strategy and eventually don't master any strategy.
Thus, psychology plays a key role in stock market.
(The author is a homemaker who dabbles in stock market investments in free time)