How to Develop Trading Psychology? Master Your Emotions  in Trading!

Before going into the depth of the blog, let’s start by assuming three scenarios:-

• When you observe any stock but don’t take entry suddenly it has shown great movement.
• When you added the stock to your watchlist but didn’t take an entry, it showed a huge spike
• You observe a stock placed entry in it, and it starts falling.

In your trading journey, have you ever come across such scenarios? In such situations one thing all traders feel is Fear of missing out (FOMO). You can regret your decision and blame the market for that, but the reality is you somewhere lack trading psychology. 

Trading Psychology: It is a phase that differentiates beginner and professional traders. It is one of the crucial factors that determine the possibility of winning and losing a trade. 

Numerous traders have negative impacts of trading psychology more than positive viewpoints. Due to weak psychology, most traders lose their money by existing premature trades due to the fear of excessive loss; some who hold trades exist positions before getting predetermined targets. Trading psychology is considered more crucial, excelling in fundamental and technical analysis. 

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So, let’s delve into this blog to understand the meaning of psychology, types of trading fears, and how to overcome them.

Understanding Trading Psychology

Trading psychology is the mental and emotional states of the trader that decide the success or failure in the live market. It denotes different aspects of the character and behavior of an individual that influence their trading actions and is as important as other factors, such as experience, knowledge, and skills, in determining trading success. 

Proper risk reward and discipline are the two most essential aspects of trading psychology. If you are following a risk-reward with stop loss in the system, there are high chances you will get your target or you will exit in a small stop loss. But if the psychology is weak, then fear and greed overtake your emotions, and factors like recreation and hipe come into the game. 

Common Psychological Trading Issues

Managing emotions is one of the most influential challenges traders face. Sometimes, greed and fear drive the trading decision; they take over the sense of making rational decisions. Fear can paralyze a trader and convince them to trade out of their setup with big risks. 

So, let’s explore some of the common trading issues that most traders face in their trading journey, resulting in the loss of massive capital. 

Fear of missing out (FOMO)

Doesn’t matter how professional a trader you are; FOMO is a prominent psychological phenomenon that impacts traders of all experience levels. In simple terms, it means fear of missing out on the lucrative market move; whenever any trader succumbs to FOMO, they start trading impulsively without waiting for any setup, leading to poor decisions and further lead to unfavorable outcomes. 

Suppose a trader is waiting for a setup and, by any chance, he missed a rally of 30-50 points in Nifty50. Now, he is in FOMO. He will try to enter a running bull candle by keeping a huge stop loss. As the candle is running and hasn’t closed yet, it can cause the trader a great loss.

Following the herd

Greed and Fear then lead to a tendency to follow the crowd, especially in the volatile market phase. In spite of sticking to their analysis and research, traders enter or exit the market at the recommendation of others. This herd mindset can result in prematurely wrong entries and exits, as, again, emotions drive decisions rather than rational judgment. 

The market never works on the sample principles, and you have to take the position based on the prediction. Suppose you are planning to take entry at a pullback, and someone suggests that you enter at CMP; there is the possibility that you will follow that blindly and take a position. 

Impulsive trading

Psychology can lead to unplanned and irrational trades driven by a desire to get immediate results in a few seconds. It is one of the most common psychological issues of option traders. Once they captured a winning trade, the desire to get more profit led them to make more and more trades in a row. Additionally, if they lose a trade and desire to recover, all the losses can cause them to punch multiple trades in a day. As a result, you have to incur more transaction costs, which further reduce overall profitability, and in some cases, you have to pay more brokerage than profit or loss. Over-trading happened due to emotional exhaustion and greed.

Ignoring stop-losses

Most traders become overconfident while making trades. Whether it is equity trading, or index trading they blindly believe in their setups and ignore predetermined stop loss or exit prices. They start trailing their stop loss losses in the hope that the market might come back in their direction. However, after holding a trade for a long time, they experienced larger losses when the positions kept moving in the opposite direction. To avoid this, some tried to add more quantities to average out the trade, which further started showing them large losses due to the theta decay(in options). 

At the same time, if they accept small losses, it can lead to more significant setbacks in trade. So, relying on your stop loss and trying in the process is very crucial to becoming a player in the long run. 

Leaving Trade Early

Some impatient traders exit the position too early on the profitable setup. In spite of knowing that the market trend is one their favor, the fear of giving back their profit to the market can hinder their profits and create a series of missed opportunities. Sometimes, traders just leave trades at small gains, which further costs them high brokerage. Moreover, some scalpers used to buy massive quantities to gain a few points, but when markets went against their directions, they cut out the trade at huge losses without following their risk-reward ratio. 

How to Build Strong Trading Psychology?

In the above parts of the blog, we have discussed various types of fears and psychological challenges an individual faces while trading in the Indian stock market. But is there any solution?

Yes, here in this section, we will discuss one of the factors you must consider to make your traditional psychology more stable:-

• When you are in a trade, never go beyond your rules. If the setup is not in your favor, do not make any entry into the trade.
• Always learn to accept your Stop loss. If your stop loss is hit, accept the fact and wait for a new setup. Do not try to trail your stop loss. 
• If you are a morning trader and you have made profits in your initial trades, shut down your system and keep yourself away from the stock market.
• Don’t feel FOMO if you have missed any trade in spite of making unnecessary entries. Wait for your proper setup.
• Trust in the process; do not get confused by the tips or information provided by others. 
• Never make random entry in a breakout candle it can a a trap.

The Bottom Line

Trading psychology is crucial as it directly affects the decision-making process, risk management, and discipline of a trader. If you have the right psychology, you will patiently wait for the right setup. After getting your setup, you will take entry as per your risk tolerance. However, if you have weak psychology, you will feel FOMO, and you will make wrong decisions or leave premature trades. 

Having correct trading psychology can enhance your self-awareness, foster a sustainable mindset, promote disciplined behavior, and finally contribute to improved trading and increased profitability. 

It is believed that in trading, fundamental and technical analysis plays 10% and psychology plays a 90% role. You can make a losing trade a winning trade with the right psychology, and inversely, you can make a winning trade a losing trade with the wrong psychology. 

So, if you want to master trading psychology, you can enroll in our course, where we will guide you on various psychological aspects of the stock market.