Ever heard of little thing called traders psychology? I know everyone and their brother talks about it, but the truth is that is because its arguably one of the most important aspects of trading and being a trader. A lot of people usually parallel traders in their mind with macho, can’t lose type of people. Losing though is part of the trading game and how you recover from a loss might be just as important. Another important component of trader’s psychology is the ability to make decisions under pressure. The competition is steep out there, so keeping a calm and collected demeanor while you are sitting on coals is important (I do not condone coal-sitting, it’s just a metaphor)
A trading strategy is vital if you want to reach your investment goals. Knowing your target entry price, and knowing what measures you will take to manage your risk, isn’t worth much when you don’t adhere to it. Exiting a trade prematurely because of market pressure, can have catastrophic results on a trader’s mentality. Exiting due to your strategy or data, gives you an opportunity to adjust and pivot when you are in the same situation in the future.
One of the biggest downfalls of starry-eyed beginning traders is focusing on the up, without having the correct risk management measures in place when it inevitably goes down.
Having a plan when things go proverbially sideways can help you maintain a cool head. Being in full realization that any instrument on any market can go down just like it goes up will hopefully help you when you need to let go of a position in the red. A great example is bitcoin, just a week ago within a period of just 24hrs it lost more than $1000. I’m pretty sure there were traders that held on to their bitcoin positions hoping it would move north of 7000 or more dollars only to see it crashing down. And traders loved bitcoin, to the point where Google searches for buy bitcoin surpassed those for buy gold in October – but as the old axiom goes “love hurts”.
Options are Always an Option
The good thing about Options is that they allow you to only risk your premium. That way even if the trade goes against you what you are risking is predefined. This can help you control your emotions a little bit better since you more or less know the outcome if it goes against you.
That’s What Business is Like
If you are intending to be professional trader, you are essentially becoming your own boss and business do well and do badly. Again, this is realizing that there is a downside to every position, every market goes down, every bubble bursts and every rose has a thorn. Even in a traditional job, some months are better than others (darn bills). Think of your loses not as losses but pressure tests for your trading strategy. Although I’m sure Warren Buffet was born Wall Street Journal in hand, he must’ve made mistakes early on in his investing career (which started at 12 or something equally ridiculous).