Hi i am James and I would like you to join me as we discover trading. Today we will start looking at the Psychology of Trading with the hope that by the end of this video you will have a better understanding of some of the emotions that you will go through when you are trading, and how we can try and remain in control of those emotions, to help us make better trading decisions.
Discover the Psychology of Trading
Life is like a rollercoaster, with its many ups and downs.
Ext: Stock footage, show charts moving up and buzz of the stock market.
Trading is a similar ride.
When we go through either one of these two experiences we find ourselves going through a range of emotions, from excitement to fear, from fear to hope.
When it comes to trading, so many overlook the importance of understanding the psychology of trading and more than often new traders find themselves losing and can’t quite understand why? We all are looking at the same charts, we receive the same market news and alerts? The answer often is because of the lack of knowledge about the emotions you go through and how to control those emotions.
With Psychology of Trading, now emotions enable us to react to situations, be it anger or fear or happiness. These emotions are controlled by the limbic system of the brain which is also responsible for the formation of our memories.
One of the biggest battles of emotions that every trader will go through is the battle between two emotions known as Hope and Fear.
Probably the most common mistakes that new traders make is that their losses tend to be bigger than their profits. The biggest reason of this is indeed because of Hope and fear.
Picture this, you have a winning trade in the market which is in profit, you feel excited and happy and then fear starts to sneak in as you start worrying that those good feelings will disappear at any minute if the market turns against you and your profit will disappear.
As a result of these thoughts which lead to the feeling of fear, you quickly close the position and literally snatch at that small profit.
Now let’s look at this scenario reversed; You have a trade in the market that is losing. This time you experience a different type of emotion; Hope. This time you find yourself hoping that your trade will turn itself around, so you don’t close your position. But the position keeps losing and the loss gets bigger and bigger until in the end it either stops out or you close the position taking a much bigger hit than needed.
In both scenarios, your losses are bigger than your profits.
It doesn’t matter if your you have more winning than losing position, your trading account will still be in the negative.
This is one of the biggest hurdles that every trader faces.
Psychology of Trading – How do you solve this?
You switch these emotions around.
Psychology of Trading – How you ask?
When you have a profiting position, you need to think that you have got the direction right and “hope” for more profits.
When you have a losing position, you need to think that you have got the direction wrong and need to “fear” more losses and instead take a smaller manageable loss.
This of course, is much easier said than done, it is one of the hardest emotional battles that can occur. But by identifying these emotions and understanding them you will be in a better position to try and master it.