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The internet is filled with accounts of people who lost huge amounts of money from bad investments. These horror stories have kept millions of people from trading because the “better safe than sorry,” mindset does make sense.
What’s more, most people don’t exactly have the capital to even begin their trading experience. With the current state of the economy, the need to not take unnecessary risks is critical and trading inherently feels risky.
Did you know that one in three Americans have more debt than emergency savings? The situation is quite the same in Canada. In a way, it’s understandable why the mindset to start trading is not very common. However, it doesn’t have to be that way.
Today, let’s explore what potential traders on the fence ought to know about the psychology of finding success in the stock market.
1. Emotions Have No Place in Trading
One of the most common mistakes that people make when trading is letting their emotions influence their choices. The truth is, this can be one stressful field especially when you realize you messed up badly.
For instance, many new traders feel flooded with regret and anger when they realize how losses actually work. Ted Jenkin, a financial planner based in Atlanta explained this with an example in an interview with CNBC. According to Jenkin, if a stock’s value worth $10 falls to $8, it’s a 20% loss.
A new trader would hope that a 20% rebound would make things break even and that sounds like it makes sense. Right? The reality is, that it would require a 25% increase because the calculations now start from $8 instead of the original value of $10.
When you are dealing with investments in the tens of thousands of dollars, this realization can be devastating. There are so many of these seemingly minor misconceptions in trading that frustrate people expecting an easy experience.
It causes traders to go into a “Revenge Trading” mode in a desperate attempt to recover their losses. Thus, consider introspecting to see if this sounds like something you are vulnerable to. Ask yourself, do I have the temperament to keep calm even if things aren’t going well? The next point should help out with that.
2. Ensure You Follow Rule-Based Trading
Talk to any successful trader and you’ll notice that one piece of advice they give tends to be uniform. This should surprise you considering how many different approaches exist in this field. Trading and investing via a set of rules you create for yourself is extremely important and they don’t have to be just technical.
Think of it as creating your own SOP which includes everything from how you deal with loss, risk, and changing market trends. This can be particularly useful for new traders because you can fit in guidelines as to how you will grow as a trader.
For example, this can mean exploring two new tools and techniques every month. You could start with something simple like understanding how to use a candle pattern cheat sheet or reading a Jared Tendler book. It really depends on what your priorities are.
Aids like cheat sheets, as explained by ValueTrend, help you get better at noticing patterns in the context of market sentiment and price movements. This gives you an immediate bonus for your trading skills.
On the other hand, reading something like “The Mental Game of Trading” by Tendler gives you deep insight into the psychological processes, which is invaluable.
You may be starting to realize that trading isn’t all about hitting the buy and sell button. It’s a lifestyle and as with any healthy lifestyle, using a framework or a system of rules helps you progress and stay organized.
3. Learning to Embrace the Science of Probabilities
Hicham Benjelloun, an expert in finance and trading stressed this point in a Ted Talk he gave and it’s definitely valid. According to Benjelloun, it’s crucial to move away from the deterministic mindset that you may be used to. This is tough because we have lived life believing the truth that every action has an equal and opposite reaction.
When you start trading, this mindset leads to frustration and losing control of your emotions. So what does embracing a probability mindset mean? Well, Benjelloun explains that people with this mindset accept losses as a natural part of trading. They know that over the long run, with good trades, their winning trades will balance out their losses.
More importantly, this shift in mindset allows you to realize that there is no magical strategy that always works. With this realization, you can develop and implement new strategies and approaches.
This could include backtesting, where you check how potential trades would work against historical data. Similarly, starting to use risk-to-reward ratios and portion sizing are other techniques that you might find yourself more open to using.
To sum things up, trading can be either tough or easy. It can be challenging or fun. Many people find it to be an extremely rewarding career path while others end up regretting their decision to trade.
Yes, your experience can go either way. However, if you understand the reality of this field and what it takes, nothing will surprise you. Good luck, trader, and may the odds be ever in your favor.
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