As the markets open, a trader begins his day by observing the stocks he has previously selected through a vigorous filtering process of premeditated entries and distinctive trend patterns. The hours gradually progress as he proudly watches his stock move steadily upward, confirming his theoretical analysis of the trend pattern. While finally deciding to buy into the particular stock, as it reaches a particular level deemed as acceptable, the trader takes responsibility for the decision made. He then relies on patience and calmness, to perceptively watch the chart pattern playing out on his screen, careful not to be influenced by any of the emotions accompanying the slight changes in stock patterns that may lead him to stray from his original plan. In an attempt to retain the analytical decisions previously made with a level of meticulous clarity, caution and careful precision and to prevent any rash and unnecessary changes, he attempts to neglect these varying levels of emotions building up in his mind throughout the course of the day.
Firstly, he aims to curb the bout of impatience slowly settling into the mind during a sideways pattern and the resulting hope for a specific outcome in the following move. He aims to be indifferent to the arrogance and slight greed that sets in as the stock moves in the desired direction and the tempting need to increase the lot size from what was financially calculated in the original plan. He aims to remain disciplined despite the rising over confidence and elation felt after a move that had gone too much in his favour and later rejects the warning signals that accompany a slight downward correction that tells that the rally is possibly over. He aims to be calm while panic starts to overtake the mind at crucial points when the outcome of a stock differs from what is expected- thereby instigating a sudden change in a predetermined decision, solely due to the fact that the stock is making a move contrary to the direction of the ongoing trade, resulting in a sliver of fear as he watches his possible losses increasing. He then aims to control the simultaneous despair, desperation, helplessness and an overpowering sense of defeat and resignation as he watches these uncontrollable events unfold as the market comes to an unfortunate close for the day.
Psychology thus has a heavily influential impact on a day trader’s mindset, while he faces multiple difficulties and hurdles along the journey of his day. Ranging from the never- ending pace of making hurried, improvised decisions and synthesizing information while operating at perennially high stress levels, to the inability to filter out an amalgamation of jumbled thoughts and emotions that results from the expectedly fast pace of the job, the core of a trader’s life is heavily dependent on his psychology. Managed well, it can be the greatest asset to a trader and managed poorly, can be severely detrimental.
For example, while the trader tries to assess an entire upcoming trend, he may be inclined to press panic buttons with the arrival of even the slightest of bad news or with negligible changes in the trend. From a retrospective perspective, that information would normally not be sufficient to truly change the direction of the move and the trader may well be aware of this. However fear, being the dominant emotion at this point of time, may impact his decision and despite better judgement, may lead to a retrospectively wrong decision. This may further lead to regret which may subconsciously persuade a trader to react in a hasty and impulsive way, leading to a sudden new decision to make up for any previous losses and the unproductive thought of “if only I could redo”. This is a clear example of a breakdown in the psychology required for a successful trader and how it can be quite damaging if not handled appropriately.
In other words, the most important characteristic of a successful trader is a specific presence of mind that takes a neutrality and an indifference to emotions that tend to cloud judgement. A trust in instinct and yet, not a dependence upon it. The capacity to adhere to discipline and stick to choices and decisions made no matter how mentally taxing or time consuming they may be. Yet, simultaneously, the potential to not be rigid but rather, flexible enough to know when to change a decision and improvise. A confident state of mind, required in uncertain and improvised situations, to manage the pressure after a successful trade for upcoming trades to reproduce the results, or the nagging fear that accompanies a string of failures. Yet, overconfidence can be quite detrimental in itself, if the trader is not able to reflect and admit his wrong decisions. An inability to be swayed by fear, panic, regret, worry, arrogance, confidence and an internal calmness that allows the analytical mind to continue to function. The capacity to stand back and watch without being influenced by the slightest piece of good or bad news or by personal biases. A lack of dependence on these emotions and the creation of a mental space that is unaffected by worries and the possibility of certain outcomes may sound idealistic, but has been executed by many successful traders on a day to day basis.
The need to free the mind resulting in a state of attentiveness and concentration without emotions and thoughts clouding mental space is essential to the process of trading. The high levels of stress prevalent in the nature of the job is another element that plays a large role and can often impact decisions as it can make the trader more reactive to situations and on edge rather than being calm. It destroys the state of the mind previously explained as ideal and will lead to a reactive nature. This may result in a loss in control of oneself and a breakdown of the psychology required for a successful and effective execution of a trade which is heavily dependent on self-discipline and self-control.
Therefore, psychology plays a role in trading and its management is essential for a successful trader to execute successful trades in a day. At times, it is this same psychological aspect of a mind that can be beneficial, but in an occupation that requires a controlled mental state devoid of unnecessary thoughts and emotions, this natural psychology that is a part of daily life can become immensely problematic. That is not to say that its control is impossible. There are indeed ways to overcome the play of the mind. Knowing these ways can neutralize the effects of psychology on trading and will be addressed in coming articles.
If you are new to trading and don’t have a solid understanding of various trading concepts, check out our free tutorial Teach A Man To Fish – A Foundation To Technical Trading.
Ananyaa Sreekumar – Content Marketer at Tradonomix.