What is Trading Psychology? its Importance & Discipline

If you say that you trade, especially in the cash or derivatives market, the reaction varies. Some will snigger you are basically gambling, while others would ask you to invest in less riskier assets like bonds, provident funds or at least mutual funds.

But is trading akin to gambling?

Trading cannot be gambling. Gambling is somewhat that depends entirely on your luck. To be successful in trading you need luck, but that is only a part of the whole strategy. You also need dedication, patience, research and advice to trade successfully. In gambling you choose something which is totally random and hope that it clicks. Sometimes it really does, and the person becomes a millionaire within an ultra-short span of time. But the chance of somebody winning in gambling is one in a thousand.

Unlike gambling, trading does not repeatedly reward somebody who approaches it solely depending on luck. The most important aspect of trading is that it requires as much discipline as investing. Only the time frame is shorter and so are the returns.

Unfortunately, the motivating factor behind majority of the traders is greed and regret. The first factor i.e. greed is easy to understand. Most of the people in the capital market think trading as a quick and easy way of making profit. Herd mentality plays a great role in trading.

What is here mentality in trading?

 Suppose, a stock is falling. Experts say that the stock has fallen enough and is currently available at very low valuations.  On hearing the expert opinions some people rush to buy that stock. The word spreads and more people join in. You may have been the logical one who was of opinion that the price can plummet further.

However, when you see the majority of the share traders jump in the fray, you feel idiotic to stand at the side while the tide is about to turn favorable. Throwing your solid logic to the wind, you also buy a number of shares of that script (well a lot of) thinking, convinced like the rest that the price would bounce back from here; thence you would make a neat profit and exit.

But share market history shows us that events do not happen as planned. More bad news( false results, false revenues, deliberate pushing of goods as sales, capitalization of expenses, profit arising mostly or of one time revenue activity, regulatory lapses, fine etc.) pulls the stock down even more. Now you are in a quandary. You took the trade from the angle of trading and not investing. in such cases mostly you do not have sufficient cash to hold the positions for long. This is briar you were supposed to get profit shortly and move off with the money. So, as the price dived further and you cannot trade in any other lucrative positions, you square off these open positions at a loss.

This is fear at play. Maybe the stock would have rebounded from there. But fear psychosis (another factor of trading and generally of herd mentality) forces you to square off at a loss, without waiting further.

If the buy price was logical for buying, still your trading behavior was erroneous. You may ask why?

Your trading mentality pushed you to accumulate more number of shares that you could have comfortably maintained in normal mode or in demat. The cash you locked in by buying a larger number of shares for quick buy and sell, prevented you from carrying out any other trades. Ultimately, you sold these shares at loss to unblock this amount.

Another emotion that plays out repeatedly in the stock market and repeatedly fools the traders is Regret emotion with a big E. Lets elaborate this with an example. Let’s say you were trading perfectly. Suddenly you notice that a stock comes down to an attractive level. But like an expert trader you wait patiently because you feel that the stock has still some downturn left. But the stock reverses, goes up, and does not come to that point again for a long time. You Regret the decision of not buying it when it had come down to the lowest point earlier

Your regret makes you forget the fact that you had remained inert because you felt the price had not bottomed out at that point. As it normally happens, price reaches a lower top and retraces down again. This time you are quick to buy the shares once it reaches the previous trough. You feel satisfied. Your regret has gone. You feel that price would rise from that point because 1) It had done so before 2) You have bought at that point.

Alas, the price dives further and you watch helplessly as it reaches the price that you had thought as the proper bottom. You can only watch and Ban-ff your head as you have already bought at higher prices Your endless wait starts as the price ho-hums around that level for a long time before finally rising, months or years later.

You wonder, what made you buy those shares at the upper level when you had a whiff that price would reach this bottom point. The answer is single handedly “Regret overcoming Logic”.

The burst of adrenaline is one of the most dangerous after effects of traders. Truly, those sitting on front of mobiles and terminals, can overcome this excitement and trade with rationality and patiently, are successful. On of the most dangerous emotion that is a result of adrenaline rush is the irresistible urge to trade.

Most of the time, you will not find someone who sits the whole day waiting for the right moment to trade. If in any case you find someone, he might be Rakesh Jhunjhunwala.

In other mortals, what normally happens is that you restrain yourself at the start. However as time passes intraday, you become restless, as you visualize the lack of trading as lack of income for that day.  Slowly, your patience evaporates, and at some point of the day, at an inappropriate opportunity you execute an order, just because you did not trade the whole day. You keep your fingers crossed that its going to move profitably. Alas most of the times it does not happen as you envisaged and instead, you suffer a loss.

Selling Short, because you feel the price has risen sky high, has left many traders thunder stuck. In capital markets price can reach sky high and then aim for the space. Many short sellers have been reduced to penury, when they short sold scripts or derivatives and got crushed when “short squeeze” occurred. Traders sometimes forget that is best to sell something only when they have an equal quantity bought at hand.

Recommended Stock Trading Course for Beginners 

The best trading psychology would be to “buy like an investor”, but “sell like trader”, without waiting for years of multibagger return or of dividends like an investor.