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Trading Psychology

Trading psychology is how traders approach, think about, and feel about the stock market and their trades. It relates to a trader’s mental state and emotions, which decide whether a deal will succeed or fail. It describes the features and characteristics of a trader’s behaviour that impact their securities trading activities. Which, in turn, affects the performance of their transactions.

To be a great trader, you must recognise and manage your emotional biases, such as greed, fear, optimism, exhilaration, and panic.

Most traders spend a lot of time and energy thinking about which way the market will go and whether they’ll make a profit or loss, which causes much stress and leads to poor buy and sell choices.

A successful trader, on the other hand, recognises that once he enters a deal, he does not influence its result. Instead of fretting about profit or loss, he perfects his trading approach.

Greed is an overwhelming desire for earnings that might impair a trader’s logic and judgement. It can sometimes cause a trader to stay in a position longer than needed to make a little more on the transaction. Buying stocks of untested firms because they are on the rise is an example of a greed-inspired strategy.

On the other hand, fear is why people abandon trades early or avoid dangerous positions owing to fears about suffering losses.

When actively trading, a trader should identify personality traits early on and plan to overcome negative traits, so they only make decisions with solid technical analysis.

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Avoid Overconfidence

Overconfidence in your trading knowledge may lead to the mistaken idea that your opinions and judgements are always correct.

Also known as The gambler’s fallacy is an incorrect perception that a particular event is less likely or more likely to occur due to prior occurrences when the likelihood of such events occurring is independent of previous events.

A skilled trader avoids falling victim to his prejudices, beliefs, and market perspectives. He instead keeps a trading notebook in which he records his trading activity. This allows him to evaluate his judgements after a transaction to see what worked and what didn’t—enabling him to trade more carefully in the future and enhance the success of his trades. 

Learn from Mistakes

A successful trader succeeds because he can take failure as quickly as he accepts triumph. Unlike traders who quit after several losses, a good trader exploits his losses to his advantage. He analyses his trading efforts to learn from his failures and apply his knowledge to future deals.

On the other hand, a trader with a status quo bias believes that prior transactions or tactics will remain relevant in the present market. The downside of making such an assumption is that it prevents the trader from exploring fresh chances applicable in the current market, perhaps locking them out of more feasible trades and methods.

Balance Trading Risks 

A successful trader, on the other hand, realises that capital preservation is a more vital goal of trading than profit maximisation. Profit maximisation is only possible if capital is safeguarded. A good trader understands when and what to trade and when not to deal. To remove emotions from the trading process, the trader might commit to particular daily trading lengths, set profit objectives, and set a stop loss.

Most traders trade on random advice, feel tempted by others making intra-day profits, and follow them mindlessly. A few trades may earn them profit, which soon gets washed away by losses. 

A successful trader equips himself with research, practice, and trading knowledge before starting, investing time and effort to study other experienced traders who are consistently successful and learn from their winning ways.   

Such a trader is likely to stay on top of the news, study charts, read trade journals, and perform industry analysis. He also researches facts and the latest market trends to know what he should trade instead of asking others or following random predictions and rumours. He develops his trading plan based on his findings and sticks to it consistently. This stock market psychology makes trading more system based and disciplined. 

Others may go the extra mile and attend webinars, seminars, and conferences to share and interact with other traders and finance professionals.

Follow Effective Trading Habits 

  1. Develop a trading plan and stick to it. It does not guarantee a profit, but it can minimise losses. 
  2. Do not amend or take a shortcut on your trading plan.
  3. Do not chase for profits. It is tempting to enter a high risk trade hoping for a high profit. But it can also lead to heavy losses.
  4. Trade what your capital can afford and what you can afford to lose 
  5. Accept the risk of loss on trades you and ensure that the potential reward outweighs the losses.
  6. Be ready to close the trade if wrong, no matter how much you believe in your prediction. 
  7. Focus on the overall picture of your trades rather than on their losses, which will lead to you developing profitable trading strategies and winning probabilities.


Trading psychology is critical to succeeding as a trader as it can increase the probability of higher success in the stock market. Over time, you will develop a winning trading psychology, leading to constant profits. 

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