Psychologists who study trading have noted some characteristics that are common to almost all of us who risk our money on the markets.
Unfortunately, as most of us know, you cannot consistently win when trading stocks. If you could, trading would be a science, and computers would be the best traders. As it is, even computers don’t win all the time, and they don’t get tired and aren’t troubled by bad feelings.
In fact, winning or losing, traders worry all the time. This kind of continual tension can be wearing, hurting a trader’s ability to think clearly. And it can grow to a point where performance is impaired.
This often happens when traders are taking bigger chances than before. If you normally trade hundreds of dollars, and you start trading thousands, the additional pressure can wear you out quite fast. Greed often pushes traders to go beyond what they can really afford, and that’s when the strain takes hold.
It’s always the easiest emotional response, and it makes the trader feel better until the losses start racking up. Overtrading isn’t good strategy, and to keep from falling into the trap, traders should take stock before pushing the button.
These are some of the main points in trading psychology, and nearly all deal with the battle between emotions and trading logic. Successful trading means understanding the emotional threat, and dealing with so that the cold logic of strategy replaces it.
To make that transition to logic from emotion, a trader has to learn to concentrate on a full-scale plan, instead of just looking at success in one trade at a time. It’s all about focusing on the long-term process, instead of the short-term gain. If your mind is working on the next series of trades, instead of the one you’re already in, then you don’t wear yourself out worrying about each time the stock moves a point higher or lower.
Tracking your trades with a trading journal gives you the means to formulate the long-term plan that will make you succeed as a trader. With high-quality journaling software, you can avoid traps like overtrading by going back and reviewing your strategy in the journal before making a trade.
With each trade you’ve made in the past, the journal will provide notes about your emotional state, your logic, and how that trade was part of your overall strategy. You’ll not only get back in touch with your long-term planning, but you’ll calm your mind and make yourself aware if you are letting anxiety get to you or you are wearing yourself out with worry.
Tracking and planning will make you avoid the psychological traps other traders fall into.