What is market psychology?
Trading psychology is the ability of traders to understand their emotions and manage them. But the market is a reflection of the emotions of all its participants. Therefore, when trading on the stock exchange, it is necessary to take into account several psychological factors:
emotions such as fear and greed.
Psychology of trading on the stock market
For successful trading, it is important to be aware of the psychological factors that influence the decisions made, and to be able to manage them. Irrational decisions of traders may be due to greed or fear of missing a good moment to open a deal. But in addition to individual psychology, there is also the psychology of the market, or the psychology of the crowd. It is she who contributes to significant market fluctuations. And they, in turn, cause emotions in each individual trader that force him to make decisions based on fear or greed.
During the pandemic, the volatility of the stock market increased due to the growth of panic among investors. There are usually one of two emotions behind this: the fear of losing funds or the fear of missing an opportunity. Moreover, pessimism has a greater impact on volatility than optimism. Increasing fear often leads to "panic selling", when traders rush to close their positions in an attempt to avoid large losses.
The principle of the mirror
The most effective way to understand the psychology of the market crowd is the "mirror principle". It is important for a trader to figure out whether he is experiencing his own emotions or has already become part of the crowd. As soon as the trader understands this, he will be able to understand other market participants. But in order to benefit from this understanding, it is important not to be influenced by other people's emotions.
Five ways not to become part of the crowd
A trading plan is your guide to action during trading. It contains a set of rules that must be followed before opening a trade, for example, in which markets to trade and when to exit trades. The purpose of the trading plan is to help you keep a sober mind and not give in to emotions.
Having a trading plan and following it are two different things. Especially if the market is not going as you planned. One of the most common mistakes in writing a trading plan is to write down your expectations from the market and the expected actions in accordance with them.
A short checklist, which should always be at your fingertips, will allow you to focus on what is happening. Comparing your actions at the time of opening a deal with the checklist, you will be less susceptible to emotions.
With the help of the diary, you will be able to track your progress and identify those areas that need to be improved. But when analyzing, you should not focus on unsuccessful trades for a long time. Use them as a hint of what can be improved in the future. Positive trades should provide information about what you do best and in what periods of the market. It is these behaviors that should be repeated more often.
For a novice trader, this can be a daunting task. Every unprofitable deal makes you give up and undermines your inner confidence. It is necessary to separate your self-assessment from the results of each specific transaction. This will help to maintain confidence, and a self-confident trader is much less susceptible to emotions of fear and greed.
The survival of a trader in the market depends on this skill. Risks are the only thing you can control while trading. It is important to be able to determine the level of risk that is psychologically comfortable for you, otherwise every transaction will turn into stress.
It's so simple that no one does it.
Despite the simplicity of these recommendations, not all traders follow them. Understanding the need to follow these rules comes gradually. The sooner you realize their importance, the more chances you have of not being part of the market crowd and making independent decisions.
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