By Shivansh Bhasin, Founder, and CEO, The Investrology
The pattern of investment has changed over the years. While people from the older generation prefer to stick to the old mode of investments like fixed deposits (FDs) or gold, millennials explore several investment options ranging from stock markets to crypto.
One of the most neglected aspects among many investors is mental discipline. In one of the recent interviews, Canadian billionaire investor Chamath Palihapitiya mentioned that successful investing is all about behaviour and psychology and even the best model or analysis in the world may prove to be of no use if investors press the panic button during tough times.
Some traders have such high standards that they overthink and over analyse market data before entering or exiting a trade. This often leads to hesitation and self-reproach and tends to undermine one’s trading strategy.
Understanding trading psychology
Although a fairly ignored aspect, trading psychology plays a major role in shaping the behaviour of an investor in the stock market. Trading psychology denotes the emotional and mental state of an investor that helps them decide the pattern of trading.
You are likely to have several thoughts in your head, arguing for and against taking, entries or profits. Experiencing such a dilemma is known as Cognitive Dissonance. In the field of psychology, cognitive dissonance is the mental discomfort – psychological stress – experienced by a trader who holds two contradictory beliefs or ideas. This discomfort is triggered by a situation in which a person’s belief clashes with new evidence perceived by the person.
Understand Your Trading Psychology and Deal with it
Trading psychology can both positively and negatively impact the trading actions of an individual.
For that it is important to identify what your trading psychology is so that you can work on it accordingly. Here are a few ways to understand if your psychology is affecting your trading behavior in the stock market or not.
Some of the ways to deal with negative traits include:
- Set yourself free from the biases: Like elderly people tend to stick to “safe” investment options like FDs, such biases are also prevalent many times among stock market investors. Often people have the tendency to invest in the stocks of bigger brands and companies, assuming the brand name may have a role to play in getting better profits and eventually ignore smaller companies. Such may not be the case all the time. For example, thousands of investors invested heavily in Paytm, since it was a major player in the industry. But investors who invest in lesser known or smaller companies like Bharat Dynamics actually made profits recently.
- Get rid of fear: Often people have certain fears and they either refrain from trading or invest very less in the stock market. But always remember, in today’s economy, not taking any risk is the biggest risk. Keeping aside your emergency corpus and funds for back-ups, you must invest properly in stock markets. If you refrain yourself from investing in stocks or invest an extremely small amount, you may end up repenting.
- No place for anger: It is often seen that investors tend to withdraw their investments out of anger and frustration, when they face severe losses. Even in extreme volatility, certain industries will surely make profit. Look out for such new companies whose shares are performing well and start investing in them.
- Don’t Get Carried Away by Chart Expertise: It seems obvious that newcomers and probably also some seasoned traders – profitable or unprofitable – believe that successful trading is all about charts. No one enough tells them that focusing all your time on your charts is a mistaken strategy. Majority of people who lose money trading may very well have excellent chart reading abilities. They can read charts very well, and they understand patterns too. Rather than going by the technical analysis all the time, it is better to play with your mental strengths and calculations at times, to enhance chances of profit.
“You have power over your mind – not outside events. Realise this, and you will find strength” said Marcus Aurelius, a Roman philosopher. His words hold true even today.
After facing a couple of losses, it is likely to feel frustrated. At such a time, you could focus more on trading your strategy and sticking with your trading plan because you’d know that these are the only things you can control. You’d also focus on improving the way you respond so that you don’t let yourself get bullied by your emotions. In the nutshell we could say “To study the market is to study human behavior, and to study Human Behavior is to study Yourself.”