The traits and skills required to be successful in the financial markets are often similar to those employed in winning a sporting competition. In most sports, successful players know the rules, what the goal is, and what it takes to finish on top. The same holds true in trading; one should have an understanding of the fundamentals of a company, basic workings and it’s direction forward. It is also important to maintain discipline and keep emotions in check for rash decisions which could impact one’s stock portfolio in similarly to irrational moves made in a game.
The Psychology of Trading Stocks
In many sports, a player has to make instant decisions regarding their actions. The same is often true in trading; one must make quick decisions as to whether to buy or sell on short notice and, in order to accomplish this, one needs to have his or her wits about them, the discipline to keep on an established trading track, and the presence of mind to know when to book profits and losses. This is no time to be emotional.
It is not unusual for trader to get scared while seeing their stocks dive on a downward trend or bad news is released on a certain stock, or witnessing the stock market fluctuations in general. The fight or flight response may kick in and a traders may feel they need to liquidate their stocks and resist taking trading risks. This may reduce further losses; however, they may also lose out on potential gains.
Like athletes, traders must to recognize their fear is a natural reaction to a threat. In the trader’s case, the threat is a loss of profit potential or money loss. Putting their fears into perspective, what they fear, and why they fear it, could prove helpful. By recognizing how a trader reacts to certain market situations, he or she can strive to avoid fear-driven decisions during a trading session and move forward with confidence.
Greed Is A Green Monster and a Foolish Partner in Trading Stocks
Fans take notice when athletes seem to lose the love of the game; their behavior indicates they’re solely in it for the money. Greed can cause investors to hang onto a winning stock too long and they run the risk of getting whipsawed or losing a position. Greed can be difficult to conquer as many are compelled to wring just a little more profit out of a stock; it’s human nature, the instinct is to exceed. This can result in impassioned rather than intelligent business decisions.
In sports there are rules, and failure to play by the rules can lead to not only losing, but being outsted from the game. Investors should establish their own trading rules beforehand by establishing limits based on their risk-reward ratio. Traders can impartially decide when they will sell, regardless of their sentiment over a stock.
For instance, if a stock is trading at $15 a share, they can choose to exit at $16 or $13 implementing a stop loss or stop limit with their broker ensuring emotion will not play a part in the transaction. In addition to implementing price targets, the trader may also decide when reports of negative or positive earnings bulletins or when macroeconomic news breaks, he or she will buy or sell a stock. Another rule a trader could employ is to exit a stock if a large buyer or seller enters the market.
Post-game locker room interviews reveal the “win some / lose some” attitude some athletes adopt. Setting limits on what a trader wins or loses in a day is another rule which will keep the emotion out of trading decisions. Sometimes the best course is take all of one’s chips and go home rather than risking a potentially losing a hand by staying in the game.
Establish a Trading Strategy
Top athletes become experts in their sports through consistent, regular practice, which leads to improved performance. Traders should educate themselves in their chosen stock interests in order to have at least a rudimentary knowledge of their holdings. If a trader has an interest in technology stocks, he or she should research the technology sector. A trader with an abundance of bank and financial stock should become reasonably familiar with those investments.
In addition to good old Google, a trader might consider attending trading seminars and sell side conferences. A logical step would be to spend as much time as possible researching potential stocks by studying charts, reading trade journals, and interviewing management, if relevant. An industry analysis or macroeconomic analysis would also familiarize the trader with trends in a chosen area of interest. Knowledge is power and a trader who understands his or her stocks could become a much more confident trader with less of a fear of the unknown.
Assess the Performance of Your Established Trading Strategy
Before the big game, athletes project how they would expect to compete and, when the game is over, they assess their performance in order to improve. Traders should also analyze and valuate their performance on a regular basis. In addition to assessing their returns and investments, they should also consider their knowledge of their holdings, the markets, and readiness for trading sessions. Routine analysis of trading habits can help the trader manage investing mistakes which may, ultimately, heighten returns. A trader aware of his or her performance may be better prepared to make psychologically sound business decisions.
Start training with a well-informed mind to find success in trading stocks.
Just as an athlete needs to know how to play the game, he or she also has to be psychologically “in the game.” Traders should also trade with a healthy psychological outlook. Employing the disciplines of setting trading rules, establishing a trading strategy, researching and gaining experience, as well as periodically assessing trading performance, can aid the trader in overcoming fear and psychological blocks which, hopefully, will enable him or her to become confident in managing a financial portfolio.