Trading Psychology
There is a lot of focus on trading strategies, indicators, and technical analysis when trading. Learn about the psychology of trading.
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Stock Market Emotional Cycle
It’s true, stock market emotions run the gamut from fear, despair, hope, anxiety, and even euphoria. It is so common to experience these emotions that you can actually expect them to occur in a predictable cycle. We call it the stock market emotional cycle.
Think of it this way: we all start out with optimism – optimism that we are going to make lots of money in the market. Over time we may have trades go in our favor and make lots of money. However, if we aren’t in tune with the normal price cycle of the market, we can ride our profits all the way back down, leading us to despair.
Here is an example of a stock market emotions chart that shows the cycle from hope to despair and back again.
The goal, of course, is to become a trader who learns to manage his emotions and make wise decisions. Instead of hope and fear and greed, become a process-oriented trader who can trust his judgment on the market.
Stock Market Anxiety
Anxiety is a pretty normal emotion for a lot of people these days. With all the fear of covid and war and famine hitting the newsfeed, it’s no wonder we’re all a bunch of anxious people. Unfortunately, the stock market can create a lot of anxious people as well.
Stock market anxiety usually stems from a lack of knowledge and understanding. The less you know about something, the riskier it becomes. And for most new traders, this lack of knowledge can lead to anxiety in trading.
“Indeed, it’s often because of our need to make money and our overconfidence that we pursue shortcuts in our learning processes as traders and take too much risk. That leads to volatility of P/L and losses, which in turn trigger our nervousness, tension, stress, fear, and worry.”
Dr. Brett Steenbarger, Ph.D.
There are certain factors that cause stock market anxiety. In the list below, consider if any of these things apply to you. It might help you learn to control your emotions in the stock market if you can eliminate some of these issues.
- Are you trading because you need to make income?
- Are you risking all of your money plus margin on a single trade?
- Do you have any idea what the outcome is of your strategy?
- Is the stock you are trading very volatile?
- Do you like to share your winning trades and not your losing trades?
- Are you placing undue pressure on yourself to become rich quickly?
If you answered yes to any of these questions, you may be stressing yourself out. Day trading anxiety can come from many different angles. We don’t recommend going full-time with trading until you have proven you can replace your income as a consistent trader. For most, this will take years. Likewise, learning to be disciplined with your position size, strategy, and ego, may take time.
To help mitigate stock market anxiety, we’ve created this checklist for you. Feel free to use it.
Trading Performance
The first step of any performance is practice. Practice, practice, practice. Trading is a performance profession. It is really no different than a sports profession, acting, or even doctor or lawyer for that matter. It all depends on how well you practice your craft when the lights are off and the seats are empty.
Don’t take it from us, even Dr. Steenbarger, who has worked with hundreds of professional traders over the years, has this to say about trading performance:
“Think about every performance field: athletics, acting, music. In none of those do we start out by following people online, doing some reading, and then trying to make a living from our performance. Rather, we recognize that it takes years of practice and mentoring to become a professional athlete, movie star, or recording artist.”
Dr. Brett Steenbarger, Ph.D.
So, keep in mind that if you don’t enjoy the trading process, or the process of learning, it is unlikely that you will excel in your trading performance. The traders who go on to become successful actually enjoy the process of learning, studying, practicing, and being a part of the market.
In other words, like discipline, achieving high trading performance is a product of being intentional with your efforts. However, there can be a lot of underlying “limiting beliefs” and bad habits that you need to fix. We talk about this in our SimCast episode with Créde Sheehy-Kelly.
Stock Trading Risk Management
Your process for risk management will set the tone for your trading mindset in each trade. It is the first thing that you should think about when putting on a trade. Period. This is the name of the game: how long can you survive in the market. Without proper risk management, you won’t.
Stock trading is not a gamble. It shouldn’t be all or nothing like Vegas. Instead, it is a game of probabilities. As part of that game, you must understand that risk management is key to your success. Knowing when and where to stop out of your trades, along with how much of your account you will risk, is of utmost importance.
As a rule of thumb, we don’t recommend risking more than 2% of your account on any single trade at a maximum. Realistically, you should keep this to about 0.5% to 1% of your account. Not every trade deserves maximum risk.
However, until you truly learn to accept the risk, you will interpret the noise of the market as a potential threat and will find some way of rationalizing to yourself that you must exit the trade too soon.
However, until you truly learn to accept the risk, you will interpret the noise of the market as a potential threat and will find some way of rationalizing to yourself that you must exit the trade too soon.
To help with your trading risk management strategies, we recommend you watch our SimCast episode with Kris Verma where we discuss the Kelly Criteria. It will help you learn how to set your risk and position size for every trade.