Introduction to trading psychology: A combination of behaviour patterns and investing principles
Trading psychology is an emotional component in the decision-making process, influencing the overall investor behaviour throughout the entire investment process. With the help of stock market psychology, it is easy to classify the kind of investor you are based on your investment behaviour. For instance, you as an investor could be impulsive or patient, flexible or rigid, agile or clumsy, risk-taker or risk-averse, optimistic or pessimistic.
Further, trading psychology tackles prominent emotions such as fear, greed, regret, and hope. According to any given situation, the emotions exhibited by an investor state whether trading is advantageous or disadvantageous. Let us take a look at each of these emotions in a little detail.
Fear of unexpected result
The volatility in the market, unfavourable news about shares you are invested in, could make you apprehensive. As a result, the first reaction could be to square off your position and liquidate your holdings. Here, learning and understanding the psychology of trading could help you to avoid making snap decisions and taking risks by focusing on your trading strategy by studying the stock charts.
Greed for profit
The urge to earn more profit could take you away from a fundamentally or technically advisable profitable position. This emotion becomes so overpowering that you might not behave rationally. The delusion of earning highly attractive profits could result in a high-risk decision that might leave you in deep losses.
Regret for lost opportunity
Regret is a never-ending emotion. No trader is completely satisfied in the stock market at the end of the trading day. Even if you have earned an attractive return, you might feel that you have lost the opportunity to earn more in the stock market.
As a result, with this emotion, you might end up placing wrong trades. In order to make up for the damage or perceived damage caused by this emotion, you might also end up buying shares impulsively and increase the risk of encountering a huge loss.
Hope for better
Though hope is a positive emotion, this emotion might backfire while trading in the stock market. There is a thin line between hope and being practical when it comes to investing in stock markets. Strongly anticipating the result in your favour might force you to make wrong decisions.
With a deeper understanding of the psychology of trading, you might be able to determine the level of success and expected return by bringing about a change in your investment habits and emotions.
However, if these emotions seem too difficult to handle to you, it is best to stick to relatively safer investment avenues like mutual funds. Moreover, you can seek help from a trusted advisor to chart a financial plan unique to your situation.