TRADING PSYCHOLOGY

Risk Management

Day traders make a lot of trades a day, normally. So there should be a planning to close a loser trade at right time using a proper stop loss. It is required as part of the good risk management, and not an unnecessary idea.

Before buy/sell one has to calculate maximum possible loss and profit. If the loss is like a burden that can hurt your capital or your planning or not? If the possible loss is more, than you are willing to accept honestly, it is better to avoid that trade. Go for some more confirm trade. There are chances again after hours or days for better one suitable to your risk parameters, if you keep your capital safely with you.

You should have not only risk parameters but also an idea about what to expect as reward on that entry. If you are not getting expected result, it is time to re analyse trading system which you have developed according to your style. If your system sounds good, but there is no reason to continue in that direction towards the goal, close the trade and wait for next chance.

Over Trading

Over trading is a bad habit of traders. Lack of patience is a big weakness of most of traders. Without a proper reason entering and exiting a trade is not fare. When one sits to trade, if it is difficult to control him / her self not to take a position without a reason, it can be considered as impatience trading.

One should think, a risk is assumed with every trade. One of the ways to reduce risk is not to over trade. There should be a trading strategy for you. Wait patiently for entering and exiting, and trade only when market ensures your strategy conditions. One should avoid condition of one bad trade that can take most of, or full profits earned from other good trades. So it is better to enter only in good trades that obey ones conditions for entering and exiting the market.

You have to make a rule for yourself as criteria to stop overtrading. For example, stop yours trading if get loss in three consecutive trades, even though they were with small losses. Reasons may be, sometimes due to tricky market, or due to any other. If the market takes money from you, it is better not to continue there that time.

Always traders have to focus on capital preservation. Try to avoid trading bad habits, to keep trading capital safe. All or nothing strategy can play against traders will, most of time. Waiting for maximum profit may give it sometimes, but reach to nothing mostly. If you trade in multiples of 2 or 3 you can exit at 2 or 3 different targets. After taking certain (1 or 2) targets you can adjust stop loss order to cost or beyond for the remaining, or trailing stop loss which is auto adjusting stop loss order following market price with an assigned fixed value as profit increasing, and stands there as normal stop loss if profit decreases, but not available with every platform.

Always start with demo accounts with play money, or trade 1 – 3 stocks only, to know behaviors of market. Or you can do paper trading by entering and exiting prices  noting down in a paper to evaluate investment strategy and risk management avoiding real money risks.

Day trading is not suitable for all types of personalities. It has its own hurdles to see profit, which is not so easy to cover for majority of traders simply. So it is not advisable to jump to market leaving current income sources, if you are a newbie. Market nature is not constant. It is dynamic in nature. Once getting profit not ensures it will be repeated with another market condition. One should not invest maximum capital at initial stage before he gets experience of different market natures and risks included.

Fear and Greed

Two notorious emotions related to trading are fear and greed. Greedy traders see money in every set up and trade too often taking too many risks. They often end up losing money, because of not taking reasonable profit, expecting more and more, but turn to loser trade.

Taking profit in various levels like target 1, target 2 and target 3 set up, can help a trader to limit greedy nature impacts. After taking enough profit from two positions and putting a proper stop loss for third position, can wait to keep growing profit, reducing risk.

Effect of fear is just opposite to it. They make very few trades. They see trade set ups, meeting their criteria and strategy, but not trading fearing loss. They do not wait to book enough profit on noting negligible weak indication in ongoing direction. It is good to close loss trades quickly after analyse changes enough. Traders should keep risk management norms and close on hitting risk limit. And need to provide chance for each entry to hit profit in a prescribed time period. Winning traders have a trading strategy suitable to them, analyse for chances to enter a trade, and execute it as planned, check its stability and exit from the trade if needed, without hesitation.

Good risk management and good execution, with good analysis make good trades. Every trade should be managed carefully for more reward  and less risks, which makes a successful trader, whom is not so easy to meet.


Universal Trade Book

BASICS OF SECURITIES MARKET ONLINE TRADING.
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