TRADING PSYCHOLOGY 101

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If you’re new to the field and trying to make sense of it, good.
The charm of seeing numbers flickering on your screen can be exciting and shattering at the same time.

1. The ability to hold these emotions from the beginning will give you an edge.

When you’re just starting, it’s tempting. The thought of conquering it all in a day just gets imprinted on our brains. Because of this, the risk of overdoing pops in.

2. Stick with what works for you and keep adding in along the way.

3. Be self-aware. Know yourself and develop a system that tunes in with your personality and risk appetite.

Let’s say If you can manage many open positions and make adjustments at a quick pace, you might want to give scalping technique’s a shot.

On a similar note, if you feel that this is a hassle for you.
You can try swing trading techniques to lower the pressure and trade with a calm mind. It’s more of a mental game.

4. One aspect that we generally tend to ignore is out lifestyle and priorities.

If you’re in a job due to which you can’t be in front of your screen all the time, you might want to opt for strategies that make it trading possible for you under such constraints swing trading.
Any particular skill set will take time to master. So be responsible for each move you make and even if it goes wrong, try to learn from it.

5. Trading psychology > emotions.

We’re all human beings and the tendency of living in greed and fear sometimes overpowers and clouds our judgements and we make poor decisions.

6. Understand that it’s okay and hold yourself accountable for it.

The trick is to stay focused on what the market is telling you rather than what you’re telling the market to do.

7. Stay disciplined as it goes hand in hand with trading psychology
This enables you to stick to your strategy and risk management rules.

It can be tempting to deviate from your plan when the markets are going haywire but with the right mindset and discipline~ You’ll be able to ace it.

Keep a trade journal to work on your trading psychology.

This is a habit that must be started by traders from the very start.

This allows you to keep track of your profit and loss, trading decisions, trade strategies, and even the factors that influenced your decisions.

To conclude, Developing the right psychology is a long thorough process which includes repetition, review and continual improvement.

 

OVERCOMING TRADING SETBACKS

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Trading is unique profession in the world, where easy money is earned the hard way.

In no other business, you can scale in so fast, and really stand a chance to make 100-1000x.

But uncertainty, risk, emotional upheaval makes this business extremely risky and Probability of success making even 5-10x impossible for most of the beginners.

From execution risk to market risk, there are so many hidden and unaccounted risks lurking in the dark to catch a trader by surprise.

This makes, emotional set-backs very common in the business.
Most of us learn quickly to manage and sail through minor set-backs by following discipline and process.

But What about major ones?

Here are the tools We use to manage them:

 

  1. Realization that major Drawdown, both expected and unexpected are part of the business, I have written it on my wall.
  2. Having maximum loss limit for the day [We consider 2% of Capital] and max loss limit for month [For us: 10%] makes you avoid days and months which are simply not suitable for your type of trading.
  3. Just like everything in life, set-backs also follow a pattern, so writing a trading journal and finding patterns in these upsetting events, makes me avoid them in future.
  4. Whenever I feel extreme stress, though trigger is not obvious, I get out of my position, can always re-enter, right?
  5. At times. In spite of doing everything right, PNL doesn’t go green and streak of bad luck never ends,
    So reducing position size to half and then half, really helps in not only sailing through the bad phase of DD but also helps manage emotional roller coaster.
  6. Trading is a lonely business, operationally you don’t need anyone. But you need right set of friends to vent out your feelings, your anger when things go wrong and you are not at fault, for instance~ broker ditching you, so cultivating such circle goes a long way.
  7. When we lose money, we get depressed and we don’t want to talk to anyone, even to people who are trying to help, watching our behavior and amending frequently with people helps not only PNL but also prevents burn-out in the long run.
  8. Set-back also gets magnified when we are using leverage, so don’t trade with borrowed capital, even if you have borrowed from your parents.
  9. Nothing teaches as much as a Loss-making streak, so try to learn as much as possible during that phase. Go back to basics, underline the books and finish chapters which were pending for long. Sense of accomplishment will make the flow of right hormones easy for mood recovery. 
  10. Lastly, nothing heals you from a set-back as much as talking to loved ones, even if they are not into the Markets.

TOP 10 TRADING MISTAKES THAT WE ALL MAKE

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We all make mistakes but what’s most important is to correct them at the earliest opportunity and learn from them.

  1. NOT UNDERSTANDING TRADING AS A BUSINESS

Most of us treat trading just like a hobby~ When it’s not or maybe even if it is, it’s a pretty expensive one.

We can acquire knowledge acquire experience but the lack of professional business approach doesn’t make it last long.

  1. TREATING TRADING LIKE A GET-RICH-SCHEME

Trading requires skill that takes time to learn. It’s not like winning lottery or inheriting money.

There are no shortcuts to it.

By consistent hard work and practice; Find a method that you know inside and out & execute objectively.

  1. PRESSURE OF SETTING FINANCIAL GOALS IN A TRADE

Being a trader comes in with a lot of self-awareness.

Until we know ourselves, we can’t really strive to make a specific amount.

Or we’ll fall into traps & lose it all.

Have patience, discipline & know what works for you.

  1. POSITION SIZING & SL

This is where we open big trades each time.

While it could make a lot of money, it also exposes us to heavy losses.

Having a mental SL is the worst thing we do to ourselves & let our a/c bleed.

Avoid leaving trades unprotected. Trade what you see.

  1. NOT KEEPING A RECORD

Success doesn’t come in without practicing, planning or evaluating your trades & psychology that follows.

We tend to skip journaling not realizing the fact~ it helps to track our progress & learn from the mistakes we made when entering/exiting a trade.

  1. AVERAGING ON LOSERS

We have a tendency to not only hold on to our losses but we try to bring down the cost price by averaging the losers.

In the hope of squaring off at break-even we collect and hold all such stocks that we never thought we’d invest in.

Ride your Winners.

  1. FOMO

Emotions are a key driving force behind FOMO.

It stems from the feeling that other traders are more successful.

It causes high expectations, lack of perspective, overconfidence/little confidence & an unwillingness to wait.

Be aware of the triggers and drive it out.

  1. SCALING UP TOO FAST

The rule is~ Never scale up based on a one-off scenario.

Once we get early success we try to become rich quickly & embrace too much of leverage.

Initially, We got lucky or maybe just gained false confidence. What now?

Have a plan rather than hot moves.

  1. ABANDONING STRATEGIES QUICKLY

Trading psychology or an unreliable process is why we quit our strategies too fast.

Furiously shifting from one strategy to another will only make the returns worse.

Let the strategy/system develop & monitor the results before making decisions.

  1. APPLYING WHAT HAPPENED YESTERDAY TODAY

The market is usually a dynamic place where things change regularly.

The sooner we understand it~ the better.

You can avoid this by looking the market & at what it indicates rather than basing out your choices out of no where.

In the end, Just like a child doesn’t learn to ride a bike without taking a few falls. No trader is perfect. The key to successful trading is:

~To identify & stick to an effective trading strategy/system.
~Never underestimate the market.
~Keep a detailed journal.
~Learn constantly.

Wyckoff’s Trading Cycle

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Wyckoff trading cycle is a great frame work for analyzing and understanding the Market behavior. According to it, there are 4 stages namely- Accumulation, Mark-up, Distribution and Mark-down.

  • Accumulation Phase:
    Begins with institutional investors-such as mutual funds, large banks etc. There is Mass buying of shares of a given stock. Price forms a base as the shares of stock are accumulated at the bottom of a bear market. Market moves sideways in a range and is spread over a long time horizon. One of the Common accumulation pattern- Cup and Handle.
  • Markup Phase:
    When the price breaks out of a range and begins an uptrend, it is called to be a markup phase. This stage is when the price begins moving up. The big money has established a position and retail investors are now invited to join in the profit party. This is the most profitable time to own the stock.
  • Distribution Phase:
    The distribution phase begins as the markup phase ends and price enters another range period. Institutional investors who accumulated at the bottom begin to distribute/ sell before anyone else. This time, the sellers want to maintain higher prices until the shares are sold i.e selling off the shares to the ones entering at a high price. One of the common distribution pattern- Head and Shoulders.
  • Markdown Phase:
    The last phase of the stock cycle is the markdown phase. Markdown begins when the price makes a lower high and no new high. It is when institutions sell inventory, simply taking profit or to change position into another stock or sector. The markdown phase is a downtrend.
  • Naturally, the market doesn’t always follow these phases accurately. Though it’s an interesting framework but has certain limitations:

    1. It is a task to identify the accumulation and distribution phases. Sometimes, what seems to be accumulation turns out to be distribution and vice-versa.

    2. In a similar manner, It becomes difficult to plan a trade as the price moves in a range.

    3. The cycle doesn’t always follow:
    1. Accumulation 2. Mark-up 3. Distribution 4. Mark-down.
    It might go around like 1.Mark-up 2. Distribution 3. Mark-down.
  • In essence, the Wyckoff Method allows investors to make more logical decisions rather than acting out of emotions. But, One shouldn’t just rely on it, rather combine it with other price action strategies.

    Read about the cycle of market emotions- https://www.tradetales.in/the-cycle-of-market-emotions/

    ~For educational purposes only, the charts are used for reference to the content to ease explanation.

Golden Crossover

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A Golden crossover is a Technical way of forecasting the market using moving averages. Some traders and investors often combine it with other indicators and methods so that their risk reward ratio is favorable.

Most of the techniques in technical analysis can be used from 1min time frame to a monthly time frame horizon. There are no specific tools which are only to be used in monthly or weekly timeframe’s. It’s about ‘how you want to use it according to your own trading and investing style?’
Getting straight to the point; Golden crossover happens when, short to medium term 50DMA crosses the long term 200DMA.
DMA- Displayed moving average.

Almost all the charting platforms provide this tool for free and you just have to plot these averages and look for 50DMA crossing 200DMA from below.
Majorly after a golden crossover in higher timeframe like weekly and monthly we can expect at least 2-3 years of bull market or more depending on other economical factors.

This is one of the best method’s to forecast the market phases and take positions accordingly. The rationale is also very simple: Let’s understand it with the help of example here- When price crosses 50DMA, It simply means that the last 50 day average price is crossed which was earlier acting as a resistance and now we can expect the next phase to be bullish or sideways with bullish bias.

In the same way when 50DMA crosses 200DMA, It means that the last 50 days average price has crossed above 200DMA and price is also above both of these averages.
We take it this way that the supply of over 50 and 200 days is now being cleared and a strong rally upside is due.

In the above chart red cord is 50DMA and blue cord is 200DMA and it’s quite clear what happened after the crossover.

We’ve explained this chart completely combining the other methods of estimating the next move because that’s where money is made. Isn’t it?
Link- https://www.tradetales.in/nifty-smlcap-100/

Do tell us in the comment box where you saw a golden crossover happening and how you traded it?

Disclaimer- This blog is for educational purposes only. Kindly refer to your financial advisor before taking decisions.
PEACE.

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