The Link between Psychology and Day Trading
How prepared are you to start day trading?
Day trading is one of the easiest ways to make money. It is a highly profitable venture, but only to those who understand all its aspects. Many people try day trading but fail, for they disregard a crucial element of this business, risk. Getting a chance to see your money grow through a promising investment is not enough as day trading can either build or destroy you.
Why is day trading risky?
- First, day trading is often unstable for the reason that it is affected by various factors that are beyond anyone’s control, such as politics.
- Second, any person can make losses, mainly if one is new in the business. Attention, information, and experience are vital in day trading.
- Third, some people use money that is not supposed to be used as business capital, such as college fees and pension.
- Fourth, currency fluctuations, changes in interest rates, and bankruptcy of companies and financial entities increase the chances of one losing money.
- Fifth, it is impossible to be 100% sure that you will make money.
- Sixth, a lack of adequate information, especially failure to seek facts, attract losses.
- Seventh, brokers increase one’s likelihood of losses.
- Lastly, day trading is characterized by lots of scams perpetrated by brokers.
However, these factors should not be a source of worry. Everything other business also has risks. The most important thing is that you should never trade in fear, as this will lead to direct losses. The easiest way to succeed is to trade while considering all prospects and stay away from the influence of others. You must get all the information you need yourself. Accordingly, you must understand what day trading entails to ensure that conduct technical analysis and read market movements. This way, you will come up with various risk management approaches. Hence, you should first equip yourself with all the necessary information, be sensible, and always risk what you can manage to lose. However, the most critical secret in day trading is always to be ready for any outcome. Remember, if day trading were not profitable, then nobody would still be in the business today.
The Psychological State of a Successful Day Trader
If you were to interact with several day traders, you would realize that 90% of them make losses. Unfounded theory suggests that success in day trading is 25% one’s money management approaches and trading system, while psychology takes 75%. Even though there is no proof that this is true, it is near the truth. Typically, day traders are motivated by two feelings, pain and pleasure. When a trader makes a profit, he/she experiences joy and is likely to be more motivated to trade more. The problem is that pleasure leads to a desire for more pleasure, and therefore such a trader will most likely start investing blindly in pursuit of more profits. Consequently, he/she will suffer losses.
On the other hand, when a trader loses some money, he/she experiences pain, which then leads to fear. This fear will get worse of the trader loses two times consecutively. The problem is that fear lowers the confidence of a trader to the point that he/she cannot invest in a deal that appears almost positive. Subsequently, such a trader misses on opportunities that would have enabled him/her recover losses.
Therefore, like day traders, we have to change our psychology. Precisely, we need to stop associating losers with pain and winners with pleasure. Instead of focusing on pain and pleasure, we should consider the goals that we aim to achieve. Typically, the goal of day traders is regular profitability. Hence, instead of using ‘money’ to judge our trends of trading, we should use points that indicate how far or close we are to our yearly goals. On the same note, we need to investigate and realize factors making it impossible to succeed. Doing so will help us understand the things we are doing wrong and try new practices.
The 100% Means of Succeeding in Day Trading
Usually, the first thing that a newbie in day trading does is to learn the basics of the business, which is an integral part of succeeding in the industry. After learning the basics of the trade, the newbie will familiarize him/herself with terms used in the business. The next step will be to study market movements of different securities on his/her portal run by a select broker. At this point, the newbie has not started trading. He/she will begin trading after getting trading tools. These are tools that help traders analyze market movements of different securities. However, many traders do not realize that trading tools do not warrant success in day trading. The most help that trading tools can offer is adequate information to help a trader understand the market more deeply. On the same note, using several trading tools at once will give a trader too much information that he/she will end up confused. Therefore, using trading tools will not help you make money, what will is trading discipline. Trading discipline entails understanding yourself and not the market. Understanding yourself will help you come up with a trading method that you will follow strictly. In each of the ways you come up with, you must set a loss point. If one method attracts losses that reach the set loss point, then you will choose another method and observe its efficiency. This way, it will be effortless to succeed in day trading.
Psychology and Mistakes in Day Trading
One of the most neglected areas of day trading is psychology and its role in the business. Usually, many traders invest their time in finding the most appropriate trading system. What they do not know is that there is no such thing. However, this does not mean that a trading system is unnecessary. Instead, it means that a trading system is one of the many things that one needs to succeed in day trading. Apart from a trading system, a day trader must have a money management strategy. Besides, a trader should be familiar with some of the psychological factors that affect his/her abilities to succeed. The first secret of achieving in day trading is balancing all elements of the business.
Typically, when you make a loss in a trade, two things come to your mind. First, there must have been some issues with my trading system. Second, I knew this trade would fail; I should have stuck with my decision not to invest in it. However, this should not be your reaction when a loss occurs. Instead, you should focus on investigating how the mistake happened and devise a solution. In day trading, 95% of traders do not achieve their goal of regular profits, only 5% of the traders do. The exciting part is that only a small difference exists between these two parties. This difference results from how both parties approach the mistakes they make. The 5% that are successful learn from the mistakes they make, while the rest do not even realize their mistakes. Many traders look at errors from the perspective of money lost without realizing that the two are not linked. One thing that you should master is that mistakes are caused by failure to follow trading rules, and therefore the only way to avoid making mistakes is to identify the rules that are violated each time you make a loss.
Consider the following cases:
Case 1: Trading system gives a positive signal
Trader: Follows the signal
Result: Profit is made
Lesson Learned: It is vital to consider signals provided by the system. Hence, if I follow all the signals, then I will make regular profits. Here, the trader has developed confidence in the system.
Occurred Blunder: None
Trader: Follows the signal
Result: Loss is made
Lesson Learned: It is impractical to make a profit in every trade. Losses are part of this business. Here the trader does not fault him/herself for following the system. Hence, the trader remains confident.
Occurred Blunder: None
Trader: Does not follow the signal, but turns out to be positive.
Result: Neutral (no profit or loss)
Lesson Learned: The trader gets frustrated for ignoring a signal that would have brought profits. In his/her mind, he/she gets the idea that I only follow signals that lead to losses and ignore those that lead to profits. Consequently, the trader becomes unconfident.
Occurred Blunder: Failure to follow a signal given by the trading system.
Trader: Fails to follow the signal, and the outcome turns negative.
Result: Neutral (No loss or profit)
Lesson Learned: The trader will get the idea that his/her system is inefficient, and that he/she is better at making predictions. Even though this may not be an immediate thought, the trader will most likely question every signal given by the system because, according to him/her, he/she is smarter than the system. Consequently, the trader will be making predictions that differ from the signal given by the system. Such practices affect our confidence in the trading systems we use and make us overconfident.
Occurred Blunder: Failure to invest in trade despite having a signal from the system.
As such, mistakes occur when we fail to follow our trade plans. Hence, if you want to succeed in day trading, you must always consider the psychological factors that affect your trading decisions and ensure that you have a trading plan.