Stock Trading Psychology



When you break down the stock market to its fundamental level, it really is just buyers and sellers pushing the stock up and down, respectively. There are moment when the buyers overwhelm the seller and the price spikes higher. And there are moments when sellers overwhelm the buyers and the price drops significantly. Wouldn't it be great if you knew when and where these events are going to happen? This is where Trading Psychology comes in!

Technical Analysis

 Technical analysis works because people believe it works. Its a bit of a paradox but it absolutely makes sense! If you think about it, when a stock reaches a support level and people think it will bounce up from that level, naturally, buyers will come in and drive the price up. You can see this happening in the green circle in the photo on the right. Once it breaks that support level and trades lower, traders now see that support level as resistance and sell at the level, pushing the price down, as you can see happened several times in the red circle. Technical analysis is nothing more than peering into other traders' minds to make an estimated prediction on what might happen next.

Thinking in Probabilities

Trading psychology is not just about knowing other the market's next move, but also creating a way of thinking, that will give you an edge over the majority of other traders. As Mark Douglas explains in his book, Trading in the Zone, you must Think in Probabilities. Ultimately, anything can happen in the market. Technical analysis alone will not guarantee you profitability. You must create and stick to a strategy that gives you a probabilistic edge in becoming profitable. There is a lot that goes into this such as having more winning trades than losers and having bigger dollar wins compared to your dollar losses. Sounds simple enough but if you've been trading for a least a little while, you'll understand that it definitely is not. Finding your edge takes time and there isn't a whole lot of concrete tips I can summarize in this post but I will recommend some books that have helped me with this.

Discipline

 Without discipline, you trading plan is useless. If you don't stick to a well-defined trading plan, your results will be random, and with random results, the market will punish you. It's pretty obvious that sticking to your plan is the right thing to do but that is easier said than done. The stock market is a psychological battlefield. Even very successful traders making millions or even billions of dollars get into mental slumps where they suffer substantial losses because of it. It's very easy to say you'll stay discipline but relying on willpower will not get you there. Your brain is extremely powerful and it will fight you as a stock trader. Most successful traders will agree that trading is a game against your own mind. You must learn to master your mind by creating systems that create habits and promote improvement to your trading. This is probably the most crucial part of trading and is where 90% of traders fall short. Many self-improvement books will tremendously help you in trading. The books listed above in the "Thinking in Probablities" section include a lot of discipline-building tips but there are also a few other books I Highly recommend, which have been invaluable in my trading career:

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