Mastering the psychology of trading is one of the most difficult, yet under appreciated, elements of learning how to trade stocks, regardless of whether one is trading part-time from home or trading professionally for a living. During market selloffs, also known as bear markets (when the selloff is prolonged and severe), position trading from the short side should be considered. While there are many books, websites, and resources discussing stock market trading strategies, very little has been written specifically about the psychology of trading, particularly for active short term traders.
Most of the time required to be successful at position trading involves the time necessary to research stock market news and events to find suitable positions trading opportunities, and checking in daily for news updates once a position trade has been established. See how these paper position trades work out, and take the time to thoroughly learn about position trading before putting any money at risk in the stock market.
The only time stock traders and investors turn for help on this topic is after they have blown up their brokerage accounts and have finally hit rock bottom. However, in this article, I will improve your trading education by explaining the key psychological emotions to be aware of, and how to avoid the common pitfalls that investors and stock traders commonly experience while learning to trade. Many stock trading sites recommend that new swing traders paper trade” to gain experience by practicing in a simulated account. Listening to the news, the government, stock experts, or other trader’s opinions is a waste of time.
There are four psychological states of emotions that drive most individual decision making in any market in the world. Since the stock market is made up of individual human beings who tend to act in similar manners, a group is formed. It is only the group’s opinion that matters during a trend, but it is the individual trader’s job to identify the subtle clues as to when a market is about to shift direction. Every swing trader hopes that a losing trade will somehow become a winning trade, but stock markets are not a charity.
If, for example, a stock pick hits its predetermined stop price and the disciplined swing trader exits the trade, then the fear of losing an excessive amount of money protects the stock trader from financial ruin. When the market is in a state of panic or fear, the swing trader should never try to rationalize or come up with excuses why they should not get out of their positions.