An experienced trader is psychologically prepared to take important decisions quickly. Trading is not everyones’s cup of tea, it takes years of experience to develop an edge in the market. The joy of trading is though, once you’ve built up enough experience, you can make money in seconds from anywhere in the world. Things will not always go your way though and you need to be mentally prepared for the ups as well as the downs.
Trading psychology is where emotional influences, pre-existing beliefs and biases meet with strategic planning and risk management. The trading life has losses and profits simultaneously. Anyone stepping into the market for the first time with profitable expectations will be disappointed when their returns are less than what was expected. This can wear you down emotionally, especially as its your own money on the line. This is all part of trading and is something you need to learn to manage with discipline and risk management. You have to play wisely.
Trading can be split in to three basic types:
Among all three types of trading intra-day trading is the most demanding as it requires quick thinking and prompt decision making. Being prepared for this psychologically can help you to improve a lot.
The psychological approach is something that filters the winners from the losers in the randomness of the market. Here are some traits and thought processes that may be making you think twice before taking a trade.
Back-testing can be done in two ways: Manually or systematically. Manual backtesting requires you to manually work through previous price charts and perform a ‘real-time’ analysis of the market to check if your strategy resulted in any profitable trades. The first step is to find the point at which you would’ve entered the trade. Next you will need to follow the chart, bar by bar and check where you would close the trade. You will need to keep a record of the resulting profit or loss to see if your strategy is profitable.
The drawback with manual backtesting is there is room for human error. The process can be automated however with systemic backtesting. This requires some knowledge of a coding language like python or R. The benefits are that it is much quicker once setup and you will be able to see how each trade affects your overall portfolio
The most important lesson is to never risk all of your capital in a single trade. Instead divide it into small bunches and trade with different instruments to manage your risk. Its also important to use stop losses to control the amount you can potentially lose. This is even more important in times of market volatility when profits and losses are amplified.
I received a lot of queries from my traders regarding the prospects for the Nifty 50 market index. There was a lot of market volatility at the time due to Covid 19. My analysis revealed in advance a few key levels which Nifty came close to but ultimately took a big U-turn from. It came near the 7500 level but this was not breached. After that, it made a high of 10328.
I have mentioned this here to show you that if you do a dedicated study, backtest your strategy, follow your trading plan strictly, then you too can make consistent profit with a good hit rate. Losing money brings disappointment but that’s part of trading, eventually, you will learn, you will gain. Keep going.