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The Psychology of Stock Trading

Posted on October 8, 2010 by StockTrading.net | No Comments

The mechanics of stock trading are easy. Whether you use charts, or fundamentals, or both, consistently applying a proven set tools is apt to give you the desired results over time. Unfortunately, when reality strikes, the impact it can have on a trader’s psyche somehow manages to bring out all the liabilities of the mechanical approach that would have otherwise been contained.

In other words, trading isn’t just a mathematical game, but also a game involving a lot of psychology.

Since the simple lessons of psychological self-management are hard to learn on your own, perhaps seeing them in wiring – and written by someone else – will allow them to become part of your mindset.

In no particular order, here are some of the more important stock trading realities that, if left unacknowledged, could severely damage your portfolio’s value.

1. Great traders have learned the art of ignoring the strong emotional pull of their instincts. Said another way, the system, technique, or strategy isn’t questioned (assuming it’s been proven) even when the trader’s gut is screaming something else. Given enough time, the discipline to adhere to a particular strategy will prove to be more beneficial than a willingness to ignore a trading system ‘just this once’.

2. Top stock traders talk less, and act more. In fact, the best of the best traders don’t talk to anyone about anything, choosing to make their own decisions without seeking the approval or guidance of others. Rumors and news commentary are meaningless to them, and they avoid it because they don’t want the opinions of others to cloud their thinking.

Yes, the web is full of message board users who share ideas and – seemingly anyway – do quite well for themselves when it comes to generating trading profits. Those stock picks may or may not be trades they made with their real money though.

At best, sharing ideas and participating in boards is a waste of time and an idea. At worst, it sets up your ego for a situation where, in its defense, a trader will make a decision for the wrong reason.

The freedom to be wrong and not have to justify it or explain it to anyone else abates making bad problems worse.

3. Most stock trading profits are generated by traders who don’t get emotional about stocks (one thing Gordon Gecko was right about). A stock is a vehicle…. a means to an end. Nothing more. All joking aside, you should be treating the business like handicapping a horse race, or playing the odds at a poker table.

4. You can’t squeeze blood from a turnip, and you can’t make a stock or a market index do something it’s just not going to do. Don’t bother trying.

Truth be told, there are only a few really, really great trading opportunities in any given year, which means a great deal of the time a trader may be doing nothing – and without any significant positions. That’s ok for a professional.

Or, think about it like this; there are professional traders, and hobbyist traders. The pros are in it for the money, and nothing but. If there’s no real money in it at the time, they’re not playing the stock trading game again until there is. Hobbyist traders, on the other hand, are looking for activity (possibly out of boredom) … a recipe for mediocrity, at best. The real test is distinguishing which one of those you are, and steering clear of being the hobbyist.

Bottom line – It’s not the actual, normal trading decisions that can drive a trader into the ground; it’s the bad decisions made under stress, while distracted, or while bored that can destroy a portfolio.

Photo via ClintJCL

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