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The Importance of Trading Psychology and the need for discipline

The psychological aspect of trading is extremely important. Traders often jump in and out of stocks on brief notice, take compelling quick decisions. To realize this, they would obviously need an undeniable presence of mind. Further, discipline is also equally important, so they will stick with previously established trading plans and know when to book profits and losses. There is no room for emotions, greed and fear.

Whenever there is a bad news about certain stocks or general market, it is not strange for any traders to get scared, they may feel compelled to liquidate their positions or refrain from taking further risks. Surely, they might avoid some losses, but what if they missed out on some big gains?

Traders need to understand what fear is, it is a natural reaction which most traders perceive as threat, in this case it is directly related to their ability to take profits or money making abilities, To overcome fear, traders must ponder what is that they are afraid of?  And why are they afraid of it. By spending a certain amount of time and knowing how they perceive certain things and instinctively react, a trader can isolate and identify those feelings during trading sessions and then focus on overcoming those emotional responses, Its definitely not easy and takes a lot of practice but its helps them be profitable in the long run.

Greed is another thing that is difficult to overcome for the beginners, it is more often based on a trader’s instinct to do better, to try to get little more than usual. A trader should recognise this instinct at a very early stage and base his trades upon logical business decisions and not on emotions or potentially harmful instincts.

The primary reason for fear and greed is due to ignorance or lack of knowledge, Traders should invest their time into learning as much as they can about their area of interest, educating themselves and, if possible, going to trading seminars and identify a few mentors who can help them fine tune their strategies over a period of time. In order to learn investing, it is better to devote much time reading trade journals, and to be able to read a balance sheet or a chart also a little background work on macro-economic analysis or industry analysis. Any relevant knowledge will always help traders overcome fear and increase confidence.

How do we create discipline in trading?

Success in trading can be achieved by adopting a trading plan/strategy. A trading plan could be developed by sufficient knowledge of technical analysis. You can however adopt your own trading time frames ranging from day trading, short term or long term positional trading depending on your convenience. If you opt for day trading, it’s worth reading the top ten rules for day trading here. It is equally important to stick to your trading plan with an appropriate risk reward ratio under all circumstances, Lets say out of 10 trades, we adopt a risk reward ratio of 1:3, Even if we loose 3 trades, we will still end up on a winning note.

Traders should always remain flexible and consider experimenting with new things from time to time. For example, they may consider using options or futures to mitigate risk, or setting stop losses at different places. One of the best ways a trader can learn is by experimenting with smaller quantities and then increase in quantities depending upon their performances. This experience may also help reduce emotional influences.

Finally, traders should have periodical reviews and assess their performance. additionally to reviewing their returns and individual positions, traders should always  review how they got ready and fared for a trading session, however up so far they're on the markets and the way they are progressing in terms of  relevant education. This periodic assessment will assist a trader in  correcting his  mistakes, which can always help increase their overall returns.



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