The stock market today throws open a world of opportunity for many investors. However, it can be a treacherous place if you don’t know how to handle the ins and outs of the markets. Investors need a skill set to trade successfully in any financial marketplace. The skill set should ideally be filled with abilities to assess any company’s basic technicalities and to decide on the direction of the trend of a particular stock. Nonetheless, neither of these skills is as crucial as a trader or an investor’s mindset.
Stocks tend to have a mind of their own, or so it seems sometimes, but investors have to contain emotion, think on their feet, and exercise discipline and caution while trading. You’ll be surprised to know that there is a subject known as “trading psychology”, as the state of your conscious mind has a lot to do with decision-making and overall behaviour when you are on the trading floor (or online platform).
When you, the investor, are in the midst of the share market today, you are required to keep your emotions under control. If you understand these, you can achieve your trading goals quite successfully. The two emotions are greed, driven by the need to make more money, and fear, motivated by the feeling that you may make incorrect decisions. If you know how to keep a check on these two negative emotions, you will not only win the psychological battle with the stock market, but the war as well.
When you have to perform different activities in the stock marketplace, you should know what emotions are involved so you can have a firm grip over them. Traders and investors have to be able to think quickly so they can act quickly. The ability to dart into and out of stocks at very short notice requires presence of mind. Investors also have to have the discipline to maintain their trading and investing plans. They should know exactly when to book profits and cut losses. The fact is, emotions prove to be a hindrance if they get in the way of these actions. When you open a demat account in anticipation of trading and investing in stocks, you may start off with feelings of excitement and anxiety. You should curb these.
When you are an investor or a trader, trading on the stock market live, it's a challenge to keep your emotions out of the picture. If you want to see success in your trading and investing activity, you should be able to exert control over emotions that are the sole drivers of sentiment. Often, while trading activity is on, you may get some bad news about a particular stock. You may even hear about the economy, in general, doing badly. The natural reaction is to feel fear. This may lead to a liquidation of stocks, making you sit on your cash, limiting you from taking more risks. As a result, you may avoid losses, but may lose out on gainful returns.
When investors and traders perceive a threat (which may materialise or not), they tend to react impulsively due to fear. Here, when there is some perceived threat to the potential for profit, you may act without thinking. Hence, before you start trading and investing, you should be aware that situations like this may well arise. Consequently, you can be mentally prepared.
While thinking about greed and its connection to the stock market today, there’s a traditional saying from Wall Street that comes to mind. The saying implies that those who are greedy investors on Wall Street tend to be losers in the end. This refers to investors who are greedy, in the habit of holding on to a position that is winning, for far too long. These investors want to make the most of a stock's winning streak right up to the last upward tick in the stock’s price. What they don’t foresee is that the stock does a sudden about-turn and comes crashing down in the blink of an eye.
Greed is difficult to overcome, and most investors may not start out being greedy, but are prone to get greedy along the way. Due to the instinct to perform better, greed comes along. However, trading should be a rational activity and not motivated by whims and impulses.
Several seasoned investors will tell you that making rules is one thing, but sticking by them takes a lot of mental strength. Impulse gets in the way of rules, and then investors tend to break them. The share market today may work to an investor’s advantage, or not, but when it comes down to the crunch, investors must stay with their rules. From the very start, you must set forth certain guidelines. These must be based on the tolerance you have for risk/reward about when you should enter trades and the time to exit them. A target for profit should be established, putting a stop-loss in position. All this takes emotion out of the trading and investment equation.
Acting with logic and reason can see investors through a trading day with ease. Additionally, investors and traders can decide which particular events trigger certain decisions to sell or buy stocks. It is also prudent to set a limit on funds you are prepared to lose or win in a day. In case you hit your target of profit, it is reasonable to stop your trading there and then.
Of course, all this is rule-bound, and the bottom line is to stick with rules and act within reason. It's not scary to trade and invest in stocks, and you can open a demat account to do this. Doing your research about particular stocks can help you know the stock’s trend too. It is ultimately up to you whether you wish to make the stock market your battleground or your playing field.
Related Articles: 4 Investment Mistakes New Stock Market Players Must Avoid at All Cost | 5 Rules Every New Investor Must Know Before Investing | 6 Stock Market Investing Disasters To Stay Away From | 10 common mistakes made by SIP investors | 4 Smart Must-Follow Investment Tips for Beginners in India