Trading is all about emotional discipline

Aug 28, 2015 | 01:42 PM IST

As a trader has different challenges to face than being an investor. It should never happen that a short term position held for long term just because you made a loss and waiting for it to turn into profit. Trading is a different ballgame itself and you need to train yourself for quick exits. We will address many Trading is all about taking quick decisions when you have to. It is a game of a very alert and disciplined mind. If you are a trader then you know that all you are looking for is making profits with the positions you are taking in the market. So as a trader you need to be equipped with the strong understanding of technical analysis tools. There is also a need to analyze news and events pertaining to a specific stock and ride the momentum arising out of that trigger. Always there exists a war among a trader and an investor as both have different style of working even if the market is same for both. Lets analyze the challenges a trader faces on the emotional front. Markets offer enormous opportunities as it is volatile in nature. A trader sitting on the banks would always grin and regret for not taking advantage of them. But when you actually enter the markets do you see all of them or can you make money in each of them? So what happened? Do you ever feel that the market is not offering any opportunity now? You are analyzing a particular stock with a very good technical pattern and when you make up your mind to put a long trade you see the stock opened high with a gap. So you feel that you missed that opportunity. Delay in taking the position has caused you losses. This is caused by fear of loss. To avoid losses we look for confirmation to our analysis which is a good virtue of a trader. This virtue is shadowed by the fear, which in turn in present inside a trader as a result of certain bad experience of loss. You need to analyze this very cause of loss. Discipline is your friend No matter how much you slog you cannot make 100% of the price movement and if you make 60% of it you are the winner. What is meant here is you need to book profit at certain level and if you don’t then the price moves against you causing losses. But is is not possible to find the exact turning point. So booking out the profit is essential. Here greed becomes your enemy. So you keep expecting that your profit making position will generate some more profit and you will exit as a winner even after it has reached the target level you have calculated. The moment your emotion (greed here) takes over your rules of trading is the moment you started losing on the position. Here you break one rule and somehow manage to justify that to yourself. Then the game starts. So you want to book and still hold on with the justification that the company is fundamentally very strong and you convince yourself to stretch your limits. If it works your way it is fine but when it reverses it hurts you the most as you have broken that rule yourself. Do you have the courage to exit with a loss in your profit? “It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you‘re wrong.” -George Soros A profit making position does not turn into loss making overnight. You always have a chance to escape with less profits than a day earlier. What keeps you away? Here comes another enemy: HOPE People just keep on hoping that they will see the same levels of profits within a few days. Aren’t we breaking the time rule here? How long did we initially plan to hold? You cannot jump orbits from intraday to week long, week long to fortnight, fort night to a month and so on. There is still some justification. So when the trend is reversed and the profit starts vanishing emotion (hope) takes over the logical mind and series of justification follows. Logically even if we know that this may be the time to exit we are always scared to miss out on huge profit and hope always keeps that feeling alive. Can you as a trader cut your losses short? No matter how you took a particular position, each and every trader had a stop loss calculation in his mind. Now how to decide a stop loss is an expertise itself but we do know certain figure where loss making trade should be stopped. Often this particular level is overridden with emotional decision or no decision. Like we bought a company at Rs 100 and 95 is the stop loss with target 115. Here we observe the stock coming down to level 95 and we just watch it with despair not believing in it. It haunts inside and the question “How can that happen?” takes over. And you don’t want to give up here because your analysis was correct and something is wrong with the price. So you keep hoping the price to move up. Then it comes down to Rs 90 and you keep hoping it to reach to your stop loss level because that is comfortable amount to take loss. There are many justifications for not cutting the losses short but real reason is you don’t believe that your trade has gone wrong this time and you keep fighting with the prices. Can you avoid the threshold jump from trader to investor? This is like an electron jumping to the next orbit of different energy level. If the energy of electron is not sufficient it falls down to same orbit with reduced energy. The situation arises when you look at the loss making position and say to yourself like ”Well, I am not in a hurry and can wait till the position shows some profit” Here the trader who is not an investor tries to think like one, who starts analyzing fundamentals and confirms with the charts that correction phase will end at some point and he will be in profit very soon. But being a trader it is very difficult for him as the lack of expertise in fundamental analysis can weigh and he may see further losses. These trading mistakes shake all the confidence of a trader. Emotional trading leads the trader to fight with the market, taking revenge, try to overcome losses in single smart trade or turn into investment philosophy. All the above mentioned things will lead to more losses as nothing can beat the market all the time. Trading discipline is the key to be a successful trader. Getting emotionally attached to any particular stock is unhealthy. Another threat to a trader is the tipster community Many a time a desperate trader hunting for profits falls prey to the tip providers. There are less genuine and more phony forces present here. Identifying a genuine service provider for short term trading often can help you but it is rare though not impossible to find. Tips can drag you to make more losses but here there is double threat. One is the loss itself and second is more dangerous. Here instead of analyzing the causes of loss you tend to shift the responsibility of loss to the tip provider. The blame makes you innocent and victimized and then the loss continues. In the conclusion we can say that keeping the emotions away, trading with discipline and analyzing the losses can make you a successful trader. Apart from the cyclical situations, there are many more risk factors involved in the trading. We will try to address the emotional impacts of the different risks scenario in the markets in our next article in series.

 

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Niveza Editorial Desk : We are a team of stock market nerds trying to stay ahead of the herd. We spend our grey cells everyday to pave a smooth road for our clients in the shaky world of stock market. While...
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