Introduction

Many of us have been told that in order to be a successful trader/investor, it is very important to focus on acquiring skills in analysing company’s fundamentals and performance, understanding economics, analysing and reading chart, determine the likely direction of the trend, and so on, generally referred to as Fundamental Analysis and Technical Analysis.

While these techniques and knowledge are very essential, many fail to put emphasis on another important key component of becoming a successful trader/investor, namely mastering the ability to control emotions and maintain discipline, which is known as trading psychology.

Whether being an investor or trader, it is extremely important to understand the psychological aspect because very often we need to make quick decisions under short noticed and/or unexpected events such as Brexit (most people had expected a Bremain). For example, an investor may have to decide whether to exit a position when the company’s fundamental is no longer in a good shape, or a trader will have to decide whether to hold or exit a trade when the trade direction is not in his favour. This swift decision-making requires a logical and prudent state of mind and we simply can’t let emotions like fear, greed, hope, ego, etc. get in the way.

Below are some selected key psychology pitfalls that are common to traders or investors worldwide whereby one needs to learn to overcome, along with recommended ways to overcome them.

Key Psychology Pitfalls and Its Remedies

a)    Fear

Fear is an unpleasant emotion caused by threat of danger, pain or harm, which is built into our feelings by mother nature to keep us away from dangerous encounters. When price directions are moving against your favour, fear naturally kicks in as we will incur loss of capital and are in danger of losing more.

Especially for newbies traders, fear will cause a trader to over-react and feel compelled to exit the trade for the terrible feelings of risk of losing more capital (sometimes refer as panic selling by weak hand holders), or too fearful to pull trigger on a trade even the opportunity comes.

Although cutting loss is a good practice and prudent risk management, but cutting loss irrationally without a proven system & properly defined trading plan will result in many unsuccessful trades driven by emotions. In many cases, the unfavourable direction of the trade movement might just be temporary once the panic selling is over.

Remedy: Quantify your Risk

Quantifying your risk is usually done during position sizing phase before entering a trade (refer to previous “iVSA Article 8 - Develop a Trading Plan” http://klse.i3investor.com/blogs/ivsatradingtipsandplans/97390.jsp), whereby calculating the proper size of your trade based on your risk tolerance per trade. This is a form of quantifying your risk as you have already set the maximum amount that you are willing to lose or risk, if the trade goes against you, provided if you do proper position sizing.

Quantifying this risk amount which translates to a stop loss price level will make decision making objective and prudent rather than being influenced by emotions. Once the stop loss price level is breached, follow your trading plan and exit the trade.

On the hand, with a proper trading plan and risk quantification, experienced traders would follow his trading plan with logical mindset and not exit the trade before the stop loss price level is hit even during unfavourable market conditions or chaotic circumstances of panic selling by public herd, because the unfavourable direction of the trade movement might just be short lived.

b)    Greed & Hope

Greed & hope is the emotion that causes investors or traders to hang on to:

·      Winning positions for too long, with the greed of trying to harvest every last profit that they can get

or

·      Losing positions for a long long time, refusing to cut loss with the hope that the stock price will recover soon. Have you come across the situation where traders/investors holding on to non-performing stocks for many many many years with 50% or even more losses? This is good example of the saying “Short term trades turning into long term investment”

Greed & hope is not easy to overcome as it is human instinct to always want to do better, trying to get maximum profits and hope for the best. A trader or investor should recognise this emotion and overcome it through the following remedy.

Remedy: Follow your Trading Plan

Develop proper trading plans and follow them with discipline as this logical best practice used by professional worldwide will guide us into making objective decisions and not being influenced by emotions, especially greed, hope and ego (refusal to admit & learn from mistakes). Experienced and professional traders always has discipline and exit winning/losing trades according to profit/stop loss targets or adhere to their trading plans that are predefined even before a trade has been entered.

Remedy: Follow Smart Money Movement

Establishing price target might not be the only rule. For example, if a trade is entered at $1.00 and price target to exit is $1.10, the trade may not always reach $1.10 before it turns south.

Another method to counter greed or fear is to follow smart money movement. By applying knowledge shared in previous “iVSA Article 6 - How to Detect Smart Money Movement” http://klse.i3investor.com/blogs/ivsatradingtipsandplans/96519.jsp and Volume Spread Analysis system, an experienced iVSA trader could decipher smart money footprints through chart reading and follow it objectively.

Even if the initial target profit is not hit and there are signs of smart money is selling/distributing, an experienced iVSA trader would take action to exit and avoid being influenced by news, rumuors and the emotion of greed, which would influence a trader to stay longer in the trade in hope for more profits.

Conclusion

It is important for traders/investors to acquire the proper knowledge in your journey to achieve key financial goals such as early retirement or financial freedom. This can be through fundamental analysis, technical analysis or combination of both.

Keep in mind to have the best practice of having your trading plans in place before hand and assisted with proven trading system to make objective trading or investment decisions based on high odds of winning and avoid taking actions that are overwhelmed by human psychological emotions (fear, greed, hope, ego, listening to tips & rumuors and followings the herds).

Remember this – “In life, you should be loyal to your spouse or partner but not in trading/investing! Don’t fall in love and get stuck in long term relationship with your stocks as there is always other better candidates to be discovered.”

However, following tips & rumuors blindly often practiced by uninformed public is NOT the method to discover them as these publicly available tips and information may seem FREE (feeding you with fishes) but will cost you much more $$$ in the end (as fishes may turn out to be rotten later)!

Hence, it is better to acquire proper lifetime skills and knowledge to catch fishes yourself, if you are SERIOUS about trading/investing in your journey to grow your hard earned money to achieve your key financial goals such as children educational fund, financial freedom or early retirement overtime. If you are serious, do take actions while you are young and more importantly, shake off your gambling mindset and herd following mentality (which is based on luck, hope & greed) now, before you risk losing your hard earned money!

Watch out for next article in this series of education articles brought to you by iVSAChart, “Article 14 – Importance of Chart Reading” under Series C: A Winning Strategy.

Interested to learn more?

- Website https://www.ivsachart.com/events.php

- Email: sales@ivsachart.com

- WhatsApp: +6011 2125 8389/ +6018 286 9809

- Follow & Like us on Facebook: https://www.facebook.com/priceandvolumeinklse/

This article only serves as reference information and does not constitute a buy or sell call. Conduct your own research and assessment before deciding to buy or sell any stock. If you decide to buy or sell any stock, you are responsible for your own decision and associated risks.