Looking to learn more about trading psychology and how the trader mindset can help you either earn better returns in the stock market or help you manage your personal finances? Trading markets is something that not everyone is in a financial position to get involved in. As all experts will tell you, it’s best to not start trading and investing until you’ve paid off debts and are at a point where your personal finances are in order. With that in mind, you can still start to practice some of the industry’s best trading psychology for your own personal finances.
Here, we’re exploring what market psychology is, what some basic psychology trends are, and how it could be applied to your personal finances.
What Is Trading Psychology?
Trading psychology is essentially the mental state and emotions that a trader has and how elements of their character and the resulting behaviors cause influence how they act within markets. Fear, greed, hope and regret are four emotions in particular that often fall under trading psychology, and all can have both good and bad effects on a person’s trading actions.
While technical analysis tools are at the fingertips of traders and investors across the globes, it’s how they take this information and apply it within their chosen market that constitutes their trading psychology and, ultimately, how successful they are at any one time. Because day trading and even long-term investing can become tricky for most average Americans, a number of individuals are now turning to robo-advisors to make their investment decisions for them.
The Basics of Trading Psychology
Beyond the emotions, there are certain attitudes within trading psychology that the best traders use within their day to day market activity. From accepting risks but knowing how to work them, to being able to accept that a mistake was made and needs to be learned from, traders new and old can benefit greatly from the following trading psychology tips:
Accepting The Risks
When it comes to any market, the fluctuations and constant market movement are always going to mean some level of risk and accepting that there is never a perfect time to buy or sell stocks will set a trader up for a higher success rate and more chance for making a decent profit. It will also save you from disappointment!
If you understand that you risk losing your investments in a market, especially when placing a stop limit order on your securities, then you’ll be better prepared for coming to deal with the situation if you do happen to lose your profits and investments.
Recognize When You Are Wrong
Being wrong doesn’t necessarily mean coming to the wrong conclusions or making the wrong move. Instead, recognizing when you’re wrong really comes down to taking things in your stride, and making sure that you’re well-educated to deal with mistakes or “wrong” moves when they come around.
Fear can be both a benefit and a debilitating factor when it comes to trading. No matter how long a trader has been within a market, there will always be an element of fear when it comes to placing an investment, or when the markets start to do the opposite of what you want it to do.
This fear can be paralyzing for those with limited experience, but it can also give you an element of caution overall that could stop you throwing money into the next market that looks like it’s doing well. A little hesitation here and there can help you better analyse risks and learn to reduce them, but don’t let it get so bad that you avoid trading completely.
Trader Mindset Applied To Personal Finances
While trading psychology and the resulting actions don’t necessarily run directly parallel to personal finance, some of the attitude and behavior can certainly be applied to personal finance. Whether you’re working from home or in a full time job, managing your personal finances is a struggle we all face, especially when they’re running particularly low.
With trading psychology, however, this could be made somewhat easier with a trader mindset.
Money management techniques drawn from a trader’s bankroll management could prove useful, especially when you’re on a strict budget. Just like with trading, try and set “stop” points. Set a budget for certain areas of your life, including bills, housing costs, shopping, entertainment and anything else you need to pay out for, and then set that stop point.
With this method, you’ll be building a psychology of reducing what you’re spending to fit into individual budgets without going over what you can afford. Make sure to leave a buffer fund so you have some cash available in the case of an emergency.
Balancing Fear and Logic
Fear within personal spending is just as debilitating as that in trading. Those that are too fearful of spending what they have could find that they spend more when it comes to emergency buying what they need. With careful planning of meals, bills and more, you can better manage your finances.
However, if you really are limited on your spending, a little fear certainly wouldn’t go amiss. Nevertheless, it’s important to balance this with logic so you aren’t under-spending and missing out completely.
Recognize When Things Aren’t Going Well
The ability to be able to sit back and say “this isn’t going well” is the most valuable psychological trait you can have. Not only does it ensure that you’re being realistic no matter your financial situation, but it can also help you determine what needs to be done before it can become a problem.
You aren’t going to become a millionaire overnight, and so having the ability to recognize when things seem to be going downhill in enough time to fix it could save you money and heartache in the long run.
Stock Market Psychology
Managing finances in trading or in our personal lives isn’t necessarily the easiest thing but with the right psychological mind set influencing our activity, we can better regain control enough to lead to success.
While there is no sure-fire way to make money in trading, for example, moving trading psychology into your personal finances could have managing your money with ease in no time.