It takes a certain type of person to succeed as a day trader. Anybody can do the market research and learn about trading strategies, but trading is about more than just following numbers and memorizing techniques by the book.
A day trader should be disciplined, but flexible; patient, but confident; and most importantly, be able to handle the ebbing and flowing of the market without having it affect how and when you make decisions. All of these ideal traits for success are based on the fundamental principles of trading psychology.
What is trading psychology?
The concept of trading psychology refers to how your emotions affect the decisions you make and your success as a trader. In this line of work—especially if you’re a day trader who is faced with an even greater number of decisions to make in a shorter timeframe—it is imperative that you make rational decisions based on objective data and strategy. This means you need to be able to control your emotions, working to establish and maintain the proper mindset.
Why does trading psychology matter?
When our emotions flare, it is easy to become reactive and make impulse decisions. Although as a trader you will sometimes need to make quick decisions, basing them off of emotion rather than logic and data can cost you big—literally. For example, refusing to let go of a loss because you’re too proud to admit defeat can leave you holding onto a losing position for too long, tanking your profits. The more you allow emotion to influence your mindset as a trader, the more mistakes you’re going to make.
The two primary emotions that cloud trading judgement tend to be greed and fear. When greed drives your decision-making process, you’re more likely to make high-risk trades or trades that you haven’t thoroughly researched. On the other hand, fear might prevent you from taking enough risks to actually see profit or panic sell a position before it has a chance to increase in value.
How do I maintain the right mindset for trading?
Separating your trading decisions from emotion takes a great amount of practice and discipline, which develops with that experience. If you want to master your mindset and take full advantage of the psychology behind trading, here are a few areas you can focus on:
Research & Strategy
To start off on the right foot as a trader, you should build your knowledge of the market and industry and use it to create a plan you can stick to. The more you research and strategize, the easier it will be to feel confident making moves based off that information, even if emotion starts to get in the way. Aim to base the majority of your decisions off this objective research and your trading plan alone. This will help improve your decision-making process both in the long-term and when forced to make a call on the fly.
Visualizing yourself as being successful as a day trader will give you the motivation you need to move past any fear you might have about taking risks—and we all know that without risk, there is no reward. However, it is also important to be honest and realistic about the possibilities and consequences of trading decisions. Confronting the possibility of loss can help you overcome both fear and greed as a trader. Once you’ve accepted that you may face a loss and still be okay, you’ll be able to bounce back more quickly from a bad trade and exercise your rational decision-making abilities.
If you’re worrying about what you need or how to plan for tax season, it’s going to be difficult to stay in a focused, positive mindset while you’re trying to succeed as a day trader.
Fortunately, Trader’s Accounting is here to help! Our firm is the leading resource in the nation for tax advice, accounting services, business formation, tax preparation, and more for professional day traders looking to maximize their profits. Our philosophy is to let you trade, while we handle the rest.
Contact a team member today to learn more about how we can help ease your mind and get you started as a successful day trader!