This is a guest post by Paul Koger, author at Foxytrades day trading blog.
Day trading makes the same global assets available to all individuals, but some win and others lose. What is the difference between them? Is trading psychology a big key to separating the winners and the losers in the financial markets?
Have you ever walked into a room and felt a certain mood or atmosphere? It might be happy, buoyant, sad or angry. The same can be seen and felt with financial markets.
Generally, these are given the names of bull (rising) or bear (falling) markets, but there are many variations thereof. CNN created a “Fear & Greed Index” to gauge the other sentiments at work. Each trader has his own psychology and here are five of the most popular lessons:
In Asian martial arts, many practitioners try to copy the skills of animals. You might have seen ninjas who try to resemble cranes, monkeys or lions. None of them model their martial arts after the pig. Why?
The lion is the “King of the Jungle.” The lion is decisive, his simple roar can cause shivers in the water buffalo. The lion is courageous.
When the lion see the “herd” of people trading stocks and bonds, he looks for the weakest antelope to devour. He does not waste his energy. The lion is precise, focused and stealthy.
He conserves his energy, slowly approaching, while the victim is unaware. When he is near, he pounces and his victim has no chance. The lion is a winner because he adheres to good habits.
Just like Stephen Curry, you need to believe that every shot will go in. You must keep shooting through your slumps. You must be confident, like the lion – the “King of the Jungle.”
The best day trading strategy also minimizes losses. If you lose all of your stake, then you are out of the game. Therefore, you must avoid bad habits.
Once you realize that you can purchase assets, you might think about owning as much as possible. Penny stocks and junk bonds are usually cheap to purchase. While, it is possible to make money with cheap assets, you must be very careful.
Do not be that guy – “So, George why do you own so many shares of that company?”
George: “Because they were cheap.”
They might be cheap because no one wants them. If that is true, then you are like the pig wallowing in mud, garbage and waste.
What are the traits of the pig? Slovenly, garbage eaters, hairless and greedy. Those who follow these traits are likely to lose money.
Slovenly: If you are slow to act, you will lose out.
Garbage Eaters: You can make money on junk bonds, but don’t create a portfolio of assets devoid of value.
Hairless: No focus and no plan increases your chances of failure.
Greedy: Take your profits.
Are you the kind of guy who carries his smart phone 24/7/365 and Tweets every 3.3 seconds? You can read reams of data on anything and everything, but at a certain point, you need to pull the trigger.
There is a time for research and a time for action. Being quick to execute your trading strategy is also essential to making healthy profits.
You snooze, you lose.
Sadly, if you are able to understand that a money-making opportunity has risen, then there will be others who share these very same sentiments. It is like the automobile, it was invented simultaneously in multiple places.
Therefore, you need to develop a plan. Highlight an opportunity. And, then when the time is right, execute the trade in microseconds.
After the markets are closed, you can analyze the data. You must control the data. Don’t allow the data to control you.
As societies become more monetized, more businesses are undergoing risk management. What does “monetization” mean?” It means that banks and other financial institutions are taking more of a role in society.
In 1776, large banks did not dominate the United States economy. Now, the five largest banks control 45% of the financial industry, according to CNBC. In 2008, these banks were “Too Big Too Fail.”
The economy has become monetized with people having credit scores, mortgages and financial control being exerted in all elements of life. Now, your credit score is used for employment, housing and banking. Why does your boss need to know your credit score?
How many different numbers are associated with you? Identity theft is not the theft of “you,” it is the theft of your “financial numbers.”
Risk management requires you to minimize any losses from trading. Some trades are winners, others are losers. You can’t allow your losing trades to bankrupt you.
Learn From Mistakes
It is easy to “say learn from mistakes, but difficult in practice.” This means that professional day traders don’t make the same mistakes twice. Sometimes, you might use a “Stop Loss” to minimize an error.
If you believe that a certain asset pattern will emerge and it doesn’t, then cut your losses and live to fight another day. You might learn about assets.
Gold prices skyrocket during the traditional Indian wedding season. Arbitrage might show you that certain price gaps only last for a limited time period. You might also find correlation between how different assets are moving.
Professionals let their successful trades run and cut the losses for their failures. When it is time to take their profits, they take them. Their strategy fits the present market dynamics.
Fit Your Personality
Just as you need a job that fits your personality, you need a trading psychology that is just right for you. People make money with all types of psychologies. Take the core guidelines mentioned above and craft them into a psychology that is all your own.