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Trading Psychology

Introduction

Are you ready to become a trader that you have always dreamed of becoming? In this infographic, we explore the different psychological traits that a professional trader typically process.


Taking charge of your emotions

Firstly, as human being, we often let our personal feelings or emotions guide our decision-making. However, making emotional decisions could be detrimental for any traders. Therefore, one of the most important psychology aspect of any trader is to be able to:




A trader who understands, and is able to manage his or her emotions can avoid instant gratification or thrill to long a stock after consecutive rallies and instead focus on technical information that are important to make sound trading decisions.

Market cycle of emotions

Optimism

Excitement

Thrill

Euphoria

Complacency

Anxiety

Denial

Fear

Panic

Hope

Relief

Optimism


Maintaining a trading discipline

Secondly, maintainig a trading discipline has also proven to be an important factor for traders.
We have outlined three key areas to help you maintain a trading discipline

1. Focus on your trading process

  • Follow your trading process strictly
  • Review your trading decisions and improve on your weaknesses
  • Remember that trading consistency is critical to trading success –
    trading is not a 100m short sprint, but a marathon


2. Devise a basic trading routine

  • Research and identify probable trading ideas for the next trading session
  • Plan your position size and risk to take for the trade
  • Gather information on the instruments to use – e.g. cash trade or leverage products such as DLC or Warrants
  • Mentally rehearse and visualise entering and exiting (both profit-take and stop-loss scenarios)
  • Record the trade and review on areas to improve (after executing the trade)

3. Develop a trading decision-making process

  • Identify the trend of the stock: uptrend, downtrend or range-bound
  • Study the trend of sector (if any): uptrend, downtrend or range-bound
  • Analyse the momentum of the stock: trending, 52-week high, retracing (pullback)
  • Identify possible strategies to execute: reversal, breakout or range-swing trading
  • Decide on the risk management approach: conservative, balanced, aggressive

Overcoming Common Behavioural Bias

Finally yet importantly, to improve and become a successful trader, it is important for you to be aware and overcome human cognitive behavioural biases.

1. Confirmation Bias

The tendency to pay more attention to information that confirm your belief
and ignore or pay less information that are against it.

For Example:

A short-term trader who is bullish (or long) on a stock begins to take in positive industry reports or news headline about the company to make a trade, instead of focusing on the short-term technical analysis and demand supply action of the stock, which matters more.

To Minimise The Bias

1

You should exhibit discipline in following the trading decision making process
and taking in both positive and negative information on a trade

2

You should keep a trading journal and regularly review the decision-making process.

2. Prospect Theory

The prospect theory is discovered by Nobel Prize winner Daniel Kahneman – it explains that investors and traders will feel more pain when losing a dollar than happiness of gaining a dollar.

Relating to this theory, this meant that traders would likely hold on to their losing to avoid pain than cutting losses early or as planned.

To avoid such behaviour, traders should reduce or maintain the position size of each trade to a level where cutting losses is emotionally manageable.

In closing, we would like to remind you there is no one single winning strategy or tool. Different trader applies different techniques and tools and optimise them to their market prospective for trading success

Traders should continue educating themselves on market structures, instruments,
techniques and tools that will aid in their understanding on the markets and aim to improve
on the effectiveness and efficiency of their short-term trading.

Trading is a marathon and consistency will be key to trading success!

Content contributed by: Brandon Leu, SGX Academy Trainer

Mr Brandon Leu’s portfolio of clients includes corporate, trusts and high net-worth individuals. Brandon joined the banking and finance industry in 2005 and he has been with UOB Kay Hian since 2013. Brandon conducts regular trading and technical analysis seminars at SGX, UOB Kay Hian, Bloomberg and other public institutions such as SMU and NUSS in Singapore.

Disclaimer:

This document/material is not intended for distribution to, or for use by or to be acted on by any person or entity located in any jurisdiction where such distribution, use or action would be contrary to applicable laws or regulations or would subject Singapore Exchange Limited (“SGX”) or any of its affiliates to any registration or licensing requirement. This document/material has been published for general circulation only. It is not an offer or solicitation to buy or sell, nor financial advice or recommendation in relation to, any investment product or service. Advice should be sought from a financial adviser regarding the suitability of any investment product before investing or adopting any investment strategies. The General Disclaimers and Jurisdiction Specific Disclaimers at http://www.sgx.com/terms-use apply and are incorporated by reference herein.

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