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

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

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)

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.

Trading Psychology

Introduction