Trading is 10% method and 90% emotions. I am not underplaying the importance of method. It's a must and a pre-requisite but not a guarantee of success. A study attributed to Harvard University found that Success = 85% attitude and 15% aptitude. This is also true in trading, and you need to trade to understand what I mean. Trading successfully is not about having a right system but a right mind set in place. That is why despite having all the great trading systems available in the market, and large numbers of self proclaimed accurate market forecasters, more people fail and only few succeed. How do you process your emotions in real-time? There are only three emotions in the market - GREED, FEAR and ANXIETY When market starts moving up, the GREED factor kicks in, and lot of people get attracted to market. It is the period when optimism starts building up. Once market continues to move up, it attracts more buyers on the same emotions - and the stock chart reflects that on Volume and Price chart. We all know that stock prices do not go to moon, but the greed factor always makes one to believe so. That's why very few people book profits on time. Similarly, when market starts moving down, the FEAR factor kicks in. All dreams start getting shattered. It is the period when pessimism starts building up. Once market continues falling, fear becomes panic, and suddenly, realization sets in that market is falling through the floor. We all know at the end of the day we are trading stocks/businesses, and they cannot become worthless, but fear factor makes you believe so.
That's why great legendary investors say - Buy when there is blood on the street, even if that blood is yours. There are also times, when market does nothing, and just trades sideways. It's a period that creates lot of ANXIETY. Is market consolidating to fall or rise? Consolidation happens when stocks aren't making any progress, but they're not doing any damage either. But the uncertainty of what's next creates lot of nervousness and anxiety. This is the way financial markets work. The greed gives way to fear. And when nothing happens, anxiety takes over. These emotions have the tendency to destroy rational thinking. Good judgments are easy to make after the fact, but it is difficult to make the right decision in the heat of the moment. Hence trading success hinges on how you process your beliefs in real time when market moves from one emotion to another. It requires lot of controlled behavior. The game is how one can protect himself from getting into panic mode and also not let euphoria take over. Solution - Write more and trade less. Lot of times, writing your thoughts and feelings down (in a trading diary) can help you understand how you think and act when market goes through different phases. Remember, Trading is the game of mistakes and emotions. It always has been and will always be. The trick is how you learn and don't repeat the same mistakes again and again.
That's why great legendary investors say - Buy when there is blood on the street, even if that blood is yours. There are also times, when market does nothing, and just trades sideways. It's a period that creates lot of ANXIETY. Is market consolidating to fall or rise? Consolidation happens when stocks aren't making any progress, but they're not doing any damage either. But the uncertainty of what's next creates lot of nervousness and anxiety. This is the way financial markets work. The greed gives way to fear. And when nothing happens, anxiety takes over. These emotions have the tendency to destroy rational thinking. Good judgments are easy to make after the fact, but it is difficult to make the right decision in the heat of the moment. Hence trading success hinges on how you process your beliefs in real time when market moves from one emotion to another. It requires lot of controlled behavior. The game is how one can protect himself from getting into panic mode and also not let euphoria take over. Solution - Write more and trade less. Lot of times, writing your thoughts and feelings down (in a trading diary) can help you understand how you think and act when market goes through different phases. Remember, Trading is the game of mistakes and emotions. It always has been and will always be. The trick is how you learn and don't repeat the same mistakes again and again.