Trading psychology: The tale of two traders
By Paul Reid
12 January 2024
Trading psychology is an overlooked and misunderstood aspect of trading, but how much of a difference does it really make? Rather than making a list, here’s a story of two traders. One follows the best practices of trading psychology, the other doesn’t. Let’s jump into the lives of Emily and John.
Emily: The cautious and disciplined trader
Emily, an investor with a keen interest in the stock market, prides herself on her disciplined approach. She spends hours researching stocks, understanding market trends, and crafting a diversified portfolio. Emily is well aware of the psychological pitfalls that can trap traders, and she's determined to avoid them. Thanks to her use of trading psychology practices, she treats trading like a business not a hobby.
One day, Emily notices a sudden surge in a tech stock, but instead of impulsively buying, she sticks to her strategy and does her due diligence. She finds the surge is based more on hype than substance and decides against investing, prioritizing her long-term strategy over short-term gains.
Soon after, Emily experiences a loss in one of her steady stocks due to an unforeseen market fluctuation. Instead of panicking, she applies her trading psychology, calmly assesses her portfolio, realizing that the fundamentals of the stock haven't changed, and decides to hold her position, showing emotional control.
John: The impulsive and overconfident trader
John, on the other hand, is always looking for quick gains. Trading psychology is not important to John. He often makes his trading decisions based on hot tips from online forums and friends, without doing his own research. John feels that his intuition is better than any research.
When John hears about the same tech stock surge as Emily, he immediately buys a significant number of shares, swept up by the excitement and fear of missing out. He doesn't look into the company's fundamentals or the reason behind the surge.
Not long after, John faces a loss in one of his trades. Without an understanding of trading psychology he panics, driven by emotion. He quickly sells off the stock at a loss, fearing it might plummet further. He doesn't stop to analyze the situation or consider the stock's long-term potential.
The outcome of trading psychology
A few months later, the tech stock that John had bought falls sharply due to a lack of real performance, leading to a significant loss in his portfolio. John's impulsive decisions, lack of discipline, and inability to manage risks have cost him dearly.
Emily, in contrast, sees steady growth in her well-researched portfolio. Her disciplined approach, emotional control, and effective risk management have paid off. She may not have the thrilling highs that John experienced, but she also avoids the devastating lows.
The point of the story
The story of Emily and John highlights the impact that trading psychology can have on a trader's results. Emily's success is rooted in her disciplined approach, emotional stability, and risk management, while John's downfall is a result of impulsiveness, overconfidence, and a lack of proper risk assessments. This tale serves as a reminder of the importance of sound psychological practices in the world of trading.
Following good trading psychology practices are just one small part of trading success. Exness offers better-than-market trading conditions and unique features that give Exness traders an advantage.
If you’d like to test the observations of this article, consider using the Exness demo account to trade risk-free. You can form your own strategies, find your comfort levels and limits, and even see which assets suit your trading style best. And when you are ready, apply your virtual experience to the real world of trading.
This is not investment advice. Past performance is not an indication of future results. Your capital is at risk, please trade responsibly.
Paul Reid is a financial journalist dedicated to uncovering hidden fundamental connections that can give traders an advantage. Focusing primarily on the stock market, Paul's instincts for identifying major company shifts is well established from following the financial markets for over a decade.