DAY 2: Understanding Trading Psychology to control your Greed & Fear

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Stock Trading is Gambling?

No...…..No..... 

Its a business. Gambling is a mindset, you gamble or bet on something without knowing the basics and only based on predictions or expectation of an outcome, your expectation is based on your gut feeling, not on facts, figures or expressions. But in trading you are informed, you make plans, you imply business management and you trade the stock based on your analysis of various factors that can help you come to conclusion about where the price of the stock will go.

Well, Analysis can be wrong, but being wrong does not mean you are gambler, as you analysed all the information, and based on that you derived a conclusion about price. 

Gambler is guided by emotions, and trader is guided about information. 

Before you enter the Financial market, you need to honestly master your TWO feelings.

You can understand better with an example, so here is an example: There are two questions you need to honestly answer yourself with. 

Question 1. Are you willing to Earn $50k per month? 

Your Answer: Yes... I am ready... let's start.........................

Wait.... Isn't it the Greed? You become ready for the earning of $50K without knowing further

1. GREED.... is one of the two feelings you need to control, as Greed will make you oversee your shortcomings, your failure, and never let you make informed and reasonable judgments... There is an old saying... Greed is a bad habit... 

Now, Let's ask you Second Question 

Q2. You will lose $50K if you invest this amount in the Stock market. Do you still want to invest? 

Your Answer: No. I do not want to invest. ..

For many this answer is obvious... That's FEAR. 

2. FEAR is the second of two feelings you need to control, as fear will never let you explore opportunities that might help you move ahead in your life with success and it will overpower your judgment and emotions making your life hell.

So.. what we meant from the above two feelings are, Greed and Fear are two feelings that drive the majority of the market traders, especially novice traders or investors. Sometime, greed will lose, and sometimes fear will loose.

If you are driven by any of the two or both, the final outcome :

1. It will demoralize you,

2. You will exit the market with no money 

3. Feel market isn't fair. 

So does Market have anything personal against you? No... The Consequence of trading or investing in the Market is the result of you being controlled by Greed and Fear. 

This Emotion gives rise to the thought that Trading is Gambling. You do not know where the price will go. Well, its true its hard to predict where the market will go, but in gambling you do not know why that happened, but in Trading you always know what makes the price go up and down. 

Now Enough of lecture.... :) here comes the Solution

Stock Market and Stock price moves in principle to Demand of Law & Supply.

If you had studies economics in your school or college, this is famous and fundamental law in economics. Let us recall it here

    

Law of Demand & Supply

It is a theory that explains the interaction between buyers and sellers of the resources

So when the item is scare or limited, and demand is high, the prices will go up, due to competition to buy, and when the item have large supply quantity then existing demand quantity, then the price is likely to go down due to competition to sell.

lets See what does Law of Demand Says:

Law of Demand means, that when the prices are higher, there would be less demand, hence fewer buyers to buy that resource, because it's costly and fewer people will be willing to buy at that price. 

Whereas, Law of Supply means, that when the prices are higher, there would be more Supply, as More Suppliers are willing to sell at higher price to make more profit.

And then the Shift and movement in the supply and demand is the main factor that effect the price. 

So In the trading also, There are buyers and sellers, and the imbalance between the demand and supply causes the price to go up and down.

So now you understand how the prices moves in the market. it's not gambling, just some economics of demand and supply. 

If you trade the market based on the law of economics or information you process, rather than personal emotion of greed or fear, you can overcome the problem.

Problem isn't big enough for you to overpower it with your own controlled psychology 

If you swear by the following Principles, you will do less to no harm to your hard-earned money.

1. Never trade or invest in the market with the money you cannot afford to lose. 

2. Never Trade with the Borrowed money. 

3. Invest & Trade with the money that is left after meeting all your major liabilities and leftover savings after saving for your family and meeting your unforeseen expenses or liabilities.

4. Never Hold on to a losing trade, unless you are ready to forget the money for unlimited time or finally losing it all over time. 

5. If you never want to lose or afraid of bearing losses, you are in the wrong place, do not invest or trade at all. 

6. Invest only a small amount per trade with proper risk and money management as there is always a risk of losing more than your capital also. A small amount is an amount that you can comfortably invest without fear. But remember, your return on investment depends on your amount invested. :) So be reasonable or accept what you earn from your small amount.

7. Make up your mind, that your Earning is directly related to the amount invested, and so is your loss too. 

8. Plan and research your trade even if it is bare small trade or minimum by Deciding the amount you are willing to invest for that trade (Capital),  Entry price, Target price, & Stop-Loss Price, well before jumping into any trade. If you have not planned any of these prices and amounts, never enter the trade. On the other hand... never do over planning..... it really kills the productivity and right trade.

9. Choose the Trading method, instrument, market, and risk to reward ratio for which you are comfortable and that suits your own personality and appetite for taking the risk.

10. Never trade on free personal or friendly advice, out of the blue tips, or because someone is investing or asked you to invest, Every individuals or firms take risk based on their own situation and it will be different from yourss, Either do your own due diligence or Ask a licensed investment/financial advisors before investing or trading, remember you are in charge of your own money and its always your own decision, so always trade at your own risk,

For some folks, Everything above should look so demotivating or messy stuff and if it does look the same to you, its best time to drop your plan to invest in the market. If somehow you believe you can Control your Greed and Fear, then definately you can be among traders who Make Money in the market and You picked up the right stick.......You have until next session to plan and make up your mind, if you are ready to join the next session.

Ready for Next Session.... See you soon.....