Why Psychology Matters in Trading

Trading Chart
How not to trade
Trading Chart
How not to trade

In case , you are not sure yet, Psychology matters in trading, a lot!

After training for over three months, I took a trade today that violated all my trading rules. It was a no brainer. Don’t take that trade or take the opposite trade. I still took the trade.

Let me be more specific here.

I bought 200 shares of Chholafin. It was call from one of the Gurus I follow. He is a genuine guy and his accuracy rate is also pretty good. It was an intraday trade. I bought at the first candle in the highlighted area. Let me breakdown as why it was a wrong trade to take:

  1. The stock was in a downtrend. You don’t buy against the trend. There was no chance of it being a retracement as It was already near the bottom Bollinger band.
  2. MACD was in the red zone. A perfect shorting candidate!
  3. % B was in the negative territory. No one buys there, no one!
  4. RSI was still not below 30, hence, it was not in an oversold zone.
  5. No huge volume breakout.

So, according to the system that I use, there was no buy signal at all. Heck, I even hesitated buying it when it was at 1190. Then, it dropped to 1189. I thought, I am getting a better price, ignoring all the indicators. Greed took over. I rationalized, “That guy is a “Stock Guru”, he must know something that I did not.” And, I bought.

That guy admitted he was wrong and updated that I should sell, when the stock was trading at 1188. I hesitated. That would mean a loss of 200. It rebounded to 1188.45. I said to myself, “See, I was right to not sell”. Then on the next candle, the stock fell, forming a huge lower shadow, hitting my stop loss. And I was out of market.

My Learnings

Why that guy who gave the call is a “Guru”?

He was gracious enough to admit that he was wrong and got out of the market before it was too heavy a loss.

Why psychology matters?

I let my greed over my rational thought process to take over while making the trading decisions. In fact, 3 out of 5 indicators told that it was a sell

I did not trust my own analysis.

I did not get out while there was still time to get out with a small loss. I could make my ego take that loss.

Trading is a discipline that requires huge mental strength and self belief. It build over time through experience and I hope today’s failure was a huge stepping stone for me!

Till next time, keep learning!

 

About Abhishek 20 Articles
A personal finance enthusiast based in Bangalore, India.

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