From the previous articles, now you have come to an understanding of how stress affects health. Most importantly, how stress can impact your trading performance. Stress is a critical factor in the learning curve of a trader. In this article, we change the topic of discussion and look at another essential part of psychology. Here you will know about information analysis of trading behaviour, classifying the behaviour into key components.
You get information related to forex, stock market, and economic events from newspapers, business channels or mobile applications. You can say that the news is real if it can answer most of the “Yes/No” type questions asked by the reader. Every question is a bit of the information. More the number of questions, the more uncertain the event would occur. You will need more information about the event.
While you are collecting all this information, there comes a mental operation called perception. It means about how your brain is going to take in that information that your senses detect. Because everyone perceives information differently, even if the information is of the same kind. At the same time, perception can also act as a filtering process. Your brain tends to take in that information which it can cope up with easily. It is an active process of the mind that selects information according to one’s expectations. A trader who wants to see a bull market will perceive it as a bull market even if the stock is in a bear market. He will ignore any evidence on the charts, which shows it is not a bull market.
Although traders are constantly exposed to tons of information, their brain does not have the capacity to process all the information at once. A trader also fails to retrieve the right information. He tries to complicate the data and take decisions due to biases and expectations.
Decisions of a trader
The issues of limited capacity for processing information and biases towards the market need to be addressed. For this, you need to understand the two different types of decisions the trader takes and the conditions which influence these decisions.
The selective decision
The most basic decision of all for a trader is to decide to open a position. This decision has various choices such as stocks, futures, options, forex, bonds etc. The next decision he needs to make is taking a long or short position. This is a selective decision because it requires you to select from the available choices. The higher level of decisions includes when to take a position, what is the position size etc. All of this basically is the decision to make an investment and how to allocate your funds. The most important decision is to select a suitable market, from thousands of possibilities. As it is the first stage in the decision-making process. The next set of judgments like executing a trade, managing a trade is complex.
The closing decision
After the trade is successfully executed, the trader needs to decide when to close the position. This decision can be easy or tough, depending on the type of trader. When the position is in profit, the trader might decide to wait for the possibility of higher profits. If the position is in a loss, then the trader might again wait in the hope that it will turn back. The decision is only between two choices, to close the position or not. But the trader will be making a lot of decisions in his mind to arrive at a conclusion. If due to some reason like the fear of consequences, if the trader is unable to arrive at a decision, then the results could be disastrous.
The selective and closing decisions are the most basic trading decisions. These decisions need to be taken under the limited capacity of the brain to process information and expectations that the trader keeps with the related information. Sometimes, after coming at a decision, the dimensions of the information also would have changed. The solution for this is to automate the process wherever the possible.
Three factors are essential to successful trading:
- Healthy psychological profile
- The ability to make accurate decisions from large a large amount of information
- Position sizing and discipline
A failure to achieve any of the above tasks could result in stress, poor trading decisions, and loss.
When you try to inculcate these practices, you achieve mental state control. For any task, there is an optimal mental state in which you are doing your tasks. For example, the action stage in trading requires quickness and accuracy. Now, this is possible if you are in a state of confidence. Traders could respond from a state of anger or excitement. Other mental states could lead to behaviour, which is not useful for trading. Thus, the optimal mental state for action is confidence. Each factor influences the ability to process information in some way. You should try to not be weak in any of these principles.
The best mental state model is only developed through knowledge and experience. You need to learn from your mistakes. You should study extensively on how to group information and handle it. By doing this, you will know which information is worth the attention and which is not. You could reduce your effort by ignoring excessive trading information from advisors, brokers, newspapers to take trading decisions. These types of traders should make trading decisions based on their analysis and market understanding, without depending on any external source.