What is trading psychology?
Trading psychology has to do with the mental state of an individual trader, and the mental state of all market participants.
Trader Psychology
Trading psychology is just as important as technical analysis and fundamental analysis (the four major disciplines that traders learn are: fundamental analysis, technical analysis, trader psychology, and money management).
Discipline, emotional control, and risk management are three important aspects of trading psychology. The four major emotions that traders must learn to control are: fear, greed, hope, and regret. Trading psychology is all about master control over these four major emotional states.
Fear – Fear often causes a trader to close out of a position too early or to not take a position at all. Irrational fear caused thousands of traders to buy gold in 2010 and 2011 instead of stocks. Gold plunged while March of 2009 was the start of the best bull market run in history. Fear caused thousands of traders to miss out on substantial profits between 2009 and 2014.
Greed – Greed often causes a trader to stay in a profitable trade too long rather than booking profits when he/she should have. Penny stock promoters often use greed to run pump and dump promotions. Greed can cause a trader to put too much money into a single trade or “to bet the farm” on a “sure thing.” Greed caused traders to throw the P/E ratio out the window during the .com bubble of the late 90’s. Greed caused speculative real estate buying and house flipping during the real estate bubble of the mid-2000s.
Hope – Hope often causes a trader to stay in a losing position too long which ties up money that would be better invested elsewhere. Praying or hoping that a stock will come back is a losing strategy and is often the result of not using a disciplined stop loss strategy.
Regret – Regret over a huge loss often causes a trader to “throw in the towel” and give up trading completely. Regret can also cause a trader to take a position after initially missing out on a good entry because the stock moved so quickly. Chasing a stock out of regret that the initial entry was missed is usually a bad idea that results in a significant loss.
Market Psychology
Chart patterns are maps that reveal the psychology of market participants. This is why books and websites that teach candlestick patterns and chart patterns usually have sections that explain the psychology behind the pattern.
Chart patterns in and of themselves are meaningless without understanding the mass psychology behind the pattern.
Indicator Warehouse | Diversified Trading System (DTS) posted the excellent video below called Trading Psychology Coach Richard Friesen | Mind Muscles Academy.
FullyFundedTrader posted the awesome Nova documentary below that links psychology, rationality, economics, consumerism, and trading, together by discussing the impact of emotions on all types of financial decisions.
What are pump and dump stocks?
Pump and dump stocks are usually thinly traded nano-cap penny stocks that are involved in a scheme to boost the stock price through false, misleading, or exaggerated statements via emails, faxes, and web sites. These thinly traded stocks with a low float are easier to manipulate.
OTCBB and pink sheet listed stocks don’t have the strict reporting requirements like stocks that list on a major exchange like the NASDAQ or AMEX. This is one of the reasons why pump and dumps are usually ran on stocks that trade on the OTCBB or pink sheet markets.
The penny stock owners who already have a large position in the company’s stock, hire a penny stock promoter to pump the stock. The owners sell or dump their stock as soon as it runs up. Pump and dump schemes are suppose to be illegal but you can find them being done on a regular basis over the Internet where regulation can be more difficult when the pump is being done from a server located in a remote country.
The victims of a pump and dump will usually lose most of their initial investment when the dump begins and the stock price comes crashing back down.
Epic Stock Due Diligence posted the great video below called Penny Stock Pump & Dump Slideshow Explanation.
eHow posted the excellent video below called Investment Stocks Tips : How to Determine Pump & Dump Scams.
Make Money Trading Stocks posted the educational video below called What is a Pump and Dump Scheme?
Basics of Stock Trading
Before we even get to the basics of stock trading, you need to check your emotional and psychological mindset. Did you just go through a divorce? Did someone close to your die? Are you angry right now and not in a learning mood? Are you able to get over the biggest obstacle for most people: your own ego?
Folks, I can’t tell you how many times I’ve seen a trader’s ego get in the way of taking his trading to the next level. The best way to learn stock trading is to put your ego aside and put on your learning cap.
