Here are five steps that will help you learn to recognize your emotional mindset:
Step One: Recognise Your Emotions, Biases, and Personality TraitsTo recognise any negative emotions or personality traits that could affect your decision-making ability, the first thing you should do is to note how you feel when you log into an investment platform. Are you overwhelmed? Do you look for the best-performing stocks of the day and make assumptions about their future without proper analysis? Or, do you automatically check the price of a stock that previously gave you success?
Self-awareness and looking inward are crucial in trading psychology, and recognising from the start where these emotions and biases stem from will prevent you from making impulsive decisions or acting out of frustration. It's important to recognise your strengths and utilise them. For instance, if you are calm and confident without being overbearing, you can use these traits during your time in the market.
Step Two: Create an Investment PlanHaving an investment plan is also important in lowering the risk of behaving irrationally in the market because of your emotions. You can work with your broker to create an investment plan or build it yourself. A solid investment plan will include exit rules and mental preparations, like a market mantra that you repeat to yourself to balance your emotions before the day starts. As for exit rules, implementing stop-loss orders is one way to exit an investment if it goes against you. Stop-loss orders limit risk, and you can instruct your broker to close a position once it has reached a specific loss level. Investment plans should also include realistic profit targets, risk/reward ratios, and entry rules.
Step Three: Work on Developing Positive TraitsGetting rid of negative emotions and habits can help you. It allows you to develop new and more positive habits, such as patience and adaptiveness. Investment plans are one of the best ways to encourage patience because they help you separate the present from your long-term financial goals. However, patience also comes from understanding that market volatility is normal, not personal, and time is on your side. Similarly, learning to become more adaptive is crucial in maintaining your investment plan. For example, just because you have set out a plan does not mean you should never revise it or adapt it to new trends and market movements.
Step Four: Learn When to Walk Away A fundamental skill for any investor or trader is knowing when to take your losses and walk away. Just because you have lost does not mean you are a failure, or that you should rush into making another investment to make up for some of your losses. Sometimes an investment won't work out, and it's important to recognise why this happened and adapt your trading strategy. Use a loss as an opportunity to learn about what went wrong and then use that knowledge to make better decisions in the future.
Likewise, investors should know when to walk away after a succession of wins. Luck always runs out, and you do not want to take unnecessary risks or gamble on your acquired profits because you are overconfident and happy. Anger can cause you to make irrational decisions, but happiness also has this effect.
Step Five: Write Everything Down People keep diaries to express their emotions about particular life events. You can also keep a log to record how you felt during a particular investment. This will give you a good sign of what you did well, or where your emotions and decision-making led you astray.