Stock Traders’ Psychology in Recent Recovery Phase:

As a trader in stock exchange many times we experience same kind of trade cycle running around us. But we never try to analyse why it happens every time? An average trader in stock market is not making profit in market even after years of experience. But he never gives his 10 minutes to think why it happens. Here in this article we will try to understand exactly what happens and why do a stock trader makes loss consistently. At the same time we will try to find better way to trade in stock market as a trader.

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There are some reasons why an average trader fails to make profit in stock market. most of the traders in stock market do not know what to buy, when to buy and why to buy. They do not know what to do in a particular time frame if the stock price is rising or falling more or less than their expectation. They do not have ready plan at any stage of their trade.

Another reason for consistent loss in stock market is Ego and Emotions!! We can find many traders around us who will hand onto the stock just because they do not want to admit that their trade was a bad decision. (Sometimes we do not need to find those traders around us. A mirror can work too.) These investors/traders will do almost anything to avoid making hard decisions because of their fear of loss, the desire for gain or their refusal to admit a mistake. and at the end of the trade in loss they will say only one line “market is not for small investors like us”. Market is what it is. But our attitude, our decisions make earn or lose money here. Always remember this is not a war, you do not need to fight with market. Just act smartly, follow rules and get profit. Stock market is the easiest way to make unbelievable profit. Only condition is do not try to prove that you are right.

Without a solid set of rules to follow, most investors become victims of human emotion, where they become far better at making consistent losses than consistent profits.

OK, now let us try to understand exactly what happens in a life of a trader. The typical trader starts out with extreme caution about jumping into the market. Perhaps he/she got burned previously and doesn’t want to make the same mistake twice. And at last he is making his mind to enter.(we saw this time in august 2009 in Indian stock market.) Now what? He will go to broker’s place. Try to catch some “buzzing stocks” from brokers and other “loss making people” around him who are trying hard to show his experience in the market (of course experience of making loss).

The trader acts as if he is damn serious about his investment and this time he is not going to lose. The market starts booming and stock prices start rising. At first, the trader is cautious that this might be a false signal that the market will soon collapse once again. But market is rising and rising… and rising!! Now people around him are talking about one stock which is rising daily 5 % since last 3 weeks. They all (almost all) has got that “tip” 3 weeks back about this stock. Now the trader is thinking in his mind what to do. The trader wants to get in this stock but is afraid that he has waited too long. (This trader is the same guy thought market would give one downfall.). Now some more good news will hit the market and some more pressure on the trader now. (If you are in India, you must remember September 2009), Remember he has not entered the market yet. He is feeling pressure just because he is not ready to accept that his “view” of down fall was wrong, and market is continuously going up and up. Now he cannot wait any more. He is entering in market and buying. Again it was not a logical decision. It was just a mistake because the trader was afraid of missing out. The trader is finally in the bull market. (Same kind of mistakes many traders did near Diwali and entered in Indian stock exchange.).

The stock is rising well now, almost 5 % move every week. Amazingly the trader makes 15 % in two weeks. Now he is one of those “experienced” successful traders and he starts advising his friends about new stocks. He is a Stock Market Guru now. And here comes twist in the story. Some disappointing government policies come out and in addition some other bad news from global market are announced. Stock market is going down and the stock which has blasted in last few weeks will be hit badly. The investor will hang onto the stock as he is a “Stock Guru”!! (Remember post Diwali correction in October 2009). The stock price is going down but still in profit. Now the trader talks about such falls are obvious in bull market and he is not “worried” yet. He says he knows the fundamental of the company and this pull back will not sustain at lower level. (In fact, everything he knows is company is fundamentally sound, but he thinks he “knows” company’s fundamental.) Some more days are passed with hopes of rise but the stock is falling down and down. Now it is showing loss of 15% on paper. But still he thinks only short term profit booking is going on. He is much smarter than such short term investor and he will earn from this trade. (Basic reason behind this stupid thought is his ego. He wants to prove himself smart trader and he wants to prove his decision was wise.). Some more days are passed , stocks is 30% down now. Now another great decision will be taken by the trader. Very “smartly” he is cutting his loss direct 50%!! He is doubling his stocks and loss is now 50% down!! (Height of stupidity!!) . Now he feels “better”!!

But stock price is still going down another 15 %. The trader cannot believe he can do this to himself. Now panic level is rising slowly but surely. He wishes he had never bought this stock. He cannot sleep at night as he is holding huge quantity now because he doubled his number of shares. In fact he starts blaming himself for his comeback in stock market. he takes his final step now. He sells!! He has lost more than 50% in this market in the same stock which was giving 15-20% upside a few months back.

Stock market is all about twist and turn. Next morning he read the news paper where he will find some good news from former financial minister about disinvestment of PSU in the country. A good reason to celebrate for stock market, but not for our “stock guru” trader. The same stock is rising now again 5% a day. And in coming days price goes high and high… and high!! But where is our genius stock trader now? He is no longer in market. he really cannot believe it. He swears he will never invest in market now. As he is not in market now, he has all the time to analyse what is going on in market. He will find the “reasons” for his losses. — Market is not for small investors. Operators play bad games in market. Government is playing dirty game with stock market. Global recession is not over yet. Blah blah blah…!

He will be busy in blaming others for next few months or years… But, eventually, he begins to think he will just dabble a little in the market again. He has a few successes. His confidence begins to grow. It isn’t long before he ’ s a market genius again.

Once again, he starts the whole process of buying at the top, and before long he is selling at the bottom. Occasionally, our average trader will hit a home run. But, more times than not, he ends up in a never – ending cycle of buying high and selling low. It is the mantra of way too many investors. I wonder if you recognize anyone here — a friend, a family member, or yourself perhaps?

Do not worry if you find yourself in above story. I would congratulate you for realisation. We all make this mistake at some stage of our trading life. What matters is, what we learn from this mistake. Now try to find some solution for such condition of average trader’s psychology. KEEP IT SIMPLE AND SAFE (KISS).

“Points to be Noted”

We all face some kind of emotional barriers in stock trading. We all have emotions and attitude, and we cannot deny this truth. As per Mr Buffet mainly two emotions drive the market. But as per my knowledge there are many. Fear, greed, arrogance, happiness, euphoria, panic, love and ego. These emotions often damage your portfolio in stock exchange. We cannot remove emotions from our life. Life will be colour less if we do so. But we can be aware of these emotions when we trade in stock exchange. We should not let these emotions take any action in stock market. Let’s have a look how these emotions eat our profit in stock market.

for example, when we trade in a blue chip company and we have paper loss in the trade we often think about its fundamental. We should be aware of this emotion of “love” for the company because of its past performance in market. We looked at an investor who let the fear of missing out of bull market allow him to get in at the wrong time. We saw how greed kept him from making a profit by keeping him in a certain stock too long. We saw how fear and ego caused him to make terrible mistakes. We should be clear about our goal, our expectations, and our time frame for the particular trade. Without a disciplined investment strategy, the odds dramatically increase that you will achieve consistent losses instead of consistent profits.

Another emotion which hurts our portfolio badly is arrogance. To be happy for our performance is good but to be arrogant for our performance in stock market (or any other field of life) will show u negative result in long run (for stock market it can be short run too)!! When happiness becomes arrogance, consistent profit will be past. Almost every trader is a “stock guru” in Bull Run. Due to arrogance, traders start thinking in a pattern and he will start making some small mistakes, instead of following his rule book. Trust me, not following rules in stock trading can be the best way to make losses!! When arrogance is running your trades, it will be hard to accept that one trader can lose money too. feeling of stock market success becomes basic priority than overall good performance of your portfolio.  Remember this rule for minimise your loss in the market:” Stay humble. Stay smart. Stay disciplined”. Let a commonsense set of rules govern your trading actions to the extent that you trade only by these rules, then any emotion that might cause you to make poor investment decisions will absolutely be eliminated. Let the rules rule!

With this final note , I would wish you all  very happy investment. Do not forget to give your valuable comments on this article.

Let the rules rule!

ASTALAVISTA !!!