Day Trading Psychology

by Manny Backus, Day Trading Strategy Expert

Trading is not for everyone; it takes great discipline.  It takes the ability to suffer losses. It takes a deep knowledge of the psychology of the markets as well as the herd mentality.  Stocks almost always overreact to news or rumors, whether it is good news or not.  If you can remain calm while everyone else panics, you can almost always make money.  This is the essence of day trading psychology.

One of the basic tenets in day trading psychology is to know who you are fully and completely.  This is never truer than in day trading.  If you buy currency stock for example, and you notice it begins to dwindle - then sell it as quickly as you can.  Otherwise, you will have lost more than you have gained, and this is not how you want to begin the day trading venture.

Psychology plays a vital role in day trading.  If the commitment is not strong, or you sense you are wavering in making a final decision, don’t make the mistake of putting it to chance that the outcome will be in your favor.  Technical analysis as well as other information is important in your decision-making.  Use it; this is not a time to rely on a gut feeling especially when hundreds of thousands of dollars may be at stake.

Research and become completely absorbed in day trading through newspapers, magazines, and online commentary.  The more you know, the more confident you will become.  Think of it this way; you would not buy a home unless you had it thoroughly inspected, right?  The same holds true for day trading.  Unless you are 1000% sure of your trade, do not let doubt or greed override your common sense.

As mentioned at the outset, the news has a great effect on the market’s activity.  For example, the current housing crisis has had a huge impact on several stocks and the market in general.  Read any and all information pertaining to whatever is happening in the world that would affect the market before you begin day trading on any given day. 

As with any business venture, there will be good days and bad days in day trading.  The psychology comes into play with your first loss.  How you handle that initial loss will determine how you handle all of your future transactions.  Day trading requires you to be calm and deliberate in your transactions, with your judgment intact and not suddenly bidding wildly to alleviate the initial loss.

Day trading also requires strength and will, perseverance and acceptance.  More importantly, knowing that some days will reap major rewards while other days may yield losses has to be understood from the get-go.  However, your determination to be consistent and the belief in your own judgment will make you a more knowledgeable trader and a stronger one.

Just as it is important to have the appropriate tools and resources available during day trading, so too having the right frame of mind is essential.  You are making a commitment, after all, and if you’re emotions override your judgment, you are in for quite a beating.  Never allow fear to invade your emotions.  If you go into day trading with a negative foundation, you will never succeed.  Be positive about this venture and understand it does have its ups and downs.  You play the market; do not let the market play you.

More importantly, however, do not allow your reaction to a day‘s profit entice you into over-estimating your ability to make money, thus wagering all that you have based on one great transaction.  The psychology of day trading mandates that you trust your instincts – they will never lead you astray.  If you’ve had a good day – then by all means call it a day.  Start fresh in the morning.  New challenges await you.

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