You can be the most knowledgeable trader, but without the right mindset, your trading results will be inconsistent. To explain this, let’s take the example of the field of sports. Performance psychologists help athletes perform at peak levels, along with focusing on every aspect of their lives, including personal challenges, eating habits and post-injury rehabilitation. They closely assess how psychological conditions impact sports performance, and what impact sports has on an athlete’s mind.
Trading the stock market is similar to being a professional athlete. Both are judged by their daily performance. You need to cultivate habits to develop emotional resilience.
This means wild swings in the stock market shouldn’t make you nervous or jittery. The ups and downs of the stock market are a normal part of the investing journey. You need the courage and agility to stay prepared for any directional moves.
It’s easier said than done. Our brains are hardwired to let emotions take control. When we see red stacking up on our positions, the “fight or flight” instinct kicks in. This leads to knee-jerk reactions, which can be costly and prevent us from achieving our goals. So, how do you avoid emotions while trading? Here’s a look.
- Treat it as a business
I always emphasize that investors need to treat themselves as self-employed entrepreneurs. This requires a dramatic shift in perspective. If you treat investing as a hobby, you won’t be able to quantify your goals. This could make it difficult to achieve sustainable progress.
Write a business plan, list your goals, figure out your risk profile and the amount you plan to invest. What will be the source of this capital? How much can you afford to lose? Outlining these things daily will keep fear and greed in check. When you treat trading as a business, you are less likely to make decisions out of boredom too.
Acknowledge the emotions
You need to consider putting some time between the impulse to act and your investment decision. That holds true for whether you want to buy the dip or sell during a surge. Various studies have indicated that breathing exercises can help you stay calm, productive and rational while dealing with stressful situations. Research further proves that different forms of breathing are associated with different emotions, so how you breathe can have an impact on how you feel. Changing the rhythm of your breathing can signal relaxation to your brain. This will give you time to re-evaluate your approach to investing.
Market research is crucial
Emotions sometimes creep in when you don’t know what to do in a particular market situation. This is why you need to stay updated on market fundamentals. Focusing on companies with great quarterly results might not give you the entire picture. Understand the underlying macroeconomic factors, both domestic and global. Be aware of all geopolitical developments that may spark market volatility.
Seek new educational resources, such as analyst opinions about undervalued stocks, price forecasts, and economic analysis. Spruce up your research with a fresh newsletter every now and then. You may find something that fundamentally changes the way you invest or something that you don’t agree with.
Either way, when you make a concentrated effort to always learn something new about investing or the markets, you will have a new perspective and confidence. This makes you a more educated trader and breaks the cycle of emotional trading.
Always remember the past
When the market nosedives the next time, remember it’s not the first and it won’t be the last time it does so. Globally, the stock markets have navigated so many obstacles through decades. For instance, Indian equity markets saw the steepest one-day decline in absolute terms on 12 March 2020, as the WHO declared the Covid-19 as a global pandemic. The Benchmark Sensex declined 8.2% to trade at 32,778 points, and Nifty 50 declined 8.3% to trade at 9,590 points. But by 15 March 2021, Nifty 50 was trading at 14,772.62 points, more than the pre-pandemic levels.
The stock market has recovered and achieved new highs after every global crisis. Also remember, even if the stock market declines, your entire portfolio might not drop. If you have a well-diversified investment portfolio, including equities,bonds, and other assets, your panic can subside significantly.
- Ignore background noise
By now, you might have read various buzzwords and phrases in articles or books. Stick to your trading plan. Have patience and discipline. Be in the zone.
They all are logical, perhaps even encouraging. However, unless your mind is at peace on the domestic front, and you are in sound mental and physical health, you cannot follow these steps. So, consider a few non-market tricks to get your head in the act, such as regular exercise, doing something creative in your free time, reading a book, etc. These things can prevent your mind from getting fixated on the markets.
Finally, accept that mistakes are made by even the best trading minds. How to respond to these mistakes differentiates a good trader from a great one. Learn from them and keep looking forward.
(The author is MD & CEO, HDFC Securities)