Learning Money Management and Trading Psychology to Trade Successfully
Professor Sanjay Bakshi claims that because our brains contain the pleasure chemical dopamine, short-term speculators are like butterflies fluttering from one bloom to another.
The amount of dopamine produced is closely correlated with the level of pleasure.
A one-night stand or bungee jumping are examples of novel experiences that flood the brain with dopamine. Pleasant, unexpected surprises are another source of dopamine.
Over the course of the day, day traders receive several modest amounts.
I want to surprise you by telling you that a doctor cannot detect the difference between the brain MRIs of a cocaine addict and a trader who just made a profitable transaction. This is the mindset a trader has when trading.
After researching the issue, I discovered that it actually causes blindness. It forces us into the rat race, which is a vicious cycle of the emotions “fear” and “greed.”
On Wall Street, there is an old adage that the two emotions that drive the market are fear and greed.
The term “uncertainty” is associated with the stock market through these two innate emotional states.
Giving in to these feelings can have a “complete and detrimental impact” on stock market performance and investor portfolios.
It’s always preferable to keep our stupidity to ourselves. I thus like to share some common “Gyan” as a regular guy.
Greed: What is it?
Humans have an innate need for more when they find something they like. This is also a crucial component of trading mentality.
I’m with you, so please don’t feel alone as a victim.
It causes a chemical surge in our brains and biases us by impairing our ability to reason. We get dependent on it.
Fear: What Is It?
Fear is another type of trading psychology. Typically, it is described as a difficult, uncomfortable circumstance, etc.
The “Dot-com bubble,” also known as the “Internet bubble,” is among the most prevalent instances that come to mind at the moment.
It was developed around internet start-ups, which encouraged investors to put money into firms with the “dot com” tag.
Their greed led to further greed, which in turn led to an overvalued situation and the formation of a bubble.
Let me use Investopedia’s definition of a bubble to help you understand:
An economic cycle known as a bubble is defined by a sharp rise in asset values followed by a decline. It is caused by a spike in asset values that is not supported by the asset’s fundamentals and is the result of irrational market behavior. The bubble deflates when there is a large selloff and no more investors are ready to purchase at the high price.
I realize that “Fear” is taking over your conscious thought, so please don’t panic. Investors quickly left once the bubble burst and focused on less risky acquisitions.
I promise you that if you Google the topic of greed and fear in the financial industry, you will be overwhelmed by the abundance of irrelevant material.
We can easily build a toolkit called “Risk management” to get around this complication. However, explaining this entire notion to you is outside the purview of this paper. It can serve as the foundation for a whole course.
How Can Trade Be Effectively Managed?
Since the topic of this post is money management, my goal is to provide a fundamental knowledge of it.
It is a crucial component of risk control.
Without it, a trader won’t be able to last very long.
It addresses the issue of survival. It raises the likelihood that the trader will live to see the end of the day. Numerous potentially profitable systems or trading strategies have failed because the trader using them lacked a way to manage risk.
Staying on the coast is preferable to drowning in the big ocean. I hope you concur. I appreciate you nodding your head.
Furniture can be made or broken by a carpenter’s toolkit. The same is true for money management.
Portfolio management: what is it?
“The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against performance” is what Investopedia defines as portfolio management. Determining strengths, weaknesses, opportunities, and dangers when choosing between debt and equity, local and foreign investments, growth and safety, and several other trade-offs that arise in the pursuit of maximizing return at a certain risk appetite is the essence of portfolio management.