Shivam's sanctuary

Beyond the Charts: Emotional Discipline in Trading and Life

(Disclaimer: I am a student and a beginner in trading. The experiences and insights shared here are part of my ongoing learning journey. Please consider this context when reading, and apply any learnings at your own discretion.)

Story time

I started trading stocks in May 2022. I started doing index options only after a few months and I still remember the day that taught me some lessons.

So, one day a lab class was going on but I was sitting at the back looking at my laptop screen and trading options. By the way, as I was a student I had a very small capital, so even a profit of a thousand rupees was a big deal for me. Right, so I punched my first trade and to my amazement, I made a thousand bucks in what seemed like the blink of an eye. My friends sitting beside me went wild. They had just witnessed me click a few buttons and suddenly become a thousand rupees richer. Their astonished faces filled me with a rush of excitement and exhilaration.

Carried away by their reactions and my initial success, I began to show off. I placed another order, then another, each one bringing in a small profit. With every successful trade, my friends' reactions grew more animated, fuelling my confidence. After six consecutive profitable trades, I was up by 10,000 rupees – equivalent to my monthly allowance at that time, mind you. I felt invincible, perched atop a mountain of success. Drunk on this feeling, I placed yet another buy order, certain that my winning streak would continue. But the market had other plans. By the end of the day, that single trade had erased 17,000 rupees from my profits. I closed the day with 7,000 rupees in loss. A sobering reminder of how quickly fortunes can change in the market.

At that point, my knowledge was limited to basic Technical Analysis. I had heard experts emphasise the importance of risk management and trading psychology, but I arrogantly dismissed these concepts.  The market has a way of humbling even the most confident traders, so who was I. It took me a considerable amount of time and numerous hard-learned lessons to gain a semblance of maturity in the markets. While I'm doing much better now, I recognise that the journey towards becoming a disciplined trader is ongoing.

That day was like a crash course for me in the importance of emotional discipline in trading – a lesson that would prove valuable not just in the markets, but in all aspects of life.

This blog is a reflection on that journey – from a brash beginner to a more measured trader – and the profound impact it has had on my approach to both trading and life.

But wait, what even is trading psychology?

Trading psychology refers to the study and understanding of the psychological and emotional aspects that influence traders' decision-making, behaviour, and performance in the financial markets.[1]

Emotions and success in the stock market might seem uncorrelated at first, but that is very far from the reality, and I learned this after I had taken a hit. 

Every kind of emotion is a function of a person's relationship with their surroundings. In the wild, for example, humans had to decide whether to fight an opponent or flee to safety. Fear and anxiety happen when we perceive that we may be facing impending doom. We become energised. We focus on examining our options, and take quick, decisive action. When it comes to trading, however, fear isn't always useful. People generally tend to give in to fear and start making rash decisions. A winning trader is one who knows how to capitalise on the fear of "herd" mentality people. Similarly, a lot of emotions powerfully influence our trading decisions.  It becomes necessary to educate yourself, understand these emotions, be self-aware and learn to control them if you want to be successful. 

Understanding trading psychology becomes important because: 

  1. Decision making - We are humans, we have emotions and a lot of things we do are because of how we feel about them. But to be successful here, you need to understand the emotional biases. In order to make logical and rational decisions we must understand our emotions first.

  2. Discipline - Discipline is created by having a strategy in place, following your risk to reward and quantities, risk management and controlling emotions. Trading psychology helps traders develop and maintain the necessary discipline to avoid impulsive actions driven by emotions.

  3. Handling losses - See, losses are going to happen, you can't escape it. You need to have a strong mental model to deal with failure and losses. Once you accept that there are only two ways a trade can go, either a win or a loss, everything will become easier. Trading psychology can also help traders to learn from losses and prevent them from repeating the same mistakes again.

  4. Managing Risk - By managing risk effectively, traders protect their capital and enhance long-term profitability. The point is you want to be in the game for a long time and stay profitable. If you do not have the right risk management model in place, then a single bad decision can wipe out your entire career here.

In short - Markets will invoke fear, nervousness, excitement, greed, anger and overconfidence. A trader that feels these things or any other thing cannot be a winner. A winning trader is cold, very logical and calculating. A person guided by their cognitive biases and emotions will always produce suboptimal results. 

How has this journey changed my personal life?

To understand all of this, it took me more than a year and I am still learning. I once heard somewhere that, "you do not need to win big to be profitable, you only need to lose small". My experience has been that how you act, how you make decisions and how you react to situations in real life is also how you are going to react in the market. 

So, whatever changes you make in yourself in order to become profitable in the market, those same changes will help you be better in other aspects of your life as well. For example, until very recently I was not very attentive to my oral health, but since I have made a habit to brush my teeth twice a day I have also started to become more disciplined in other ways as well. I exercise more, I meditate more and heck, I have even started to write more. Basically what happens is when you improve yourself in one way, it acts like a winning vote to your ability to improve yourself. Once your brain starts to accept that positive changes can be made, it will start to change other things as well. So, once I started to be more disciplined in my routine life, I also became disciplined in the market. I follow my rules, I stick by my entry and exit, I keep greed and fear in control and I trade the quantity that I have preset for myself. 
But these changes work in both ways. Positive change in routine life can make you a better trader and by making changes in your trading system you also become better at life. This is what my personal experience has been. It is like a bidirectional feedback loop. 

I also remember the days when I used to get very angry and fidgety when I had losses. But as I said, when you accept that there are only two outcomes then the result gets easier to digest. But you need to be able to take losses happily and build courage in yourself to take stop losses and just be consistent with following whatever your plan / system is. I have heard enough experts say this and I also believe that people do not need a "better" system, they just need to follow one system religiously for a very, very long time. 

To summarise, I: 

  1. https://www.investopedia.com/articles/trading/02/110502.asp