The Psychology Behind Technical Analysis

          The psychology behind trading stocks is the force that moves the stock market. A stock chart is nothing more than a picture of human emotions. Painted on the canvas are the emotions of greed, fear, hope, and euphoria. As a disciplined trader, you capitalize on the psychological demons that plague othertraders.

• Should I buy?
• Should I sell?
• Should I take profits?
• Should I take a loss?

These are some of the questions that destroy trading accounts because the novice traders asking these questions do not have a plan. If you asked a professional trader one of these questions he or she would say, "I don't know. What does your plan tell you to do."

So what ends up happening? They get excited and buy at the worst possible time. Then the stock reverses. Fear creeps in and then the stock goes lower... and lower... and lower. Finally the pain becomes too much to bear so they sell taking a huge loss.

You cannot take big losses and expect to be a profitable swing trader and if you cannot take a small loss, then you will take the mother of all losses! Believe it!

Now let's look at the psychology behind what happens when a stock does go in the desired direction:

Excitement! Euphoria! Yeah, I'm making money! "I had better sell to lock in these profits since I have had several losing trades in a row." The trader then ends up selling too soon!

By now I'm sure that you have heard the saying, "Keep you losses small and let your winners run". Look at what just happened in the above example. The un-disciplined trader has just done the opposite! They have let their losses get big and they have limited their winners!

All of this mental anguish can be eliminated by having a decent trading strategy and the mental discipline to stick with it. Write down a plan for the trade before you trade the stock. Then trade it according to the plan that YOU have written. Remember that you have devised a plan before you got into the trade when your emotions were stable. Now you can trade your plan with confidence.

For most novice traders, it is not their strategy that is causing them to lose money. It is themselves that is their biggest enemy.