Introduction

Trading is often referred to as the art of reading charts, patterns, trends, market sentiment, company fundamentals, et cetera. However, it is much more than that. It is about being disciplined and controlling impulses as well i.e., a strong psychology. To be a successful trader, you need both intellectual skill and psychology in equal proportions and one without the other is just like jam without bread.

Trading psychology is a combination of emotions and state of mind of a trader when he is participating in the market. It is governed by their behaviour i.e., their responses to market’s stimuli which is anything and everything that is unanticipated or unwanted.

It is very easy to have faith in your strategy when all is going well. For example, in 2007, the market was in a mad bull run and almost every second person was making money whether they deployed any strategy or not. However, the real test came when the bubble burst and the markets crashed in 2008. It is then that one needs to realise that they are not a bad trader, nor do they have poor strategies. It is just a bad market situation where all is going awry and if one holds patience and sticks to their strategy till the end, they are bound to succeed with flying colours.

Trading psychology comes into play when you have something at risk – whether it is your own money or your job (if you are trading on behalf of your firm). When you have something substantial to lose, you feel indecisive about whether to hold on to your gains/losses or exit your positions. A lot of newly launched mobile/desktop applications allow you to get a feel of playing in the market by first letting you trade with fake money. This is a good way to learn the nitty gritties of the market – the what and the how! However, it does not give you an accurate picture of how the environment will affect your decision-making process because you have nothing to lose when you are participating in the market through a trial account.

In this module, we will study all about how a trader’s mindset differs from that of an investor, what are the common mistakes that a typical trader makes and how can you improve your psychology to overcome those mistakes. We will learn about some behavioural biases prevalent in the market that actually give birth to these common mistakes. All the sections in this write-up aim to showcase the importance of trading psychology and ways to control it. 

Investor Vs Trader Mindset

Before we understand how the mindset of an investor differs from that of a trader, we need to understand how their actions differ in the stock market.

An investor is one who takes a long-term bet on the markets. An investment is considered long term in the stock market when the holding period is more than one year, whereas, in the debt market, it is typically seen as over three years. But a trader usually takes short-term bets on the market, such as for a period of a few days, weeks or months.

An ideal investor bets on the market after having done thorough research on the fundamentals of a company. Since they invest their money for a longer term, they must have more conviction on how the company will perform and for that, a thorough analysis of the company’s financial statements, debt structure, corporate governance, off-balance sheet investments, etc is absolutely necessary.

A trader takes a short-term view on the market which can range from a couple of hours to a week and even a few months. Now, their actions may or may not be directly related to the ongoings of the company. To explain this better, let us take an example: RBI announces that it is going to reduce the repo rate; a typical trader sees this as a decrease in expenses for commercial banks and an increase in business (think of this as Banks can now offer more loans to the public) that will eventually form a bullish opinion on the banking sector. This tells us that traders often trade on news which are more to do with macroeconomics than with the particular stock directly. Traders also try to form trends and patterns in price movements and trade on the basis of their predictions drawn from these trends and patterns. These are known as technical trading strategies.

After having understood the conative aspect of investors and traders, we can now evaluate their mindsets i.e., the cognitive aspect. It is not very difficult to derive the same after being aware of what was just discussed above. Of course, the risk appetite of a trader is way higher than that of an investor. Actions induced by short term news have a much bigger impact on gains and losses than those involving a long-term view. You must have heard the phrase: Higher the risk, higher the returns but nobody talks of “greater losses with greater risk”. Similarly, more the time to offset your trade, more the time for the prices to normalise which results in normalised returns.

A trader takes more risk as they work on predictions whereas an investor tries to beat the market by knowing the exact strength of a company’s fundamentals. If an investor does thorough research, he/she typically minimises the luck factor that plays in the stock market. Of course, some amount of luck will always be prevalent but in the long term, factors that do not directly impact the company or its sector will not impact returns on your investment either. One needs to understand that investment is for long-term wealth creation whereas trading is more of a day-to-day occupation.

The Play of Primary Emotions on Trader’s Mindset

Previously we have learned the differences between the investor's and trader's mindsets. Let us now understand the primary emotions that affect the psychology of a trader. 

Stock markets can be very volatile at times and can get the best of your emotions. As we discussed, a trader is one with a higher risk appetite due to the higher uncertainty involved. This invariably enhances the role of the four primary emotions: fear, greed, hope and regret that grapple a stock market participant. 

Fear 

We mentioned earlier how traders often act on “news” which may or may not be directly related to the company. Now, bad news about the economy, in general, will obviously scare a bullish trader. But what should his/her immediate reaction be? Should he/she liquidate the position and sit on the cash, waiting for the economy to recover?

To the naked eye, it may seem as though he is avoiding monetary losses but there are two factors that are not being taken into consideration here and they are: 

a.Transaction costs - expenses incurred in carrying out a transaction in the market.
b.Opportunity costs - costs in the form of potential benefits that a trader foregoes when he chooses one alternative over the other .

He should first analyse whether liquidating his position is the only and most profitable option ahead of him and for that he needs to ask himself the following three questions: 

• Reflection of a negative event on price: “Is this bad news going to re-adjust prices significantly or has the market already adjusted for this bad news in advance?”
• Capability to change strategy: “Is he capable of changing his bullish strategy and turning into a bear? If yes, will it be the best course of action?” 
• Contrarian strategy: “Can he leverage this bad news to his advantage by buying at a low (since everybody else is selling) and then selling as soon as the market recovers from the shock?”   

Questioning oneself before taking an impulsive action is what will enable one to have better control over their emotions when trading in the market. Traders must quantify this fear in advance (i.e., before the event takes place that will have a negative impact on them) and devise a plan of action ahead of time. This will ensure that no action is taken in haste at the time of the negative event, thus minimising losses to the trader. 

Greed

Greed is not an easy emotion to overcome. It is human nature to hold on to your winnings to win every last penny that is possible. In a bullish market, this tendency of a trader enables him to earn big wins but in a bearish market, it leads to untenable stock positions.

The only way to combat greed to some extent is by showing discipline in your trading strategies. Discipline comes by way of setting mental rules and following them when in dire straits. E.g.: Setting a profit target or a stop loss.

Hope 

Hope is very similar to greed with the slight difference that it causes one to hold on to their losses hoping for a reversal and some relief henceforth. Most people are too proud to admit that they have gone wrong and are thus able to accept their losses. Falsely believing in their original strategy and skill, they do not exit their positions further magnifying losses. 

Let’s take an incident from the past to understand this emotion even more clearly. Even when technology stocks had started dipping in early 2000, showing early signs of the dotcom bubble burst, investors continued to get their hands dirty in those stocks. It eventually led to a brutal crash of the NASDAQ index whose effects lasted for years to come. 

Regret 

This is a feeling which I am extremely familiar with. I would like to explain this emotion with my very own example of holding a certain stock.

I bought SRF Industries in Dec 2017 at ₹1981 and sold it in April 2020 at ₹3725. At the time, I had made gains of 88% and was extremely content with my profit level. Now, the selling decision was not completely my own. My family badgered me continuously at the time to exit the stock for they thought there were better opportunities available in the market then. I still believed in the fundamentals of the stock and wanted to hold on to it for longer. But seeing the profit then, I was scared it would dip as that was the overall sentiment of the market due to the spread of the COVID-19 virus and imminent lockdown. Hence, I succumbed to my family’s suggestions thinking I will buy the stock later when the price goes down. Since then, SRF Industries stock has been unaffected by the pandemic and on the bull run. Today (as of April 2021), it is at ₹6156. Almost every few weeks, I see the price of the stock on my watchlist and my heart is filled with “regret”. I cannot help but get affected by the so-called “fear-of-missing-out”.  

You might wonder how greed is different from regret? Greed is what makes you hold on to your “current” stock position in hopes of bigger gains and smaller losses. On the other hand, regret is what you experience after exiting your “past” stock position. 

A consequence of regret is that it often makes traders enter into a position after the window of opportunity has closed. In my case, I did not act on it as my initial strategy after selling SRF was to buy it only when it falls and then I couldn’t get myself to buy it at such a high price. However, even that is wrong because it was not a well-calculated decision. As a long-term investor, I should have calculated the company’s true value (either using a comparable approach or discounted cash flow methodology) and then held on to the stock till my target true value reached.

Moreover, once you have sold a stock after it reaches your target value, there is no point expressing any sorrow (or regret) if the stock price further rallies. This is because it is important to realise that no individual can “predict” the exact high of a stock or the exact low. So, it only makes sense to hold on to something until you deem it to be the maximum value it is worth attaining.

Another learning from my story is that a stock market decision should always be your own. It is okay to take advice from people but until you are convinced with the advice and find that advice to be the best course of action at that point in time, you should not act on it. Otherwise, you will exhibit something called attribution bias – a cognitive bias where you tend to attribute your winnings and successes to yourself and your losings and losses to other people or external factors. We will discuss in detail a myriad of behavioural biases in the subsequent sections.

Classification of Traders by Trading Style

We have distinguished between an investor and a trader's mindset. However, there is a further classification of traders – active and passive whose characteristics differ widely, and so do their mindsets. 

Active traders are those who devise their own market strategies – identifying individual stocks, trends, patterns, using technical indicators, making predictions, et cetera. They use their own skill and intelligence to make profits in the market. Hence, they are more affected by psychology and the emotions that the field encompasses i.e., Fear, greed, hope and regret.  Attribution bias is especially prevalent in active traders’ mindsets wherein they try to take credit for profitable trades and shirk responsibility for bad buys/sales.

Passive traders are those who replicate the market as they believe that doing so will ensure maximum diversification and the best possible returns. Psychology doesn’t affect them as much but it does to some extent. The most common of emotions affecting these traders is regret when they choose to look backwards in cases where the market has been down but certain stocks have performed very well (E.g.: Falling market during the first wave of COVID but new highs for SRF Industries). At such a time, it is important to also remember the times when replicating the market has been extremely beneficial vis-à-vis focusing on a particular sector, index (E.g.: When the mid-cap index kept hitting new lows every day but the market was up due to the high-performing blue chips). 

Evaluating Common Trading Mistakes and their Probable Solutions

Previously, we have covered the different trading styles followed by active traders & passive traders. However, there are common trading mistakes that every trader encounters, which we will discuss in this section and also try to provide a probable solution for each. So let us begin:

1. One blowout trade wiping out all your previous wins:

 It is often said that 20% of the trades cause 80% of the losses – so it is about controlling those 20% of losses. This can be done by keeping your psychology strong and staying true to your strategy and plans. The more you get rid of impulse, the lesser will be the percentage of the losses caused by these 20% trades.

2. Failing to admit that you have made a wrong trade or used a wrong strategy: 

Own experience: I personally bought SAIL at ₹90 in 2018 based on the news that SAIL will expedite its modernisation and expansion plan. However, like most PSUs, this elaborate plan kept being delayed and the stock kept falling. When my investment had fallen by 20%, I felt that now it is too late for me to book my losses, might as well wait for a reversal and will exit at breakeven. However, I never got that opportunity and SAIL’s stock price went as low as ₹30 in mid-2019.

Learning: We must accept our mistakes and not wait for a miracle in hopes of reversing our mistakes. Once we do realise our mistake, the next course of action should be to bear in the current losses because waiting for a reversal will only enhance the magnitude of those losses. Averaging down is the worst possible strategy one can apply. In fact, what one must apply is the Pyramiding strategy wherein one adds to their existing trade position when the stock is moving in a favourable direction i.e., when you have bought a stock and it starts moving upwards, at every level, we should keep buying but in smaller quantities each time so as to not increase our exposure by a very large extent.  

3. Increasing your exposure to a beaten down stock so as to reduce your average buy price: 

Own experience: Late 2018, I bought more of SAIL at ₹60 thinking that I will cut my overall losses by earning quick profit trading in this ₹60 lot of the stock.

Evaluation: Human nature doesn’t allow you to accept losses. You keep trying to undo your mistakes by making more mistakes and this is why you tend to go for more aggressive strategies (similar to the one elucidated above) once you start losing.

Probable Solution: The only solution is to set strict mental limits; in this case, in the form of stop losses. Also, one must never take a trading decision incentivised by covering losses, their trading decisions should be only based on their strategy and belief, not hoping for mere luck to be on their side.

4. Taking market exposures bigger than your capacity’s allowance: 

Some people treat stock markets as “gambling” or “easy money”. They put all their money on one or two stocks (perhaps based on “tips”) expecting to become a millionaire after that. This is a major problem. Stock market will reward only those who exhibit patience, discipline and skill. A combination of all three is necessary to make money. There is no easy money – even if you make money on one trade based on sheer luck, you will lose it in the next one just how a gambler does in a game of roulette. Money management is a very big aspect of this discipline. One must trade with only that proportion of their income that they can afford losing and keeping stringent stop losses is imperative to continue in the market for the long term.

5. Stopped trading after suffering losses on recent trades:

Profit and losses are part of the game. One must treat them as inevitable outcomes. Losses are not always a result of poor strategies or incompetence, but sometimes just a market phenomenon - a result of the market’s trend. Hence, it is important to not get dejected and continue modifying one’s own strategies to achieve maximum accuracy. If one sticks to their exposure limit and stop losses, they won’t ever find the need to stop trading altogether.

6. Unable to stick to a sound strategy because the last few trades made losses:

This happens due to lack of confidence and is very natural. However, this can be overcome with more and more experience. When you are starting off in the market or testing new strategies, either take smaller exposures or have a smaller cap on losses (i.e., set conservative stop losses). This enables you to test out your strategies and realise even in profitable trades whether the strategy worked on account of being effective or whether it was sheer dumb luck. Once you have established this, it is easier to have faith in your strategy even after a number of consecutive failed trades. This is a calculated (higher probability) loss reversal strategy and not one based on “hope” and “luck”. 

Importance of Setting Stop Losses

Previously we got a brief idea of how a stop loss can be used to avoid some common trading mistakes. Therefore, in this unit, we will focus more on the importance of stop-loss while trading. 

Setting stop loss is a mental tactic which enables you to preserve your capital and prolongs your stint in the stock market. So, invariably, the importance of setting stop losses is directly proportional to the importance of preserving one’s capital. 

Let us enumerate this concept with the help of basic mathematics. 

Suppose, you start trading with ₹100. 
Within a short span of time, you lose ₹10.

As you can see from the table above, as the % of loss on capital increases, it keeps getting tougher to be able to restore it to its original value. When we lose 50% of our money, we need to double our investment (100% gains) to be able to reach the stage from where we started. 

A. Risk-Reward Ratio 

Ideal risk-reward ratio should be 1:3 which means that if positive price movement is by 15% i.e., gains or reward for you then your stop loss should be at 5% price movement on the opposite side. Hence, your losses should be on average one-third of your gains. 

B. Trailing Stop Losses 

Trailing stop losses is when you continuously change the level of your stop loss based on what is happening in the market. Basically, when the price moves in favour of your bullish trade, you keep increasing your stop loss level keeping the % of loss on capital constant. Similarly, you keep decreasing your stop loss price level in the case of favourable price movements on a bearish trade.  

C. Different Stop Losses for Different Trading Strategies 

Different trading styles attract different risks, hence we have to have different stop loss levels for them. We can’t have one single strategy for all our trading styles. There is more risk in day trading so stop losses should be set at 0.5-1% of your invested capital, as all trades are time bound.

 In case of swing trading, one holds the stocks for several days to a few weeks in order to gain from price movements or swings. Since the stocks are exposed to overnight  risks, the stop loss should take into account the volatility of the stock. Stop loss can be set at 5% level. 

In case of investments (which typically have a holding period of minimum 6 months), the strategy used for investments is mainly fundamental analysis. It ensures that one is investing in a solid business which will be less affected by the ongoings of the world in the long term. Based on how good a business you are investing in; your stop losses can vary from 10-20%.  

D. Heuristics for Setting Stop Losses 

• Swing Low/Swing High: When you take a bullish position on a stock, your stop loss can be just below the swing low. Swing low is when the price is lower than any of the lows in a defined trading period. Similarly, when you take a bearish position on a stock, your stop loss can be the swing high. This obviously has to be seen relative to your probable loss in capital percentage but it can be used as a general guideline as swing low and swing high are those levels from which the stock had earlier bounced back in the opposite direction. 
• Technical Indicators: There are few technical indicators which help in identifying and putting appropriate stop losses. They give us the exit at the right time hence saving capital. Average True Range and Parabolic Stop and Reverse, super trend, moving average are few commonly used technical indicators to put initial or trailing stop losses. ATR is a volatility indicator and is often used to determine trailing stop losses. PSAR is a trend indicator which shows whether the current trend is likely to prevail or reverse. One can move the stop loss to match the indicator at every price level, thus this indicator also helps in setting trailing stop losses. Moving Average and Supertrend also help to do the same. 

Market Anomalies

Before discussing different kinds of behavioural biases, let us first talk about the impact these biases may have on the stock market. You must have heard of the term, Efficient Market Hypothesis - when the stock market reflects all types of information and immediately adapts to new information. This implies that you can neither use technical or fundamental analysis to beat such a market that is fully efficient. Now, we all know that this is highly inaccurate, especially in the case of the Indian stock market. This is because of Adaptive Market Hypothesis wherein behavioural biases lead to anomalies that cause the various cycles, trends, crashes and booms. 

Some of the market anomalies are as follows: 

1.Momentum 

When rising stock prices further cause a rise in that stock’s price and falling prices continue falling. This anomaly indicates that one should always buy past winners and sell past losers even with no new information in the picture. This goes against the principles of finance. 

2.Calendar anomalies 

Some examples of this type of anomaly are the “January effect” and “Mark Twain Effect”. January effect is when stocks perform exceptionally well in January often owing to investors selling more in December to set off losses for tax benefit or to show high performance at the end of the year. 

The Mark Twain effect is related to low returns in the month of October and has got its name from the famous quote by Mark Twain, “October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” This statement is actually one of sarcasm which indicates that it is ALWAYS dangerous to trade in stocks but the special emphasis on October is what gave this phenomenon its name. 

3.Value Effect

Here, value stocks (low price multiples and high dividend yield) tend to outperform growth stocks (high price multiples and low dividend yield). 

4.Earnings Surprise

This is when a company's actual or reported financial numbers are widely different from market/analyst expectations. The analyst expectations are often based on the company’s previous financial reports and the company’s own estimate or guidance in concalls. However, when a positive earnings surprise occurs, the market reacts positively going for a bull run and vice versa. Often, companies purposely give low “guidance” in order to increase their share price on the basis of a positive earnings surprise. This is highly unethical. 

Behavioural Biases

Now, let us discuss the different types of behavioural biases that affect the stock market participants. They are as follows - 

Loss Aversion 

It is said that investors are more affected by losses than by gains, even if both are of the same quantum. This causes them to hold on to losing stock positions in the hopes of breaking even. They do not realise the opportunity cost of the invested amount which could be invested elsewhere to earn is much more than the amount lost in the other trade. Loss Aversion bias leads to risk aversion by investors as well as they prefer to play safe. 

Overconfidence Bias

This is an emotional bias wherein investors have too much confidence (more than necessary) on their skill, strategy, analysis, et cetera. This causes them to not hedge their risk properly, take stock exposures bigger than their capacity, keep holding on to losing stock positions, not selling at the right time with profits and a multitude of such scenarios. I have often found this bias to be more prevalent in new participants. Most new participants enter the market in the bull run when they see everybody around them is making money by trading in the markets. So, but obvious, they also make money initially and that leads to generation of overconfidence bias. It is imperative to understand that many times, your losses and gains are just a market phenomenon and have nothing to do with your skill or strategy. 

Herd Mentality

“If everyone is doing it, it must be right!” - This is the mindset of many, not only in the stock market but in life in general. And this is the mindset that had led to the birth of the dotcom bubble, housing bubble, Japanese bubble economy and several other such historic bubbles. One must always act on individual faith and research in the stock market, otherwise it is very easy to get wiped out by this tsunami.  

Anchoring Bias

 Investors often use an arbitrary number or some information as anchor for subsequent judgements and decisions. Owing to this, they do not adjust to new information adequately. In my example of SRF earlier, I sold it at ₹3725 and turned that number into an “anchor point”. I refused to buy the stock at a higher price even though there was positive news about the company and its business as I kept hoping for the stock to revert to this anchor. 

Availability Bias

It is like using a shortcut when one uses easily available information or even preconceived notions to make judgements and trading decisions. The most common example is that of mutual funds which are heavily advertised. Just because they are heavily advertised, they become more recallable to an investor and they tend to falsely believe that the particular fund is also the best option from an investing point of view. 

Hindsight Bias

It is easy to identify the source of an event after the event has occurred. However, this identification often deludes traders into thinking that they have “predictive powers” and that this identification could have been done in the past too. After every crash or rally, you often hear people saying that “Of Course this was going to happen” but in reality, the same reasons do not seem that obvious at the time of taking action. 

Recency Effect

Putting more weightage or giving more importance to the “recent” events before taking a trading decision is a result of Recency Effect. For example, the announcement of a merger can take precedence over the firm’s track history in conducting business. 

Confirmation and Cognitive Dissonance Bias

Every human is born with an ego and even in the stock market, they want to be right every time. As a result, they only look for information that confirms their pre-existing belief and choose to ignore new information which challenges their belief. This results in lack of responsiveness and adaptation by a trader. Cognitive dissonance has a similar outcome but it doesn’t stem from ego or from the need to be correct but because humans don’t want to go through the psychological distress of dissonance by accepting information that proves them wrong. This is what I was personally experiencing when I tried to “average down” my SAIL position. 

Status Quo Bias

Status quo essentially means that the person is resistant to change and doesn’t want his present state/position/situation to be modified in any way. This again causes people to not adapt to new information or accept that their previous beliefs were wrong. It results in holding losses for too long and also missing the opportunity to sell and make substantial gains.  

Self-Attribution Bias

This bias is like a free rider in a group project. When something goes right, they come forward to attribute the success to themselves and when things go wrong, they take two steps back blaming others for the failure. This bias causes one to ignore his mistakes and not learn from them, in a way, it prevents the growth of a trader as he will continue to repeat his mistakes. Traders suffering from self-attribution bias also tend to take too much risk and hold overly concentrated portfolios. 

Endowment Bias

This is when an investor puts more value to something when they own it as compared to when they don’t. As a result, investors often avoid selling a stock either due to emotional attachment with it or the belief that it will provide superior returns (which may or may not be true). This also prevents investors from researching alternative investment opportunities. 

Behavioural Tactics to deal with Primary Emotions

Till now, we have discussed strategic tactics to deal with primary emotions and behavioural biases which will to a large extent help traders avoid commonly made mistakes. Let us now enlist some simple behavioural tactics to ensure a strong mental state of mind. 

1. Briefly change your environment setting when anxious, scared or dejected

It is very helpful if one leaves the trading room for a short while when they feel the emotions of anxiety, fear and dejection. The best course of action would be to go to an open place in such a situation, either your balcony or garden or even the building compound. Fresh air helps to rejuvenate and brings the body back to the original state. 

2. Maintain a journal of the times when you lost control over your emotions

Recording such situations in a journal helps you to identify a trend as to when you react the most and how you react. It also helps you to track your improvements in controlling emotions. It mentally prepares you to react differently, in a more composed manner, when the same situation arises again. Revisit the journal when you are in check of your emotions so that reading about those situations impacts you with a greater force and instills a feeling of remorse deep within. This remorse will act as a reminder the next time and help you control your emotions with greater ease until it becomes a part of your DNA. 

3. Deep breathing exercises

There are several videos available on the internet with a step-by-step guide of deep breathing exercises. Some exercises that can be followed are - belly breathing, alternate nostril breathing, resonant breathing, sitali breath, pursed lip breathing, et cetera. These exercises help you to normalise your blood pressure and heart rate thereby, de-stressing your mind and helping you reach a state of equilibrium. 

4. Pin down quotes near your trading set-up as a reminder to not fall prey to greed, hope and loss aversion

These quotes act as a constant source of reminder to keep your emotions in check and also remind you of the aftermath of losing control of your emotions. A reminder of what all you can lose often acts as a driving force in the positive direction wherein you put your heart and soul to try and avoid such a situation. 

5. Close your eyes before starting to trade on a fresh day to visualise yourself making trades and taking losses

Visualising and anticipating negative events is a way of conditioning yourself to a highly volatile situation. This prepares your mind for such a situation and thus, you are in better control of your emotions and actions when this situation actually arises. 

6. Do not overexert yourself

Mental health has a direct relation with physical health. Lethargy will cause you to take sub-optimal decisions in the trading arena. Getting proper sleep is crucial for the mind to function to its best potential. Hence, one should take proper note that he is not starting his day already tired because that will reflect not only on his trades but also his trading psychology, that is, the ability to manage his emotions will also be particularly weak on such a day. 

7. Maintain your energy levels by consuming fluids/peanuts/fruits continuously

This is in continuation to the previous point. It is not only important to start your day energised but it is equally important to remain energised throughout. Hence, one should constantly consume energy drinks (avoid packaged items - prefer fresh juice, barley, glucon-D), fruits and high-protein peanuts. To ensure that this becomes a part of your daily routine, one should try and fix the timings of consuming these items. 

8. Pursue a hobby every day 

Make it a habit to do something that you enjoy doing every day. This will prevent a person from thinking about trading even after the day has ended and will help his/her mind rejuvenate. Hobbies can vary from reading books to even meeting your friends every day for a game of cards. It should just be something that you thoroughly enjoy and which helps you distract yourself from the trading world. 

Behavioural Tactics to Fix Mistakes

Now that we have learned the behavioral tactics to deal with our emotions. Similarly, let us discuss the steps to rectify our mistakes.

Step 1: Mistakes are in reality, synonymous with not following rules. So, at the end of each day, ask yourself “Did I make a mistake?” However, if you didn't even have any rules in place then everything was a mistake.

Step 2: If you did not make any mistake then pat yourself on the back. If you lost money despite sticking to the rules, tell yourself “Sometimes, the market controls whether you win or lose and there is nothing you can do about that.”

Step 3: If you made a mistake then try to discern the factors and conditions that led up to it. Ask yourself, “How might that happen again?” - Note these scenarios down and pin them at eye level across your trading setup. 

Step 4: Just parallel to these scenarios, also note down some effective responses. Now, rehearse performing these on a daily basis and gradually, you will realise, they turn into reflexes for you rather than forced. 

Conclusion

So, from this particular module, we have learned how psychology plays an important role while trading in the stock market. We also learn how an investor's mindset differs from a trader's mindset. Therefore, before you start trading or investing in the market, it is essential to categorise yourself. By categorising, it is easier to ride the market, and definitive psychology helps in paving the way to success in the stock market.