As with other aspects of our lives, the internet has changed the investment landscape for good. No longer do people require the services of a stockbroker to begin trading. Now, anybody with a computer and internet connection can begin buying and selling stocks, shares, bonds and currencies. This has led to a huge surge in people taking to the virtual trade floors, and more people than ever are now dealing in stocks, shares and currencies. While may seem easy, requiring just a few clicks of a mouse, psychologically, it still poses the exact challenges as traditional investing, and understanding this psychology is essential for any stock market trader serious about making money online.

Group psychology

Crowd behavior plays a crucial role in the stock markets. When traders and brokers start acting in groups, a consensus soon builds up and drives the market in a particular direction. Prices of stocks are reliant on supply and demand, so when brokers and traders start clamoring to buy or to sell, the price is driven up or down. Brokers and traders know how important this is, and most good brokers will be aware as to what other traders are doing. However, when online trading with no communication with a broker, getting a feel for the group psychology of the trading floor is much harder. The financial news is a good resource to enable online share dealers to understand what is happening, and financial news websites are updated close to real time, so you can make decisions based on the very latest information.

Individual psychology

While following the crowd may be the safest form of investing, acting contrary to group mentality can actually lead to greater profits. Often, when the market peaks due to mass purchases, it soon falls again. The same is true for when prices are driven down because of mass selling; they eventually rise. An astute trader who has the nerve to buy when everyone else is selling, and vice versa, can sometimes make substantial gains. However, this is of course a high-risk strategy and requires a strong mind to know when is the right time to buy or sell, when to cut and run, and when to sit and wait, and the best way to build these skills is to identify the key psychological components that affect decision-making.

Discipline

It is very easy to panic after making a large investment against market forces, especially if the price suddenly goes in the wrong direction. Discipline is therefore crucial. Selling stock in a panic because things don’t appear to be going the way you hoped, will always result in losses, so having the confidence to let the market take its course, no matter how bad things start to look, requires an immense amount of discipline. Of course, online traders, as with traditional investors, need to know how to handle losses and not allow them to dent their confidence, because this can hinder future results.

Confidence

It is all too easy to let losing money on the markets affect your confidence. The more losses you accrue, the more confidence you may lose, and this may end up with you taking fewer risks. Eventually, this can lead to a downward spiral of fewer returns and lowering confidence, until a trader has so little faith in his or her ability that making any real money becomes impossible. The reality is, however, that all traders lose money, and it takes a lot of mental toughness not to allow a run of losses from affecting rational decisions, which is another key aspect to understanding trading psychology.

Logical thinking

Decisions in online trading should always be based on research, logic and a well-governed plan, and not on gut instincts or feelings. Allowing a lack of confidence, or any other emotion, to interfere with the decision-making process is tantamount to handing success to lady luck. Of course, a trader needs to learn from his or her mistakes, but losses and risk need to be embraced as part of the trading process and a run of “bad luck” should not to be thought of as some divine conspiracy. The same is true of over-confidence. Just because every investment you have made has generated a profit, it doesn’t mean you have some divine gift for making the right decisions.

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This post contributed by Lucy Faraday, Guest Author