Basic trading psychology stipulates that there’s more to trading than the technicalities involved. This embodiment of psychology entails complex characteristics of behavior, actions, and character that influence trading decisions. Under the category of trading psychology is the concept of emotional trading. Emotional trading allows emotions and personal feelings to influence trading decisions at the expense of rational analysis.
When trading emotionally, a trader delegates actual reasonable intuition to impulses from emotional triggers. The consequences of an emotionally-driven trading decision can either be positive or negative. However, most times, it primarily results in the latter.
In trading, there are precise strategies to follow. These strategies illustrate pure scientific and empirically proven research that stands the test of time and diverse scenarios. But emotional trading is drifting away from this procedure(s) by giving in to emotions such as fear, greed, doubt, anger, depression, anxiety, etc.
Emotional trading is a pervasive phenomenon, particularly because traders are humans, and emotions are an inseparable feature common to us. In other words, attempts to eliminate emotions from trading can be a far cry, but reducing it to a negligible degree is possible.
Common forbearing teachings on managing emotions offer self-consciousness as the first step in preventing human reptilian notions. The same also applies to trading. So, the first step a trader needs to note is readily identifying signs of emotions. For example, emotion-driven decisions could be selling shares out of panic, hiding from price updates, and trading without stop-loss, to name a few.
According to Victor Sperandeo, “the key to trading success is emotional discipline.” So, here are 6 emotions to keep in check for a nearly emotion-free trading decision. Consider them as the seven deadly sins.
6 Common Emotions In Trading
Fear is a destructive emotion in trading. Fear of missing out, known as FOMO, is the most common demonstration of fear in trading. Because of the worry of being left behind, many traders impulsively buy short-term value assets because of momentary rises or low prices.
They do this out of an assurance of an upward rise in the asset’s value. While this may be profitable, it is not a gamble worth taking as it is primarily catastrophic. Fear may also translate to a lack of interest in the market.
Here, traders perform all theoretical analyses but fail to make practical decisions out of fear of losing money. What’s more unfortunate about this is the limitless opportunities they miss out on. Losing or winning in every trading action is an opportunity to learn.
Of course, the ordeals with trading can be very maligning. Depression is undoubtedly a result of the destructive effect that comes with trading. Due to the heavy numbers involved with trading and how persistent a bearish run could be, traders often develop acute depression, sometimes leading to suicide ideation.
In 2020, a young man reportedly committed suicide upon seeing a negative balance in his Robinhood accounts. So often, it is common for traders to be depressed after a massive trading mistake.
As a result of the unexpected trading twist, some traders became numb as the situation continuously affected their subsequent trading decisions. However, a trading mistake shouldn’t be a reason to make another.
There are several approaches to prevent depression or, better still, trudge from the loop of depression. First, have it in your mind that losing is an inevitable part of trading. Therefore, only trade with amounts of money you can afford to lose. Furthermore, remember always to set a stop loss or a trailing stop when you suspect trading is headed in an unfavorable direction.
It is usual for traders to feel pangs of anger after losing a significant amount of money or failing to seize a trading opportunity. Of course, anger is an entirely normal emotion, but there’s a problem when it becomes a springboard for subsequent trading decisions.
An example is revenge trading, an attempt to recover money lost. However, this doesn’t usually end well, as it further complicates things. Consider walking or watching your favorite series or movie show when fuming rage after a trading decision heads south.
Afterward, review your decision honestly and consider better ways of preventing such mistakes from reoccurring.
Perhaps the most common is greed, the endless desire to make more after success. So, familiar to most traders is excess confidence after bagging a trade of multiple wins. However, this is normal and can be self-hurting when it becomes so complacent that you suddenly think your strategies are unfailing.
To avoid falling into the snare of greed, trade what you’re comfortable losing. Markets constantly fluctuate, and the strategy that previously guaranteed wins might soon become outdated. As such, ensure you don’t repeat techniques because they once worked. Instead, employ a contextualized approach that takes note of every detail.
This is common to newbies. They second-guess every decision, hoping it turns out to be what is intended.
Also, experienced traders are not entirely immune from doubt. Doubt often manifests as “imposter syndrome” in seasoned traders. They usually think their earlier success is down to luck and not intelligent evaluation. However, regardless of your status as a trader, you bypass doubt with a contrary trust in your intuition.
Anxiety usually occurs after a bad trade. Recovering from bad trade can take time, psychologically. PTSD Post-traumatic stress disorder is a common feature in trading, often making traders underestimate their decisions in subsequent trading activity.
Nevertheless, you can avoid anxiety by taking an extended break after losing or ease into trading gradually by staking reasonable amounts.
Final Thoughts On What Emotional Trading Is.
Emotions are an essential part of our existence as humans. Whether in daily interactions or urgent needs like trading, they are always obviously present. But in trading, emotions can become as adverse as they can be favorable.
The guide to becoming an expert trader is managing emotions. Emotions can manifest as overt greed or siding with the herd without independent thought; meanwhile, identifying them is the best hack to keep them in check.
I believe this article has helped you identify what emotional trading is, its various forms, and how to avoid trading with your emotions. If you have got further questions, thoughts, and ideas, please leave them in the comment section below.