Emotional Trading

What we call evil is simply ignorance bumping its head in the dark.

– Henry Ford

Emotions are one of the biggest risk factors when trading as it is almost impossible to prevent them interfering with our thoughts and actions. Indeed there are times when emotional responses are good and provide a response to market movements and ideas of what to do. However more often than not they are a significant distraction that prevent clarity of thought and that is never a good thing when trading.

Greed and fear are the most prevailing ones and many believe like Gordon Geckko in the movie “Wall Street” that “Greed is good”. Greed can motivate the trader to strive for more, to look harder for the opportunities and keep going. However it also clouds judgement as it becomes easy to be so overtaken by the greed for more money that caution, sense, trading strategies and clarity of thought go out the window. Hand in hand goes fear as the risk of losses start to put everything in jeopardy. The intense desire for money takes away the capacity to look rationally at a market situation and frequently when the market turns in the wrong direction the trader will ignore their strategy, throw away their plans and exit the trade, usually too soon and at a loss.

Even without greed being a driving force, traders cannot avoid the emotions such as anxiety, frustration and even anger. With their money on the line and committed to a presumption of what the markets will do, it is hard not to react when things don’t go as anticipated. If it is not clear what has driven the market to go the other direction then it is easy to get angry or get fearful that somehow you have misread the markets or gone for a totally wrong strategy for the conditions. Either way all clarity of thought goes and it becomes easy to stop following the basic rules of being a trader. Obviously this is precisely the wrong response and detachment and calmness is essential.

Finally when talking about traders and emotions it should be mentioned that traders are often competitive. Looking at those around and running comparisons on the level of success and amount of money that everyone has accumulated is fundamentally destructive. If you perceive that others are doing better it is all too easy to fall into the envy trap and become jealous of all that they have. Such emotions can only be negative as with them go negative thoughts and potentially a sense of failure as a trader. This self doubt and sadness can in some circumstances be a spur to analyse what others are doing that are different and review your strategy to potentially enhance your earnings. However typically they lead to clouded judgment and negative thoughts and inability to focus on each trade. What actually sets the successful trader apart from others is that they trade for themselves, they focus on their own work and don’t care how or what others are doing, except in terms of an abstract sense when figuring out potential market movements.

So whatever the emotions that hit, it is evident that a positive state of mind is what is needed. It is essential to recognise when your judgment is being clouded by fear, greed, jealousy etc and have in place a strategy to regain focus, a clear head and a positive attitude.

 

If you like this post, can you do me a favour and click the ‘Like’ and ‘Share’ buttons to spread the message!

How to Double Your Returns in 10 Simple Steps

Your information is 100% secure with us and will never be shared