The stock market may not have emotions, but traders most definitely do. Thats why trading psychology is so important. This is also part of what makes trading such a rollercoaster: you feel those intense highs and terrible lows.
You’ll never be able to totally remove human emotions from trading. However, gaining an understanding of the psychology of trading can help you remain calculated and level-headed when the heat is on during a trade.
Ready to get mental? In this post, I’ll share my take on some of the most common emotions in trading, how they affect traders, and how to avoid giving in to them.
The Emotions of Trading
When it comes to emotions in trading, the big four that tend to get traders into trouble are greed, fear, hope, and regret. Let’s take a look at each of them:
This isn’t the movie “Wall Street,” and you’re not Gordon Gekko. Greed is not a good thing for traders. Here’s what it can make you do:
- Set unrealistic price targets. Greed can make you set unrealistic price targets based not on reality but on what you wish you could make from a trade. This is a real problem, because while you’re dwelling on how much more you could make if you stay in a trade, you could be missing out your chance to either cut losses or maximize profits. With this mentality, you’re not looking at the trade clearly, and are more likely to make bad decisions that cost you money.
- Ignore the rules. Greed can make you do dumb things like ignore intelligent risk-management practices. When you’re in a greedy mindset, you can get so blinded by the idea of what you could make that you take risks and gamble. Unfortunately, this attitude can get you in a lot of trouble — I’ve seen more than one trader lose all their money by ignoring the rules.
While caution is good in trading, fear can mess with your mind. A fear-motivated trader is more likely to do the following:
- Give in to panic. When your trading decisions are rooted in fear, you’re more likely to do things like sell in a panic, regardless of the price. The inability to weather normal market events like pullbacks and to step back and determine whether or not entry and exit points are intelligent can keep you from executing successful trades.
- Avoid risk entirely. As a trader, you want to do all that you can to mitigate risk. But it’s a simple fact: The stock market is volatile, and it’s impossible to trade without assuming some level of risk. If you’re completely risk averse, you could find yourself suffering from the “paralysis of analysis” — where you’re so caught up in reviewing the technicals that you become too scared to actually execute trades in a timely fashion. You may also find yourself avoiding quality setups because you’ve been burned before.
- Fall into the FOMO trap. On the flip side of being risk avoidant, fear can also inspire rash behavior like chasing stocks, simply because you’re scared of missing out on the action. Unfortunately, chasing stocks is rarely a good strategy. It makes you ignore rules and risk management practices. But more importantly, if you’re chasing, you’re already behind the curve. Personally, I like to be ahead of the curve when I pursue trades.
Generally, hope is viewed as a good thing. However, as a trader, it can lull you into a deluded sense of security that things will work out in a trade — even if the stock’s price action tells a different story.
This so-called “hold and hope” mentality can make you do things like this:
- Wait for the stock to turn around. It’s humbling to admit that a stock isn’t performing as you’d hoped. A false sense of hope can lead you to believe that things will improve if you just hold on to the stock a little longer — even if there’s zero evidence or data pointing toward that happening. Instead of doing the responsible thing and cutting your losses, you hold on in vain. In situations like this, often enough the price will continue to plummet, compounding your losses.
- Wait for a catalyst that may never come. Traders with a false sense of hope might also trick themselves into believing that there’s a huge catalyst just around the corner that will save the day (and the stock price). In this situation, you might hold out hope that a company that has consistently reported disappointing earnings will suddenly report huge profits.
News flash: This is trading, not a movie with a guaranteed happy ending. To expect that things will turn around with no hard data is magical thinking, not logical thinking. Hope is not a strategy!
Regret can paralyze your thinking, life, and overall well being! It’s a beast of an emotion in trading. Here are some common reasons why traders feel regret:
- Missing a trade. Every trader will feel regret about the trade that got away at some point. However, it’s important to remember this: There will always be another trade. There will always be another chance. By wasting your time obsessing about the one that got away, you may, in fact, be missing out on current and future opportunities.
- Not taking profits. Did you wait too long and miss out on maximum profits? Or, did your trade slide from green to red? Hey, you’re not alone. This happens to every trader from time to time. Instead of kicking yourself about it, take the time to evaluate where you went wrong — at what point should you have taken profits? Learn from this experience, and resolve to do differently next time.
- Losing money. To the best of my knowledge, no trader has ever jumped for joy at a big loss. However, it’s part of the game.
If you’re so traumatized by loss that you can’t move forward, it’s going to be a problem. Instead of dwelling, take the time to consider if you could have done anything differently. If you learn from the experience, then there’s value in the loss.
Mastering Your Emotions as a Trader
So … how can you master your emotions as a trader? Well, there’s good and bad news.
The bad news is that you’ll never be able to 100 percent master your emotions — you’re human, after all.
But there’s good news, too: It’s easier than you might think to keep your emotions in check.
Here are my top tips for controlling your emotions in trading. These tips might seem simple, but just try putting them into practice. They’ve been very helpful for me, and hopefully will be for you, too.
- Challenge your thinking. Keep learning, observing, and questioning what you do in trades. It will help you continue to improve.
- Have an accountability partner. Get yourself a trading buddy … and keep each other accountable. It’s incredible how much this can improve your trading.
- Stick to your plan. Make, and commit to, your trading plan. Easier said than done, but it will help you see more consistent results.
- Be disciplined. None of the above tips will work without practice and dedication. So resolve to be disciplined and stick with trading responsibly!
SwingTrades With Paul Scolardi
My name is Paul Scolardi, and I’m a swing trader. I’m also the lead teacher at SwingTrades.
My trading style revolves around trying to locate tomorrow’s trending stocks before they peak. I do this via a system I’ve developed over the years of looking at earnings winners, sector leaders, and hot IPOs.
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Don’t forget: Trading requires lots of hard work and dedication. No matter how much you study and prepare, there are always factors in the market that you can’t anticipate. Trades are always executed at your own risk.
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