Role of Emotion in Trading |
Posted: July 9, 2019 |
Emotion is defined as ”a strong feeling deriving from one's circumstances, mood, or relationships with others”. Emotions are what drive our actions and it basically rules our lives. We decide our activities depending on the type of emotion we go through. There are six basic types of emotions that we humans go through:
You must be wondering why all of this information is relevant for traders. Well, trading is also an activity driven by emotions, rather than rationality. It should be the other way around, but without training and practice, we mostly resort to decision-making based on emotions. I’m here to tell you emotion should play no role in your trading. Here’s why. Picture this: You are a trader with strong basics of trading. You have carefully chosen your asset, investment amount, formed the perfect strategy. Studying the markets is something that comes natural to you, so you’re all set on placing the trade. What could go wrong? The voice inside your head that will stir a sliver of doubt in your head whether to buy or sell. Even though you know buying seems to be the rational choice here based on your predictions, your inner gut suggests you to sell. You can’t explain how your mind came to this conclusion, but that little sliver of doubt was enough to cause you to change your mind. You ultimately end up losing the trade. What’s worse is you start to question your trading system which was perfect in the first place. What let you down was your emotions. To be successful in trading, leaving your emotions out of the window is a must. Take decisions based purely on logic and rational. As a trader, you must act smart and trade with the market. Now saying this is often easier said than done. We all have undesired emotional bursts for which we have to pay a price later. In trading, the cost of such recklessness is losing your hard earned investment. Out of the six basic emotions listed above, you need to avoid sadness, fear, disgust, and anger. Happiness and surprise are two emotions that follow a successful trade. These are positive emotions that bear no bad consequences. You can also feel surprised after losing a trade that you expected to win. In such case, avoid resorting to any of the negative emotions. Now, I’m going to list you a few tips to help you minimize the impact of emotion in your trading:
I hope after reading this article, you know how detrimental emotions can be for trading. Follow the tips above, and don’t pay heed to the voice inside your head. Your brain is your best friend in trading. “Remember, NO ONE has the right to control your emotions, thoughts, and actions, unless you let them.”
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