Many traders claim that the results they can achieve on financial markets primarily depend on their mindset. That is why it is important to know the various psychological situations that traders and investors can find themselves in.
Fear
This is the most frequent emotion and is linked to the risk of sustaining losses (and, in some cases, also the fear of missing out on profit opportunities). Fear can arise: before entering a position. The fear of losing money (especially after a losing streak) can cause the trader to hesitate to enter the position, even if analyses point to an attractive opportunity; when the position is already in place. In this case, the trader is afraid of losing gains, fearing a sudden trend reversal. Exiting a trade too early could then lead to recrimination (as the trader has made only small profits despite a much larger market movement). Both of these errors arise from a lack of confidence in one’s own methodology, but a methodology that has been evaluated and tested should be consistently and rigorously applied.
Wishful thinkingWhen a position is not going in the right direction, we hope that the market will eventually prove us right. In some cases, traders can’t accept the fact that they made a mistake in the initial analysis and increase their exposure, making a dangerous average-price trade. Then you have wishful thinking mixed with the will to recoup losses, which causes traders to trade too much or too often (with the risk of overtrading), or to increase the size of open positions. This behavior usually leads to further negative results, caused by risk-taking beyond what the trader can handle.
DisappointmentAfter a series of losing trades, or after a period of not achieving desired results, traders will naturally feel disappointed and discouraged. However, traders should never forget that trading requires patience and perseverance. We can only achieve positive results by tackling calmly and rigorously the various situations the market presents us with, and by managing operational risk wisely.
Anger
When you lose money, it is normal to feel angry first at the market and then with yourself. The first, completely normal reaction is to blame others for our mistakes, but this is obviously completely unfounded. Losses in fact derive from a misinterpretation of technical market forces at work. The most emotional traders frequently react to this feeling of anger by indiscriminately increasing their positions, setting themselves up for further failure. Often, they decide to go «all in» and risk a large amount of capital on a single trade. No need to point out that in most cases this type of gamble ends in more bitter disappointment.
Panic
This is the mental situation that arises when the loss has become so great that it can no longer be endured and managed (very often because stop loss orders were ignored). The consequences of this situation can be devastating, both from a monetary and a psychological point of view. Confidence in our strategy is undermined and the danger is that we may be afraid to return to the market.
Euphoria
This is the opposite of the previous situation, which occurs after a series of trades that have closed with a particularly significant gain. There are periods, in fact, when we are in perfect harmony with the market. However in this situation, one often risks overdoing it, excessively increasing exposure and taking greater and greater risks.
Article written by - Stefano Gianti
Expand
