“Trading is not about the number; it is about mastering one’s mind.” ~ As cliche as this may sound, it is very accurate.
Trading is the act of buying and selling both physical and online goods. Psychology deals with the emotional, mental or behavioural aspects of an individual. In this context, trading focuses on buying and selling online assets. Trading psychology encompasses the biases of a trader, emotional state, discipline and self-control towards trading and its outcomes.
Due to the psychology of a trader, biases and prejudices can be made on a particular data and analysis. These biases can impact the decision made by the trader, either resulting in errors in judgment or great trading activity.
This article will serve as a guide to understanding emotions in trading, mastering your mind and becoming a successful trader.
The Emotions of Trading
In trading, different emotions get traders or investors to make decisions on what shares or coins to buy or sell. When traders understand the psychology that drives them, they can overcome their biases towards trading and make more rational decisions. Let’s consider the emotions experienced by traders and what differentiates winners from losers.
These emotions are:
- Greed
- Fear
- Hope
- Regret
- Pressure
Let’s consider each one of them.
- Greed
Greed clouds the rational judgement of a trader or investor when they aim too high. It is often driven by an excessive desire for wealth or the belief in overnight success. When traders and investors are blinded by greed, they tend to forget the knowledge of the market.
An example of a greedy investor will be Alex, a day trader with a history of successful trades. Alex was a successful trader with a series of wins; one day, he found himself chasing more significant profits.
He had a rule on when to exit trading, but on that day, he refused to use his usual exit strategy; he kept trading, hoping for that one big score. Unfortunately, the market turned against him, resulting in significant losses. This example shows how excess greed can lead to the downfall of a successful trader.
- Fear
Fear is an emotion that causes doubt in one’s mind; it makes them believe they are unlucky or things will crash. Fear makes traders or investors close out their trade and sell their coins or stocks prematurely to avoid the risk and make losses. Fear can also be seen when a trader only invests in low-risk assets to avoid risk and not lose capital.
Sarah is a relatively new trader and has witnessed a rapid decrease in the value of a particular cryptocurrency. Driven by the fear, she only invests a tiny portion of her savings into the market, scared it will crash on her too. Due to Sarah’s fear, she is losing out on potential returns and a boost in her wealth.
- Hope
The psychology of a greedy trader or investor is usually made up of hope for quick gain, but most of the time, it is met with regret when it comes crashing.
Sometimes, traders know the coin or stock they are hopping on has no real value. But they go ahead, hoping to cash out before it crashes. Some go ahead and overhype their skills or the value of the shares, thereby holding it to a bit longer than it crashes.
- Regret
The other side is where a trader regrets missing out on a stock or coin that brought quick gains. Not to lose out the second time or have regret, the trader goes ahead and buys the stocks or coins without understanding the value behind them.
This often comes from a need for more discipline and belief in oneself. Each time decisions are made in the stock or crypto market due to pressure or greed, it always ends with regret.
- Pressure
There is the fear of missing out, the regret of not joining in, and the belief of being the next multimillionaire from a gain in shares or coins. All these emotions are founded on pressure.
Pressure from friends who have made gains from those shares and stocks, pressure from social media as everyone is talking about the share or coin, but it seems you are missing. Pressure that you will never make a good profit as everyone is already a multimillionaire by 18.
Moving past the crowd and avoiding them will go a long way to help as a trader. As a trader, you must recognise the emotions people or society are projecting to you. Then go ahead to avoid them at all costs.