The most common emotions traders experience and how to prepare for them
Emotions hold a special place in trading. Their impact has been the subject of many studies and approached from multiple angles throughout the last decades. In this first article for our new Trading Psychology section we will be looking at a what the main emotions experienced by traders are and also how they can be managed to better serve the goals of the trader.
We start off with this positive emotion, that comes about when we have a winning trade or an analysis that predicted the behaviour of an instrument correctly. It gives a sense of superiority, strength and confidence.
There is nothing wrong with experiencing it, it is after all a confirmation of success and comes with some sort of reward and profit. It’s how one reacts after the initial phase of the “win” happens. It’s almost always carried into the next trade and colours the experience, but experienced traders strive not to let that happen.
As each trade is a separate event, complete with its own circumstances and specifics (even if it follows directly after another, or if it’s simultaneous but in a different instrument), it has to be experienced, analysed and ultimately trades as such. Try not to expect success as it comes only with preparation.
Surprise isn’t something that’s experienced frequently when it comes to trading. It’s confined to short moments or periods, but it does carry a special significance to the way price movements, wins and losses are internalized.
This emotion goes both ways of course and in its positive variation it leads to the aforementioned elation. When it’s in a negative way, it can be trickier, as it goes along the lines “why did this happen”, “it wasn’t supposed to do that”, usually defying analysis and what might seem as common sense.
The markets will serve up many surprises and actually people who have been trading for a longer time, decades to be more precise, say that on occasion they get caught off guard by something. The correct response when you are surprised, no matter if its positive or negative, you have to always take a step back and not act immediately after it happens. It marks an event or change that you weren’t able to predict and this should be put under scrutiny. Not only to prevent losses, but also to ensure future wins in similar circumstances.
We all know it happens sometimes after a trade goes wrong and although most people don’t trade professionally, some even for fun, it can cause anger.
And for those times when it happens, it can take one of several forms – impulsive trades, revenge trades and desperate trades. All of them have their specific traits that we will go over in detail in later articles, but they do share this same source.
The anger management approaches from life in general do apply here, but with a slight twist. Most people who trade don’t have such issues and react poorly when they happen, either by being frustrated with something they don’t actually control (the market) or deciding that it’s too hard to understand (or that the whole thing is rigged).
Taking a deep breath, removing yourself from the situation and allowing some time to pass before you assess what exactly happened are all sensible and come with one overarching theme – simply don’t trade while you’re angry.
In part 2 we will be looking at the effects of fear and greed, as well as the ego’s role in all of it.