When trading in a financial market, the importance of trading psychology should not be overlooked. Whether it’s forex, stocks, commodities, or any other tradable assets, how traders choose to harness their emotions can minimize or increase their chances of success or failure. The four psychological states of emotions that drive most individual decision making are fear, greed, hope and regret. Heres’ a deeper look at how each of these emotions manifests themselves in trading and the repercussions they may cause.
Fear is defined as a distressing emotion that is caused by a feeling of impending danger, which more often than not triggers a survival response. This holds true regardless of whether the threat is real or imagined. When it comes to trading fear is not all bad, it can get you out of a bad trade and prevent financial ruin. However, the panic that is often coupled with fear can also fuel poor decision making. Some instances may include influencing a trader to sell a position regardless of the price or causing a trader to be fearful of entering the next trade as a result of losing money on the previous one.
Greed is commonly defined as an excessive desire for money and wealth. When it comes to trading, greed manifests as the desire for a trade to provide an immediate and unrealistic amount of profit. It is an all too consuming emotion, directing the traders’ focus on how much money they have made and how much more they could potentially make by staying in the trade. This type of problematic reasoning is not without its consequence as a profit is not realized until a position is closed. Therefore, until then the swing trader only has a potential profit. Moreover, Greed also blinds traders to sound risk management practices.
Hope is regarded as one of the most misleading human emotions and can be very harmful when it comes to trading. It can cause a trader to stay in a losing trade even after it has hit the stop. As with greed, hope can prevent a trader from taking profits on a winning trade as there is the “hope” of recouping past losses by remaining in an open position. Every swing trader hopes that a losing trade will somehow become a winning trade, however, the stock market is not a fairy tale and there are no guaranteed happy endings.
Regret is defined as a feeling of sadness or disappointment over something that has happened or
been done, especially when it involves a loss or a missed opportunity. It is a completely normal
emotion for a stock trader to experience from time to time as a direct result of taking on a losing
trade or missing a winning trade. The most important thing, however, is to not become consumed by regret, focusing solely on losing trades or missed opportunities. If you lose money on a trade, the best thing to do is to evaluate what went wrong and move forward. Dwelling over missed
opportunities or loss of money will only serve to cloud your judgement and prevent any future
When it comes to trading it is completely natural to experience any of these four emotions. What’s important, however, is how we choose to conquer them. That’s why having a good state of mind and a great broker is a true recipe for success. From narrow spreads to high leverage, CedarFX provides traders the tools they need in order to succeed. Choose from their renowned Eco Account or 0% Commission Account.
Sign up today at www.cedarfx.com.