The Four Emotions Traders Have to Deal With, Lessons For Us All
Stock trading is all about psychology and dealing with emotions. To be successful as a trader, you should be aware of these emotions because they influence your decisions, and if you are not aware of these emotions, they can lead to impaired judgment and decision making. Because these emotions are universal, there are lessons to be learned for us all.
Hope
Hope is a useful emotion; it helps us through hard times, and in history, it gave people the strength to even endure the harshest situations. Hope is also an inspiration for us, and it is very easy to find a lot of inspirational quotes about hope.
Hope can be a powerful force. Maybe there’s no actual magic in it, but when you know what you hope for most and hold it like a light within you, you can make things happen, almost like magic.
Laini Taylor
In trading, however, hope is not a good emotion. The market is going down, but we keep holding on because we hope things will get better. And the worse it gets, the harder we hope it will get better. `Now it is so bad; it has to get better!` But well, it doesn´t always work this way, and if we cling to this, it will only make our loss bigger. Hope is delayed disappointment… You cannot make things happen, and there is no magic. Our minds trick us, we are inspired by people who survived through hope, but we forget all the people who had high hopes but still lost. We do not like to think about that. Mount Everest is covered with bodies of people who were very determined and hopeful. Another trick of our mind is that we will search for information and news, which will prove that we are right, and we ignore the messages which are pointing in the opposite direction. In trading, it is important to recognize this emotion of hope, and usually, it is a sign that you should get out and cut your losses before it even becomes worse. The price of stocks is not listening to your hopes or wishes.
Greed
Greed is one of the seven deadly sins humanity is struggling with for a long time. Greed can be useful for motivating us to work hard and achieve things. But we have to know when enough is enough, and greed makes us feel like it is never enough. The stock is going up, but if it gets higher, I can make more profit. Instead of taking the sure small profit, we want to make more, and we let the small profit slip away, and suddenly the market drops, and we do not make any profit at all, and our little profit is lost and turned into a loss. Greed will make us unhappy in the long run.
That same night, I wrote my first short story. It took me thirty minutes. It was a dark little tale about a man who found a magic cup and learned that if he wept into the cup, his tears turned into pearls. But even though he had always been poor, he was a happy man and rarely shed a tear. So he found ways to make himself sad so that his tears could make him rich. As the pearls piled up, so did his greed grow. The story ended with the man sitting on a mountain of pearls, knife in hand, weeping helplessly into the cup with his beloved wife’s slain body in his arms.
Khaled Hosseini
Be satisfied with the little things. Little profits make big wealth. Take it slow and step by step. No one can take away the profit you take. And yes, the times you sell, and afterward, you see that the price is still going up, and you think, I could have made more profit! It happens, but also remember the times you sold, and just after that, the price dropped. Warren Buffet said: `be fearful when others are greedy, and greedy when others are fearful.` There always will be people who make more profit; that is not the point. The point is that you are satisfied with what you make. And if you manage to be satisfied with what you make, that will bring you happiness and make you a successful trader.
Fear
Fear is a good thing when it prevents you from making bad trades, and it can keep you from overtrading your account, and it tells you to sell a stock before you lose more money. Fear interrupts processes in our brains that regulate emotions and the way we process information. It hinders our reflection before acting. This impairs our thinking and decision-making, leaving us susceptible to intense emotions and impulsive reactions.
The only thing we have to fear is fear itself.
Franklin D. Roosevelt
In trading, there is a fear of loss and the fear of missing out (FOMO). Fear can trigger three reactions, fight, flight, or freeze. Fight and flight lead to action and change. The change can be that you get too aggressive or the opposite, too passive. You change your trading strategy; you do not keep your trading plan, leading to loss. You are acting more aggressively or passively than you usually do. Freeze is being inactive; you stay in a not profitable situation, or which is losing. You are afraid of making a decision. In trading, this behavior typically leads to ´bag holding`; you have lost on your stock, but you do not want to take your loss, and you just keep holding on while you are slowly losing more and more money. You are frozen, and you keep waiting, in the end, making your loss bigger. The first thing to deal with fear is to recognize it. Fear can make you anxious and restless. Your heart rate goes up, and your breathing accelerates. When you sense fear, take a step back. Try to analyze why you feel fear; once you can describe it, deal with it, and take your fear away. Only get back to trading when you feel comfortable again and at ease.
Regret
Regret is one of the complicated emotions inevitable in our human condition. It can be one of the most challenging emotions to deal with, and everyone in trading has experienced regret. An easy way to recognize regret is if we start thinking about: `What if…`. These two words can be the start of a very confusing train of thought, which is usually not realistic or helpful.
The feelings that hurt most, the emotions that sting most, are those that are absurd — The longing for impossible things, precisely because they are impossible; nostalgia for what never was; the desire for what could have been; regret over not being someone else; dissatisfaction with the world’s existence. All these half-tones of the soul’s consciousness create in us a painful landscape, an eternal sunset of what we are.
Fernando Pessoa
In trading, it happens that just after selling your stock, the price jumps, or vice versa; we just bought stock, and the price tanks. And then we start thinking… I should have done this, or I should have done that… Although very understandable, this kind of thinking does not lead to anything. Mistakes are made, and we can not always predict what will happen. The best you can do is at the moment of a decision you make the best out of all the data you possess, and you come to a balanced and thought through decision. This does not guarantee success, so you still can make a loss or miss out on profit. The best thing to do is think about errors you could have made and fixing those errors. Use your mistake to learn from it. If no errors were made, try to get over it as soon as possible and not overthink the situation. One of the mistakes in thinking about decisions in the past is that we assume that if we made another decision, this would have led to success, but this doesn´t have to be true, so it very well could be that the other decision would have led to even worse results. Take the loss, learn from the situation, and move in.
Psychology is an essential factor in trading, and having control over your emotions can make the difference between being successful or being a failure. I hope this article has shed some insights and that it helps you to become a better trader, and a better person!
Interesting links:
Primary And Secondary Emotions Necessary For Better Decision Making
What Our Basic Emotions Tell Us About Happiness
How You Keep Fooling Yourself: Cognitive Dissonance
You Cannot Know What You Do Not Know: Dunning-Kruger Effect
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