How to avoid emotional investing?
Most traders/ investors fail when they let their emotions control them and make irrational decisions. There are 9 major emotions in trading.
1. Fear.
Fear is probably the most talked-about emotion we face while trading. When a stock's price falls a lot, you may fear buying because you think that it may fall further so you panic sell. Soon after, the stock may rally. So you missed buying when there was extreme fear. When the price rises, you may fear buying because you fear it may fall back until it has risen to such a level that you FOMO (Fear Of Missing Out). By the time you bought, the price was about to fall.
When a trade turns against you, the fear of losing your hard-earned money drags you into delaying the realisation of a loss, which eventually turns into bigger losses. You can prevent fear by improving your technical analysis (TA) skills and being disciplined in cutting loss.
2. Greed.
Greed comes a close second to fear. Greed strengthens the gambling mindset. A trader makes impulsive decisions in pursuit of profit. After a few positive trades, you may become overconfident. You may queue to sell at too high a level and the price fell before that level. So you missed selling when there was extreme greed. To prevent greed, sell at a reasonable level that is reachable.
3. Boredom.
There is no need to trade all the time. You may trade too frequently, which may result in losses. When a stock is moving sideways or downwards, sometimes it is better to exit and wait on the sidelines until market sentiment improves. When a stock is bullish, it may be better to hold until the top of the swing before selling. Buying and selling too often may result in smaller gains.
In between trading, you can use the time to improve your TA skills or do some research.
4. Depression.
You may feel depressed after suffering a big loss. To avoid this and prevent the loss from getting bigger, you should have a stop loss strategy. If you buy a stock, cut loss when the price falls 10% below your purchase price. If you short a stock, cut loss when the price rises 10% above your buying price. This preserves your capital so that you have spare capital to trade when there are opportunities. In some countries, the stocks may be more volatile and you may want to set a higher cut loss limit.
5. Doubt.
You may doubt the decisions that you made. To prevent this, do your own due diligence (DYODD) and improve your TA skills to gain more confidence.
6. Anger.
When you reach the point of anger, it's usually because your doubts and fears have been confirmed. The only thing you can do is learn from your mistake.
A common form of anger in the market is known as revenge trading. This is where you attempt to make back money after recording a significant loss. For example, if you lost money buying 1000 shares, you may decide to double down by buying double the number of shares at a lower price. But the price continued to fall. In most cases, you will lose money when you decide to revenge trade.
You should find out about the fundamentals of the company before averaging down.
7. Anxiety.
Recovering from a bad trade may cause anxiety. You can avoid anxiety by coming up with a good trading strategy. First, DYODD on a stock you are interested in. If it has good fundamentals, then identify support and resistance levels to determine buying and selling prices by using TA. After you have bought, be disciplined in cutting loss if something goes wrong.
8 Hope.
You bought a stock and then the price dropped substantially. You hanged on to the stock in the hope that the price will recover to at least your purchase price. Hope or wishful thinking will make you hang on to a losing stock even in the bear market. Stick to your cut loss strategy to prevent this. Maybe you bought at too high a price or the fundamentals have changed for the worse.
9. Love.
You have an emotional attachment for a stock. Maybe you made money from the stock in the past and can't bear to let go when making losses. You can't stand any negative comments on the stock and always hope that the price rises. You are not facing reality. The price rises and falls all the time on good and bad news. Don't love any stock and cut loss if the fundamentals change.
Conclusion
Don't be too emotional when you trade. You can be a successful trader if you control your emotions by having a trading plan - DYODD, use TA to determine your buying and selling prices and cut loss if necessary. TA can minimise but not eliminate greed as you may choose too high a resistance level to sell.
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一起发 : What winter winter?
101822670 : it is always greed that lead to other symptoms. when you are greed, you want more and when stock price drop you fear and panice so you stop loss and sold at loss. if you hold price drop further and you get frustrated why never sell earlier
bullrider_21 OP 101822670 : When you are greedy, you want a higher profit, you queue at a higher selling price. But the price falls below that, so you make a lower profit or maybe even a loss.
Giovanni Ayala : Fear Cannot concor your perceptions of Life so Fear you should not hold
70737635 : Stop lost is the solution
romantic Chipmunk_49 : wonderful
bullrider_21 OP romantic Chipmunk_49 : Glad you find my article useful.
Lnova : ah thank you for linking to your articles such as this one!![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
Lnova bullrider_21 OP : so helpful