The popularity of speculative trading in the financial markets, partly due to internet-based retail trading solutions, has created a new population of traders. Most of these traders are non-professionals attracted by the potential to generate revenue quickly.
Many novice traders may believe that it is very easy to make money. However, their emotions can get the better of them and lead to losses.
By mastering their emotions, traders make better decisions based on a set method rather than greed, fear, or a failure to move on a trade.
By neutralizing their inner emotions, traders avoid impulsive moves that quickly create losses while a longer-term position can average significant gains.
Many novice traders think that it is easy to make money trading, especially when they try a free practice account with a broker service. One good trade can make a trader believe that market speculation and trading is an easy occupation—one in which revenue can be quickly generated with little work or research.
Unfortunately, when these inexperienced speculators start trading live accounts and risking real money on the market, the activity becomes much more complex.
When new traders take the leap from their virtual trading accounts to trading with real money, they are now subject to the powerful influence of trading psychology.
In other words, while it may be easy to trade when there is no real risk of loss does, when the trader’s hard-earned dollars are on the line, focus and price objectives are suddenly serious factors that go into trading decisions. Often, traders using virtual accounts will feel relatively comfortable even when the market moves against the positions they enter. This allows them to keep their focus on their price objective and wait for the market to get moving in the right direction. Because there is little consequence tied to virtual money, emotion does not interfere.
Unfortunately, when a trader’s actions affect the gain or loss of personal assets, the trader is less likely to behave in a methodical way.
Emotion can be a trader’s worst enemy creating misjudgment and losses. Emotions generate what psychologist Roland Barach calls “mind traps” in his book, “Mindtraps: Unlocking the Key to Investment Success.” Barach provides a collection of 88 lessons explaining the pitfalls of many traders, such as fear and greed.
Greed can lead a trader to hold on to a position too long in hopes of a higher price, even as it falls. This emotion has been the main reason why many trades change from large gains to large losses. To thwart this emotion, try to take an objective look at the reasoning behind your positions. When one of your positions experiences a large run-up, ask yourself whether the reasons behind your initial investment still remain; if not, it may be time to close or reduce the position.
Fear can prevent a trader from entering trades and lead them to exit a position far too early. If an investor is concerned with potential loss and the risks that come with an investment, they can often be dissuaded from a good opportunity. Also, if a trader is more susceptible to fear, they may sell out of an investment far too early based on the fear of losing the gain they’ve made. In many cases, this can prevent a trader from cashing in on a much bigger gain.
Paralysis by analysis is a phenomenon by which traders are so intent on analyzing everything about a potential investment, they fail to pull the trigger on the trade. In this case, the investor may constantly question all of the analysis details. This is unachievable and can prevent a trader both from making monetary gains and from making experiential gains by getting into the trade.
A wide range of other emotions can rule a trader, but the important thing for any market participant is to recognize these emotions.
All traders will experience at least one mind rap, but the best traders learn to recognize, understand, and neutralize them. This process forms the foundation of any speculative training. Therefore, if you want to become a successful trader, you should first spend some time getting to know yourself and the particular mind traps you are susceptible to. A skillful trader attempts to master their emotions and prevent them from affecting their performance.
Traders are only human, and trading perfection does not exist. However, profitable trading can be achieved when a trader learns to manage their emotions. This will be easier for some than for others, yet only through experience can you hone this skill. Before you can learn how to win, you must first take some risks (or at least get into the market) and learn to master the emotions that come with making and losing money.