4 Emotions That Drain Your Money in Online Trading
November 2, 2021
Online Trading and Emotions. Seemingly, two irreconcilable worlds. In reality, two worlds that intersect, and whose interaction generates a significant impact on the hopes of success in trading.
Emotions emerge prominently when practicing online trading. It's a universal truth that concerns all investors, from the most experienced to the beginner. The distinction lies in the way emotions are managed.
It's worth delving into the issue, discussing the emotions that impact trading activity more than any other, the risks they cause, and the correct ways to manage them.
Online Trading and the Topic of Psychology
The topic can be traced back to the relationship between trading and psychology. An established relationship that has already produced a certain literature. A relationship, however, that many traders - especially beginners - tend to deny as an unconditioned reflex. Talking about certain topics can make one uncomfortable, especially when they affect earnings and intertwine with money-related issues.
Why does psychology, or better yet, an individual's psychological sphere, affect investment activity? Actually, the reason is easily understood: the stakes are always high. Talking about stakes might be risky in reference to an activity that has nothing to do with (or at least shouldn't) gambling, but it conveys the idea well. At any moment, the trader can lose money. Nothing is certain or established in trading. As if that weren't enough, the trader is essentially alone with themselves, and is always responsible for their results, whether positive or negative.
This generates a sort of inner landslide, which is also continuous. A real psychological pressure. On a superficial level, the trader experiences "strong" emotions. Recognizing them is the first step to effectively managing them and consequently reducing their impact on trading activity.
Because it's a matter of mere management. It's not possible in any way to avoid emotions from arising. They can only be rendered harmless.
So, here's an overview of the most frequent emotions, the risks they expose traders to, and some advice for managing them in the best way.
Fear
Fear is probably the most frequent emotion among those that emerge during trading activity. It's the prerogative of beginners above all, who have to face new situations each time, but it concerns everyone (just like the others). What kind of fear is it? Obviously, the fear of failing, of not making investments, of losing money.
In the worst case, fear becomes panic. At this point, the trader reacts in two ways: either over-trading, i.e., making impulsive gestures of a purely consolatory nature but substantially ineffective, as they are not supported by the necessary lucidity. Or they become paralyzed, missing opportunity after opportunity.
Fear is a tough nut to crack, as it always produces disasters. It can lead to total capital loss and thus the abandonment of trading practice, with all the consequences this can have on self-esteem.
How to defeat fear? Rather than defeating it, it can be kept at bay, ensuring that the compromised lucidity it causes doesn't have any effect. The quickest way is to create a routine, a precise trading system. In this way, the trader has already made all possible decisions, and they did so at the moment of maximum lucidity. It's not easy, as one must fight against the instinct that ill-advisedly suggests betraying one's trading system, but it's a commitment that can be fulfilled.
Greed
Greed is also a fairly frequent emotion. It can emerge in two distinct phases: at the beginning, when trading is perceived as a territory rich in opportunities, and when a series of successes are achieved, perhaps consecutively. In these cases, especially the second, the trader gets caught up in the frenzy of earning. Not that the desire to get rich is inherently negative (after all, that's what traders are there for), but when it exceeds the limit, it can compromise lucidity.
That's when the trader, transformed into a sort of modern-day Icarus, bites off more than they can chew and... Loses.
How to combat greed? The secret is to cultivate discipline. The trader must be obedient. To what? To their trading system, of course. Discipline is an approach that is by definition opposed to instinct, but it can be successfully cultivated. Moreover, the skills that the trader will develop in the attempt to become disciplined will also be useful in other areas.
Hope
Hope is an emotion, but in a certain sense, it's also a way of life. Some proverbs are there to prove it. Those who base their actions on mere hope almost mathematically risk being disappointed. Better to rely on organization, planning, and rationality, at least in trading.
Traders who base their entire operation on hope generally don't have an effective action plan behind them. In simple terms, they improvise. Too bad that in trading, improvisation has no place, and indeed always leads to disaster. The market is too complex an entity to be faced with the feelings of the moment.
The advice is to abandon hope as a driving force and to shift one's trading activity onto the tracks of organization and systematicity.
Euphoria
Generally, euphoria is not considered a negative emotion. In fact, it's considered as something very similar to happiness. In reality, it's as dangerous as all other emotions, at least in trading. It emerges during a particularly fortunate period, where successes are strung together. The mechanisms, in part, are similar to those of greed (also because they are often connected). Certainly, the risks are the same. In fact, euphoria pushes the trader to invest well beyond their means and above all outside the trading system. In simple terms, they forget prudence, forget what they decided previously, and improvise, supported by a momentarily sky-high self-esteem.
In this case, it's good to stop and reflect. In short, let the "drunkenness" pass. Once it has passed, one can resume trading as always (hopefully): with rationality, and following one's plan.
