The psychology of trading is an integral part of every one of us. Markets are a kind of a living organism the development of which we try to analyze using rational approach, which creates a gap between the expectations and the final result.
Today´s article will focus on the 5 emotions, which can affect our every-day trading, influencing the final outcome in the short term as well as the long term.
In the previous articles, we talked about the biggest addictions of a trader and managing fear . We introduced addiction as a state, which triggers emotions, and fear as one of the strongest emotions.
Why is it important to know our strongest emotions? How can discovering them help us in trading?
Before examining the individual emotions, it is important to understand what the term emotion means.
The word “emotion” is often interchanged with the word “feeling”, but they are two different things! Feeling is one of three parts of an emotion.
Emotion comprises of:
- Feeling is simply an internal assessment of an experience. One assesses, whether the experience is good/bad, pleasant/unpleasant, positive/negative etc.
- Physiology is feeling’s partner. It accompanies the assessed experience with a physically perceptible process – it is usually a change in heartbeat, breathing or the blood circulation in certain organs (typically a tight feeling in the stomach or chest) or muscle stiffness, sweating or even aches and illnesses.
- Behavior is the final result of both previous states, which completes an emotion. A display of behavior can be a reaction (e.g. freezing, attack or escape), expression (facial expression / momentary expression, e.g. mimics or gestures) and finally a change of approach or focus (e.g. the decision: “Next time, I’ll set a higher/lower Stop-Loss”).
And this is where we get to the core of emotion itself. Thanks to it (or because of it), each of us can subjectively evaluate and assess the newly arisen facts , concrete situations and the final results of our work. Read this sentence one more time.
Do you now believe it is important to know human emotions and learn how to control them? Let’s move on to the 5 strongest emotions of a trader:
It is a short-term emotion every one of us knows. Whether you were wronged in school as a child or upset by a work colleague, you’ve definitely experienced anger at some point in your life. Anger can strike anyone, even an experienced trader.
Did you wake up and feel like today was going to be just one of those days, and now, at the end of the day, you find out you’ve suffered the biggest lost in your trading history? Who are you mad at? The markets? The broker? The trading strategy?
Unfortunately, the harsh truth none of us want to hear is that ourselves and our trading choices play a significant role towards the final outcome. Anger is often a limiting emotion, which steers us away from independent and critical thinking, which can create bad habits for the future and new approaches to trading itself.
It is seen as a positive emotion. In trading, we usually encounter it after a winning streak. Everything seems great and we can feel the excited heartbeat, our lips curled into a smile.
Can this emotion be useful for potentially successful trading?
Definitely, but there are a few limits we have to follow. Joy usually reflects a positive situation, therefore we transfer the newly arisen fact into our new approach. This means that since we managed to execute a successful trade under certain conditions, we must do the exact same thing the next time.
And this is where a problem might arise due to inattention. After all, markets are variable, and therefore it is impossible for one verified approach to work every time. That is also the reason all our trades aren’t profitable. Anyhow, if we manage not to give in to the emotion, it will help us improve our trading strategy significantly.
It is one of the strongest emotions, which has a strongly reactionary character and influences our actions undesirably.
It is usually seen as the opposite of joy. It is often a secondary emotion that takes over after anger, which is a short-term emotion. As soon as we realize and admit our situation, state or mistake, we move on to the phase of internal isolation and melancholy. At that moment, we feel like all our effort was wasted, think about the loss that we suffered, and look for the meaning of it all.
In this stage, trading is, naturally, ineffective, which is partially caused by the fact that we don’t even want to trade.
As strange as it might sound, despite the emotion being negative on the surface, it is possible to employ it and start trading again. But how?
The answer is in us. Thanks to suffering a great loss, we get some time to reorganize our activities . That means we take a break from trading for a while and try to use our brain to think, analyze, and ponder, which is important for changing our approaches and habits.
With time, we create new approaches and attitudes, which will be more effective than the previous ones. Then we can go back to the default state of joy.
To lighten the mood, it is the last emotion, and also the strongest one of all. Love is a very positive, strong, and lasting relationship towards a person, thing or activity. Passion and commitment are the basic concepts of love, and in extreme cases, it can even include addiction.
Love towards trading is just as beneficial as love towards any other hobby, because it drives us forward and strengthens our motivation to go on and keep on improving in what we enjoy doing.
* Trading is risky.
Future articles will, inter alia, focus on using one’s potential to the maximum and controlling one’s emotions.
We wish you successful trading!
About the Author
Team Purple Trading
Purple Trading is a true and 100% fair ECN / STP forex broker providing direct access to the real market. High speed orders execution, no trade-offs, no limits for any type of trading, the most advanced trading technologies. Explore more about Purple Trading at www.purple-trading.com .
P.M. Purple Trading is a trade name owned and operated by L.F. Investment Limited., 11, Louki Akrita, CY-4044 Limassol, Cyprus, a licensed Cyprus Investment Firm regulated by the CySEC lic. no. 271/15.