Why You Must Control Your Emotions While Trading In The Stock Market

2021-10-22 02:59:16

Trading in the stock market requires years of practice and thorough understanding of market dynamics to maximize gains. Unlike investing, where the holding period is long, trading involves frequent buying and selling of securities. 

Among the several things that you should not do while trading is to trade under emotions. Emotional trading has several pitfalls, and doing so can result in significant capital loss. Here are reasons why emotions shouldn’t cloud your trading activity.

Impact of Trading in the Stock Market Emotionally

Exposes You to Unnecessary Risk

Stock market trading is a risky affair in itself, and there are various systematic and unsystematic risks that you need to deal with. While there are many strategies to counter these risks, you tend to adopt a myopic approach if you trade under emotions, which elevates the quantum of risk manifold. Irrespective of the stock you are trading in, you need to understand its fundamentals and the company’s corporate governance model.

It’s prudent to trade (buy and sell) securities with robust fundamentals to enhance your riches. However, when you trade emotionally, more often than not, you tend to ignore these essential aspects. For instance, during these times, when markets are experiencing an exhilarating bull run, there’s a fear of missing out doing rounds. Many investors feel that they will miss the bus if they don’t invest now. 

In the process, they tend to overlook the vital aspects of trading and may end up banking on stocks with weak fundamentals. This elevates the quantum of risk significantly, and there are high chances of capital loss. So, it’s prudent to keep your emotions under control and go about the entire activity.

Results in Trading Not Aligned With Your Goals

Whether you trade or invest, it’s essential to align them with your goals. Goal-based investments ensure that money is available when you need it. However, when you trade emotionally, you tend to take calls that hardly do justice to this principle. To put it otherwise, it makes you aloof towards the larger picture, and you tend to take a short-term view. This can prove to be detrimental to wealth creation. 

On the other hand, when you trade unemotionally, your judgments are based on logic, facts, and figures. You trade according to the goal you wish to achieve and get your calls right. This not only enhances your wealth but gives you a pleasing experience. 

At the same time, it helps you navigate the market better, understand the impact of various market forces, and develop a solid strategy to augment your gains further. 

Makes Your Trading Experience Pleasant 

This is another reason to make sure there is no room for emotions in trading. Stock markets are an opportune place to create wealth, provided you are ready to stay committed and not adopt shortcuts to success. Shortcuts often lead to flawed decisions that may mar your entire experience. Things are no different with emotions. 

Irrespective of whether you trade under fear or greed, there are chances of your experience going sour. A bad experience, especially during formative trading days, can act as a dampener and turn you off markets once and forever. Many investors have turned their back on markets following a not-so-good experience, thus robbing themselves of the opportunity to maximize their wealth. 

Stock markets, particularly equities, have the potential to generate inflation-beating returns. Also, with various other financial instruments on the offering, they help you diversify your portfolio. However, if a sour experience leads to you giving up on markets altogether, the loss is yours in the long run. 

Makes You Indulge in Revenge Trading

When you lose capital because of emotional trading, you tend to get involved in revenge trading. This trading refers to the practice of going ahead with a trade to overcome a previous loss. There’s an intense feeling to overcome the loss as quickly as possible, and in a bid to do so, you go about making random trades that can cause more harm than good.

The danger doesn’t end there. Revenge trading may also result in overtrading, significantly increasing your costs. Stress levels also go high up, and there are high chances of making too many bad calls. However, things can be pretty different when you trade unemotionally. 

If things are not going your way, you can stop for the day, take time to find out where you have gone wrong, and take corrective measures to ensure success the next time you trade. 

Ways to Control Emotions

Formulate Your Plan

Every trader is different. To keep emotions under check, formulate your trading strategy based on your needs and market knowledge. Identify and set up your risk levels and benchmarks on when to enter and exit. Keep revising the plan time and again to ensure you are on the right track.

Block Market Noises

Emotions can erupt from market noises coming your way. Whether markets are in a bull run or a bear phase, you will hear a lot of noise. Not all noises are inconsequential but allowing all of them can impact your trading strategy and decision. So, you must filter the noises to keep your emotions under control.

Think Logically

Logical thinking can help you keep a tight lid on your emotions. When you think logically, you tend to make rational decisions that help you reap profits. Always question yourself as to whether your decision is emotionally driven or is backed by fundamentals. 

Bottom Line

As human beings, we all have emotions. However, when it comes to trading in stock markets, it pays to keep away from them and adopt a disciplined approach.

Source link