Don’t Let Your Heart Fool You: How to Keep Your Emotions from Ruining Your Plan?
“Our irrational behaviors are neither random nor senseless. We all make the same types of mistakes over and over.”
Hello and welcome to the Traders Campus blog, where we keep you updated on important financial news and provide valuable information and tips on how to be a good and consistent trader.
Today we want to focus on the Achilles’ heel of every trader and investor ever – the fact that we are living human beings, with feelings, desires, and mental states. You may have already heard how important it is to keep your emotions in check when you enter the game, but you’ll be surprised to know how even the most experienced and accomplished traders are often prone to let their sentiments get the better of them as much as you do.
So, let’s start from the beginning: you learned all the basics, you’ve set up your charts and chose the trading strategy that suits you most. You even did well on a demo account, with consistently growing returns. Now you put your real money on the table, and suddenly everything changes – your heart runs faster, your blood pressure is going high and you start hearing different voices in the back of your mind. Psychology has come into effect.
This is when you need to recognize your weaknesses. Researchers on behavioral finance have pinpointed the emotions which are the investor’s worst enemies: Fear, Regret, Hope and Greed. We are here to give you advice on how to avoid their bad influence.
Know your enemy – Fear
The most common fear associated with traders is Loss Aversion – or in simple words: fear of losing your investment. Although fear in general has an extremely vital role in our survival, in the case of trading it can come with many unnecessary biases – from not taking a position even though it matches your strategy, to cashing your profits too early, and even to all-out panic selling, in an attempt to recoup losses.
To keep the overprotective part of our brains in check, we recommend choosing a less aggressive strategy, with lower risks and more long-term goals. Keeping the account size small at the beginning, will allow you to feel more in control of your funds. And always remember – even profitable traders lose 70% of the time, so losing is just part of the game.
Know your enemy – Regret
The ability to feel regret is crucial for us as humans – to examine our past actions, to change and to evolve. But again, it has its own pitfalls in our case. Studies have shown that traders tend not to buy an asset if they previously sold this asset at a loss, especially if the asset’s price went higher in the meantime. Buying the asset now would remind the trader that he made a mistake, and that’s something everyone wants to avoid.
To keep away from getting stuck in past misconceptions, we recommend sticking to your trading plan and paying close attention to the indicators. Hindsight is good, but only if you know how to use it. Giving more significance to objective signals will let you put the past behind and look ahead to the future.
Know your enemy – Hope
As much as we value this positive feeling that drives us forward, a trader must know that too much optimism might be dangerous as well. Researchers found that people who were in a positive mood often made wrong assumptions and eschewed calculated judgement. In the case of trading, the most common mistakes associated with optimism bias is holding onto a losing position in the hope that the price will turn around, or risking too much to make up for losses. Being aware of your blind spots is critical is this condition, and we recommend that if you’re in a cheerful mood, look for evidence that might be contrary to your current tendency, in order to get a balanced picture and curb your enthusiasm.
Know your enemy – Greed
Well, this one basically doesn’t need vindication. We all know how destructive greed can be to our lives and to those around us. When a trader’s appetite is insatiable, there is no limit to the damage he can do to himself. Common mistakes would be: not taking your profits even when the price has reached your original expectations, risking too much money on a single trade, or the notorious FOMO, or “Fear of Missing Out” – that contagious impulse that drives people to buy whatever is popular right now, without considering long-term viability.
As always, the best advice is to obey a disciplined investment strategy. Write down your rules where you can always see them, test every new strategy in advance to expose your weaknesses early, and above all – put pictures of what really matters in your life in front of you – whether it’s your family, friends, health or that dream vacation you’re saving for. Remember, the game rewards those who are calculated, patient and consistent.