Impulsive emotion, the gigantic enemy every trader has to tackle
Every stock trader has two big enemies to deal with: Lacking systematic approach; Letting impulsive emotion lead the decision. Just because you have subscribed expensive financial data services and having 6 mounted 34-inch-screens on your desk, doesn't mean you have a "systematic approach" in place. No matter how fancy and how sophisticated the tools one can have, given that flash trading bots, or faster algo systems or newly emerged AI, machine learning tools, at the end of every tool, there are still human-made decisions. In this post, we would focus on "impulsive emotion" problem when a person is making trading decisions.
Imagine this scene: In the evening, after a long-disappointed day, a young trader sitting in a bar, complaining life to an experienced trader. The old trader would usually say this: You overtraded too much. But what exactly does this "overtrading" term mean? Well, here are some common negative emotions and symptoms every trader has encountered (many times) when he/she was overtrading:
- FOMO (Fear of Missing Out): the fear that one might miss out on a big profit opportunity by not getting into a trade.
- Greed: an excessive desire for wealth or material gain.
- Panic: selling stocks impulsively and without reason, often in response to a sudden drop in the market.
- Shaken out: selling a position due to fear or panic, even though the stock may have a long-term potential for growth.
- Whipsawed: being caught in a volatile market and losing money quickly (because of quickly buying and selling in wrong rhythm).
- Ragestorming: making impulsive and emotional trades after incurring a loss, like a revenge, sometimes it's called "revenge trading" (so basically a loss after a loss, keep losing in a row but still hope a big battle to win over). This is THE most hurtful and harmful emotion!
"Then is there a way to deal with this psychological issue?" The frustrated young trader would definitely keep asking. The mentor (usually the more experienced trader) would list these points for sure:
1. Set realistic goals: Day traders should set realistic goals for their trading activities and understand that success takes time.
2. Stay disciplined: Day traders should keep discipline and stick to their trading plan, even in the face of losses.
3. Practice mindfulness: Mindfulness techniques such as meditation and deep breathing can help day traders reduce stress and maintain focus.
4. Take breaks: Day traders should take breaks to step away from the market and clear their mind.
5. Seek support: Day traders can seek support from a mentor, a support group, or a therapist to help managing stress and maintaining emotional balance.
"By developing these habits, you can improve emotional control and increase your chances of success in the market!" The elder says. Let's hope the young trader would listen!
How to develop these habits? Practice, practice, and practice! One tool can definitely help: PLATO'S DISCIPLE ON WALL STREET is created to help trader to tackle emotion issues and build up strong and disciplined mindset in market. The web version of this game is free to play, and no registration needed. The desktop edition, published in Microsoft Store, carries more features. You can find it here.