The psychology of trading


Managing emotions can lead to more considered trading

Many investors, especially those who frequently trade, realise the importance of staying on top of market trends and carefully monitoring their risks.

However, many of these same investors also know they sometimes make trading decisions based on instincts or emotions, rather than careful analysis or reasoning.

When markets are volatile, emotions like concern and fear can sometimes cloud judgement and lead to decisions they would not normally make.

Understanding these obstacles and having a strategy in place to help overcome them can lead to more considered trading.

Overcoming emotional reactions

When a stock is down or there’s bad news in the market, traders can get nervous about their positions. This can lead to an overreaction or a lack of action, resulting in a negative outcome. Emotion may be crowding out rational thought.

In these situations, identify what you perceive as a threat, then plan a strategy to address it. This can include putting in place defensive strategies, such as hedging.

It’s natural for traders to want to hold onto winning positions. However, in this pursuit of profit they may not be alert to market signals that indicate it may be time to sell. Have a trading strategy in place that will help you leave positions before market sentiment shifts.

Building discipline and confidence

While experience is critical to building your trading discipline, there are strategies and tools that can help you build your discipline too.

Many investors establish buy and sell price targets, and stick to them regardless of emotions. Others set targets for how much they are prepared to gain or lose across their entire portfolio over a certain time period, and create trading strategies designed to achieve these targets.

One of the best ways to build trading confidence is through market research or the support of a market specialist adviser. Many sharemarket investors study market charts, read company reports and announcements, talk to or learn about management teams, and analyse economic and industry trends.

By putting in place strategies that can help you manage emotions, you can build discipline and confidence, and stay on track to meet to your investment goals.

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