It's no secret that emotions play a big role in our day-to-day lives. We experience a range of emotions such as happiness, sadness, anger, and fear daily. The same is true when it comes to trading and investing. This is why it is crucial to control emotions when trading or investing.
Unfortunately, many people allow their emotions to get the best of them, which can lead to disastrous consequences.
In this article, we will discuss why you need to control your emotions when trading or investing and how to do it effectively!
Why controlling your emotions is important
When we are emotional, we don't make rational decisions. Psychology often divides the brain into two separate thinking processes. The left side is more logical, it's the side that we use for things like math and language.
The right side is more creative, intuitive, and emotional. Weighing the pros and cons of a situation is a left-brained activity. When we are experiencing strong emotions, we tend to rely on the right side of our brain which can lead to impulsive and irrational decisions.
What is emotional trading?
What often happens in the market is that greed and fear overtake the minds of many market participants and then they start making decisions that are not well thought out or analyzed. When we get caught up in the moment, we can make rash decisions that we may later regret.
For example, you may see a stock that is skyrocketing and you may feel FOMO (fear of missing out). You may buy the stock without doing any research or analysis and then watch it plummet shortly after.
On the other hand, you may see a stock that is tanking and you may feel the need to sell it immediately before it goes any lower. Again, you may make this decision without doing any research or analysis.
These are both examples of emotional trading which can be detrimental to your success as a trader or investor. Being driven to make unreasonable decisions based on emotions is one of the most common causes of failure in the markets.
Be aware of this potential in yourself and learn how to activate the left side of your brain to communicate with the right side to prevent these types of decisions.
Why you need to prevent emotional trading
To paint a picture clearly of why you need to prevent emotional trading, let's take a look at the fictitious story of Mrs. Mad. This young lady invests her money in the stock market.
She has done well for herself and has made some great profits over the years. However, there are times when she lets her emotions get the best of her.
For example, she bought ABC stock at $50 per share and it went up to $100 per share. She was angry at herself for not investing more so she bought even more shares even though the stock was already up 100%.
The problem was that the company was starting to become overvalued but her anger in the short term blinded her to this fact. The stock then went back down to $50 per share and she lost all of her profits plus some. Her anger from this trade began to manifest itself in other areas of her life.
She began yelling at her husband for not warning her about a potential market crash. "If only you had told me, I could have sold all my stocks and avoided this mess!" she screamed. The truth was that no one could have predicted the market crash, but her emotions led her to believe otherwise.
This is just one example of how emotional trading can lead to disastrous consequences. Of course, this is dramatized but it shows how emotional trading can be harmful to both financial well-being as well as social relationships.
How to control emotions when investing or trading
Each person has their own ways of controlling their emotions. However, developing discipline is one of the most effective ways for most people to control their emotions. This is because it takes the power away from the emotions and puts it back into the logical part of your brain.
Having self-awareness is also important. If you can catch yourself being emotion-driven, you can then take a step back and reassess the situation. Oftentimes, we make emotional decisions without even realizing it.
If you can catch yourself in the act, you can then make a more logical decision. Meditation can also help to control emotions. This is because it allows you to clear your mind and focus on the present moment.
When you meditate, you also temporarily isolate yourself from a common emotional influence (other people). If having self-awareness is difficult (as it is for many people) being around people who are not emotional can also help.
These people can provide a more objective perspective and help you to make better decisions. The third-person perspective can catch things that you may not have seen. A unique but effective approach can also be to create an emotional checklist before making any investment decisions.
For example, the checklist can have a questionnaire that asks questions such as "Am I being greedy?" or "Am I investing because of envious speculation?".
If you answer yes to any of these questions, it may be an indication that your emotions are clouding your judgment.
Talking to a psychologist can be helpful. If your time and money spent with these professionals can identify or create a way to control your emotions, it may be worth it. Investing in yourself internally can make you a better investor in other areas of your life.
5 Tips to control your emotions when investing or trading
The above strategies are broader ways to control your emotions. Those strategies can take some time to develop. Here are some quick tips that you can start utilizing today to ensure your trades and investment decisions are based on logic rather than emotion.
1. Identify your triggers
What sets off your emotional reactions? Once you know your triggers, you can start to work on avoiding them or at least being aware of them.
2. Create a trading or investing plan
Having a plan can help you to stick to your strategy and not make impulsive decisions.
3. Set realistic goals
If your goals are unrealistic, you are more likely to get frustrated and emotional when you don't achieve them.
4. Take breaks
If you feel yourself getting too caught up in the market, take a step back and take some time away from it. This will help you to clear your head and come back with a fresh perspective.
5. Talk to someone
Sometimes it can be helpful to talk to someone else about what you're feeling. This can help you to understand your emotions better and figure out how to deal with them.
By following these tips, you can start to control your emotions when trading and investing. Remember that it takes time and practice to master this skill. So, don't be discouraged if you have a few setbacks along the way. Just keep working at it and you will eventually get there.