The Risk of Trading with Emotions

Published by Sharekhan Education | March 3, 2022

The Risk of Trading with Emotions

By Anand Sharma | Sharekhan Education
It’s easy to get emotionally attached to money. After all, money is something we’ve all worked so hard to acquire! When I ask people why they’re in the stock trading business, their usual response is that they’re in it for the money. And that’s when I realized why it’s so hard to remove emotion from trading, especially in times of extreme volatility.

The Reason we Trade with Emotion

Fear and greed are both a part of the human psyche and make regular appearances while trading. A few green candles can make you greedy, just as a few red ones can make you nervous. Reading a candlestick chart can induce a rollercoaster of emotions, where every up move and down move can entice you to buy and sell on impulse, without any thought and consideration.

Individuals aren’t the only ones guilty of this. When prices increase, we see the picture of greed in the markets, and when prices fall, we see a picture of doom and gloom. But we know every rising price isn’t a buying opportunity, just as every falling price isn’t a selling opportunity. We also know the market inherently moves in a zigzag pattern, and that these ups and downs are nothing but corrections or retracements in the market.

The Effects of Trading with Emotion

Emotions such as greed and temptation may cause people to underestimate the risk they take, which may then lead to losses. When losses get frequent, traders overcompensate by overtrading – sometimes out of greed, oftentimes out of revenge. If losses continue, the feeling of revenge eventually turns into resentment and dissatisfaction, and that’s when they abandon the stock market altogether.

How to Trade without Emotion?

While trading without emotion is no rocket science, it’s easier said than done. To help you along the way, here’s a list of pointers one should keep handy:

• Trading without emotion needs you to have a set plan, which allows you to rationally decide when to enter and exit trades
• Focus on the strategy, not the news. It’s great to keep up with news, but avoid news-based trading
• We own our trades, therefore we are responsible for our decisions; think twice, think wise
• Fear, temptation, greed, etc. are all to be distrusted; instead, place your trust in your plan

We at Sharekhan Education attempt to change the students’ perception that they must chase the price rather than just waiting patiently for the market to get to a predetermined price where risk is minimal and reward is at its greatest. Observing veteran traders in their element will help you realise the substantial difference between how professional and retail traders react to market movements.

By enrolling in this stock market course, you can learn the basics and the various aspects of trading.