Trading stocks is famously a very risk-heavy activity to participate in. Whether this is while doing it as a side-hobby or as your main means of making money, it can really be quite risky. This is especially true if one is investing a significantly large sum. However advanced you are in your knowledge of stock trading and however much experience you have, there is always plenty of risk in this world. This means that the possibility of losing a large sum is always possible. It is quite understandable why this would be a problem for anyone. This is why trading causes stress in almost any trader. The mental impact of stock trading can be huge, and your analysis can be skewed.
The higher the investment, the greater the pressure. This can, therefore, cause people trading to act rash in their trading decisions, which can potentially cause even more problems in their trades. Many continue to experience such problems even after utilizing demo accounts, and thus already have a strategy. Therefore, for any trader, it is of the utmost importance to get their emotions under control when trading. Here, we will present the types of reactions one may have and how to deal with them.
Greed and its mental impact on trading
Greed can be very detrimental when it comes to trading. One wants to be hungry for a profit but being greedy can expose a person to more risks than they might otherwise face. A trader could want to get as much possible out of a trade, sometimes even when the potential profits are miniscule. If one is not careful, the losses they get could be far worse than the profits. It is therefore of utmost importance that traders keep their greed under control. The mental impact on their trading can be considerable.
A trader should thus be very careful when they are in a very lengthy bull market. They may convince themselves that they are betting on a sure thing, as it has worked so far. However, a turn in the market can be sudden and devastating.
The best thing to do is identify when you have enough. Set some realistic goals for yourself, in terms of potential profits, and do not go far past them. You should also always be comparing the potential risk with the potential profit of a trade, to find out how worthwhile the risk really is.
Fear and its mental impact on trading
On the opposite end of the spectrum, one could be affected by their fear just as much as their greed. The mental impact on your trading can be equally dire. If one is fearful of any potential losses, they would be unlikely to ever turn a sizable profit. This almost makes participating in trading stocks pointless. The problem comes when a trade has any element of risk at all, so when there are downturns. Some traders would be quite likely to draw their investments out of the stock at this point. This does mean that there are potential losses one could avoid, so the appeal is quite understandable. However, this could also mean that there are potential profits ahead that they miss out on in the long run.
The issue is that almost every stock experiences a period of downturns, many of these being rather small. The prices of stocks are set by people’s opinions on them; therefore, it is natural that prices would vary all the time. Most of the changes are just background noise. What a trader must do is figure out when a price change is for real and would cause considerable damage to their profits.
If someone really is not vigilant with their fear, it could cause panic and end up in very damaging results.
One thing a trader can always do is set up stop orders to automatically trade at certain price points. There is no real negatives with using them, they cost nothing, so using them is always a plus.
Traders must balance this fear with some drive to do well in stock trading. Otherwise, they will never get anywhere.
The most important thing is to keep up a balance between your greed and any potential hesitation in a trade. Going too far in either direction could cause a problem for your investments. Keeping a trade plan in mind can really help deal with this. The mental impact on your trading can be greatly reduced. Next time, we will go into further details on how to deal with your emotional state while doing stock trading.